Ontario Realty (OR) is a major property developer based in Toronto. It is in the business of building office towers and other commercial premises. In the past year, the Ontario economy has suffered a serious downturn, and commercial properties have been particularly hard hit. OR now finds itself with several major city sites for which there is little chance of development until the economy recovers. OR’s debts are now $150 million, and its assets at today’s values are worth $80 million. Interest rates are slowly but steadily rising. Two banks hold security for 90 percent of the debt. The balance of the debt is unsecured. The company is unable to make regular payments on its loans.
John, the CEO of the company, has weathered this kind of crisis before. He is convinced that a recovery should begin within a year. His discussions with the two major creditors suggest that only one would be prepared to negotiate a more favourable payment scheme until the market recovers. John seeks advice from an insolvency practitioner about the pros and cons of making a proposal.
What advice is John likely to receive? What factors will the creditors consider in responding to OR’s situation?