General Growth Properties: A "Cram Down"?

Based on the verbiage coming out of General Growth (GGWPQ), this seems to be the way this is headed.

So, what is a Chapter 11 “Cram Down“?

If all of the legal requirements of a reorganization plan are met, with the exception of a successful confirmation vote by creditors, the plan may still be confirmed over the objection of a dissenting class. If the plan does not discriminate unfairly and is fair and equitable to the dissenting class, it can be crammed down on the impaired class that votes against the plan.167 In a cramdown, the debtor may (1) reduce the principal amount of the secured claim to the value of the collateral; (2) reduce the interest rate; (3) extend the maturity date; or (4) alter the repayment schedule.168 The debtor may also make a minimal payment on the unsecured claim. Under the Bankruptcy Code a cramdown is permissible when the plan provides a dissenting secured class with consideration equal to the amount of its claim or when no class below the dissenting unsecured class participates under the plan, the plan.169

Feasibility Requirements of a Cramdown Plan

Before a court confirms a cramdown plan, the court must, among other things, determine whether the plan is feasible. In other words the court must believe that the plan probably will not be followed by an unproposed liquidation or a need for further financial reorganization.188 According to the United States Supreme Court, “[h]owever honest in its efforts the debtor may be, and however sincere its motives, the District Court is not bound to clog its docket with visionary or impractical schemes for resuscitation.”189 Although the feasibility requirement does not guarantee the success of the reorganized debtor, it does require that the plan enable the reorganized debtor to emerge solvent and with reasonable prospects of financial stability and success.190 The burden is on the debtor to prove that the plan is feasible.191

Generally, the factors that the court considers in determining feasibility include: (1) the earning power of the business; (2) the sufficiency of the capital structure; (3) the condition of the collateral and any deterioration that may have occurred throughout the bankruptcy process; (4) economic conditions; (5) management efficiency; (6) the availability of credit, if needed; and (7) the debtor’s ability to meet capital expenditures.192 The court is obligated to evaluate past earnings to determine if they are a reliable criterion of future performance and, if not, to make an estimate of future performance by inquiring into foreseeable factors that may affect future prospects. To enable the court to evaluate past earnings and to estimate future earnings, the debtor must present competent, concrete, and reliable evidence.193

Therefore, although debtors may propose to restructure their debts, debtors have a significant burden to establish that they will be able to satisfy the payments proposed in their plans. In a single asset real estate case, the court will deny confirmation if the debtor cannot demonstrate the plan’s feasibility based upon realistic and verifiable projections establishing the existence of adequate cash flow.

Important note: Under a cram down plan, if all senior credit classes are made whole, then the equity is permitted to remain in tact.

Now, even if all senior creditors are not made whole equity can remain in tact under the “new value exception”. It was set forth in dicta in a 1939 United States Supreme Court case, Case v. Los Angeles Lumber Products Co.175 This exception allows equity holders to keep their ownership interests even though unsecured creditors do not receive full payment of their claims, provided that equity holders contribute new capital to the reorganized debtor in an amount reasonably equivalent to their retained interest in the debtor.176 The new value exception requires that the equity holders’ infusion of capital be (1) substantial, (2) new, (3) reasonably equivalent to the interest being retained, (4) in the form of money or money’s worth that constitutes more than a promise by the equity holders to make future payments,177 and (5) necessary to a reorganization.

So, right now the equity of General Growth is worth $190 million. That would be the interest to be retained, a pittance given the potential value of the equity in a cram down scenario.

Now, let’s talk about “secured creditors”. General Growth has its malls in separate entities, each (for the most part) with its own mortgage (some properties are grouped together). The secured creditors in this case have their loans secured by those properties. Does this mean that the value of the loan is what is secured? No.

The US Supreme Court has held that there is a “disposition value” to the claim. The actual value of the property on the market (or what the creditor would receive in a liquidation) is treated as secured and anything over that, now becomes unsecured.

This simply means that the current fall in CRW prices gives GGP huge leverage over the creditors in this case. Any reorganization that gives creditors more than they would see in a liquidation (it can be reasonably argued that liquidation prices are far below even current ones) will be looked at favorably by both the court and creditors in terms of the “fairness” test. It also allows an easy debt restructure guide as the new loan amount would be the present value of the property with the balance being repaid as equity or, an additional loan with a longer dated maturity because an unsecured creditor in this case can elect to have its claims treated as secure with a:

1111(b)(2) election: (1) the undersecured creditor loses the right to vote regarding the previously unsecured claim; and (2) the unsecured creditor must make the election before the conclusion of the hearing on the disclosure statement. Often, this second requirement forces the undersecured creditor to elect before adequate disclosure has been made concerning the plan and the proponent’s intentions. By making a section 1111(b)(2) election, a creditor may significantly affect whether the amount of deferred cash payments proposed under a plan and the present value of those payments satisfy the cramdown confirmation standards of section 1129(b)

Based on statements from management, one can only assume this is the direction they plan on heading. Should they be successful, it is not only good but fantastic for the equity.

Disclosure (“none” means no position):Long GGPWQ