Tag: ggp

The firm of Wachtell, Lipton, Rosen and Katz has put out some very interesting opinions as to the General Growth (GGWPQ) Chapter 11. It goes to the central thesis we have here that the lenders, one way or another will end up extending maturities on the loans. This, in turn, will leave tremendous value for the common shareholders.

First this from 8/12:
GGP WLRK

Here is the applicable section:

Given the novelty of some of these issues, it is not yet clear how the coming wave of real estate restructuring and bankruptcies will play out. While this round went to GGP and against the SPE and CMBS lenders, it remains to be seen where the balance struck by the GGP court between creditors’ rights and the interests of equityholders leads when thorny issues such as cramming down secured lenders to extend maturities and alter pricing and other terms to the benefit of equity are presented to the court, or how negotiation and settlement discussions – both in formal bankruptcy proceedings and in consensual non-bankruptcy restructurings – will play out in the post-GGP era. The prospect of SPEs being included in consolidated bankruptcy proceedings will also raise issues not addressed in GGP, such as whether solvent SPEs will participate in an enterprise’s DIP financing, potentially structurally subordinating mezzanine lenders. Another twist may be the bypassing of the intricate consent and control mechanics in pooling and servicing agreements, with CMBS certificateholders working independently of their servicers.

Whether or not consistent with the expectations of creditors and debtors, the GGP ruling is consistent with the general tendency of bankruptcy courts to be pragmatic and to place substance over form. As the GGP court concluded: “These Motions [to dismiss] are a diversion from the parties’ real task, which is to get each of the [debtors] out of bankruptcy as soon as feasible. The [secured lenders] assert talks with them should have begun earlier. It is time that negotiations commence in earnest.”

Then on 8/24 this:
REIT and Real Estate Restructurings and Bankruptcies – Further Observations From the Front Lines

Again ,the applicable portion:

The “cramdown” provisions of the Bankruptcy Code (colloquially, in the case of a secured creditor, “cram up”) permit a plan of reorganization to be approved over the dissent of a class of creditors if the plan is “fair and equitable”. Even an over-collateralized loan need not be paid off in cash in a bankruptcy case, and in today’s climate of scarce refinancing capital, non-payment and partial payment have become common. With respect to secured creditors, a plan is fair and equitable if, among other alternatives, it allows the creditors to retain their liens and provides for new or “rolled over” debt in an amount, and with a value equal to, the secured claim. However, the appropriate interest rate, maturity and covenants of the new obligations are not specified by the Bankruptcy Code. Most courts refer to the market in deciding such terms, but some courts allow for the possibility that the market is inefficient (a serious risk in today’s financial climate) in choosing terms that will not result in the new instrument trading at par. In addition, the 2004 U.S. Supreme Court decision in Till v. SCS Credit Corporation – a chapter 13 case of uncertain applicability in chapter 11 – suggests that cramdown rates in the range of prime plus 1 – 3% are appropriate. Certain GGP shareholders have publicly floated the notion of cramming up GGP SPE debt with seven-year paper at current interest rates. Whether such terms would pass muster before a court depends on any number of factors. However, in the recent Spectrum Brands case secured creditors facing both a reinstatement and cram-up fight reached a consensual agreement with the debtor that gave them a 250 bps margin bump, a LIBOR floor and an actual shortening of maturity relative to their prepetition credit agreement.

This and other cases settled both in and out of court in recent months suggest that the uncertainty surrounding cramdown tends to lead parties, where debt is secured but cannot be refinanced, to compromise solutions – rates not so high as might be incurred in a refinancing, nor so low as the rates that prevailed in the recent bubble financing years.

It is important that the Judge in the case has a very wide range of latitude as it pertains to remedies. Other than maturity extensions, other options simply make very little sense. The battle now becomes over not whether or not to extend them, but for how long and at what rate. As long as CMBS markets remain as restricted as they are, the maturities have to be pushed out farther or the Judge risks being in the same spot a few years from now and this new debt comes due without a market to refinance it in.

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

Talking about Stocktwits and General Growth Properties (GGWPQ)

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

Talking about Stocktwits and General Growth Properties (GGWPQ)

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

This is a huge, huge win for General Growth Properties (GGWPQ). Interesting comments from debt holders that they acknowledge the CMBS market is effectively closed. So, if we know we are no going to liquidate, we know we cannot refinance because the debt markets are closed, then all that remains is debt maturity extensions, right?

There are some very telling statements in the ruling:

There was no evidence to counter the Debtors’ demonstration that the CMBS market, in which they historically had financed and refinanced most of their properties, was “dead” as of the Petition Date,32 and that no one knows when or if that market will revive. Indeed, at the time of the hearings on these Motions, it was
anticipated that the market would worsen, and there is no evident means of refinancing billions of dollars of real estate debt coming due in the next several years.

The following testimony of Allen Hanson, an officer of Helios, is telling: “Q. Helios is aware that there are debt maturities that will occur in 2009, 2010, 2011 and 2012 that the CMBS market will not be able to handle through new CMBS issuances, correct? A. Based on the circumstances we see today, yes.”

Regarding SPE structure as “bankruptcy remote”:

There is no question that the SPE structure was intended to insulate the financial position of each of the Subject Debtors from the problems of its affiliates, and to make the prospect of a default less likely. There is also no question that this structure was designed to make each Subject Debtor “bankruptcy remote.” Nevertheless, the record also establishes that the Movants each extended a loan to the respective Subject Debtor with a balloon payment that would require refinancing in a period of years and that would default if financing could not be
obtained by the SPE or by the SPE’s parent coming to its rescue.

Movants do not contend that they were unaware that they were extending credit to a company that was part of a much larger group, and that there were benefits as well as possible detriments from this structure. If the ability of the Group to obtain refinancing became impaired, the financial situation of the subsidiary would inevitably be impaired.

Later:

Delaware law in turn provides that the directors of a solvent corporation are authorized – indeed, required – to consider the interests of the shareholders in exercising their fiduciary duties. In North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007), the Delaware Supreme Court held for the first time that the directors of an insolvent corporation have duties to creditors that may be enforceable in a derivative action on behalf of the corporation. But it rejected the proposition of several earlier Chancery cases that directors of a Delaware corporation have duties to creditors when operating in the “zone of insolvency,” stating [w]hen a solvent corporation is navigating in the zone of insolvency, the focus for Delaware directors does not change: directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners. 930 A.2d at 101 (emphasis supplied).34

This statement is a general formulation that leaves open many issues for later determination – for example, when and how a corporation should be determined to be insolvent. But there is no contention in these cases that the Subject Debtors were insolvent at any time – indeed, Movants’ contention is that they were and are solvent. Movants therefore get no assistance from Delaware law in the contention that the Independent Managers should have considered only the interests of the secured creditor when they made their decisions to file Chapter 11 petitions, or that there was a breach of fiduciary duty on the part of any of the managers by voting to file based on the interests of the Group.

The record at bar does not explain exactly what the Independent Managers were
supposed to do. It appears that the Movants may have thought the Independent Managers
were obligated to protect only their interests. For example, an officer of ING Clarion testified that “the real reason” he was disturbed by the Chapter 11 filings was the inability of the Independent Managers to prevent one:

Well, my understanding of the bankruptcy as it pertains to these borrowers is that there was an independent board member who was meant to, at least from the lender’s point of view, meant to prevent a bankruptcy filing to make them a bankruptcy-remote, and that such filings were not anticipated to happen.(Altman Dep. Tr. 159:7-13, June 5, 2009.)

However, if Movants believed that an “independent” manager can serve on a board solely for the purpose of voting “no” to a bankruptcy filing because of the desires of a secured creditor, they were mistaken. As the Delaware cases stress, directors and managers owe their duties to the corporation and, ordinarily, to the shareholders. Seen from the perspective of the Group, the filings were unquestionably not premature.

Conclusion:

The Debtors here have established that the filings were designed “to preserve value for the Debtors’ estates and creditors,” including the Movants. Movants are wrong in the implicit assumption of the Motions that their rights were materially impaired by the Debtors’ Chapter 11 filings. Obviously, a principal purpose of bankruptcy law is to protect creditors’ rights. See Young v. Higbee Co., 324 U.S. 204, 210 (1945). Secured creditors’ access to their collateral may be delayed by a filing, but secured creditors have a panoply of rights, including adequate protection and the right to post-petition interest and fees if they are oversecured. 11 U.S.C. §§ 361, 506(b).

Movants complain that as a consequence of the filings they are receiving only interest on their loans and have been deprived of current amortization payments, and Metlife complains that it is not even receiving interest on its mezzanine loan, which is secured only by a stock interest in its borrower’s subsidiary. However, Movants have not sought additional adequate protection, and they have not waived any of their rights to recover full principal and interest and post-petition interest on confirmation of a plan. Movants complain that Chapter 11 gives the Debtors excessive leverage, but Metlife asserts it has all the leverage it needs to make sure that its rights will be respected.

It is clear, on this record, that Movants have been inconvenienced by the Chapter 11 filings. For example, the cash flows of the Debtors have been partially interrupted and special servicers have had to be appointed for the CMBS obligations. However, inconvenience to a secured creditor is not a reason to dismiss a Chapter 11 case. The salient point for purposes of these Motions is that the fundamental protections that the Movants negotiated and that the SPE structure represents are still in place and will remain in place during the Chapter 11 cases. This includes protection against the substantive consolidation of the project-level Debtors with any other entities.

There is no question that a principal goal of the SPE structure is to guard against substantive consolidation, but the question of substantive consolidation is entirely different from the issue whether the Board of a debtor that is part of a corporate group can consider the interests of the group along with the interests of the individual debtor when making a decision to file a bankruptcy case. Nothing in this
Opinion implies that the assets and liabilities of any of the Subject Debtors could
properly be substantively consolidated with those of any other entity.

These Motions are a diversion from the parties’ real task, which is to get each
of the Subject Debtors out of bankruptcy as soon as feasible. The Movants assert
talks with them should have begun earlier. It is time that negotiations commence in
earnest.

Gropper/GGP SPE Ruling

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

When we are looking at REIT’s and wondering how to value them it all comes down to NOI. With that in mind, lets look at Q2 for GGP:

NOI for the second quarter of 2009 was $615.8 million, a decrease of approximately 2.1% from the $629.1 million reported in the second quarter of 2008. Minimum rents (including temporary tenant revenues), overage rents and other revenues (including sponsorship, vending, parking and advertising) in the second quarter of 2009 declined as compared to the same period of 2008 due to the continued weakness in the economy and occupancy declines. In addition, we sold three office buildings in 2008, as discussed above, which also contributed to the decrease in NOI. Weaknesses in certain of our tenants’ businesses also led to a $3.9 million increase in our provision for doubtful accounts in the second quarter of 2009 as compared to the second quarter of 2008.

Note: For GGP one must ignore the headline numbers for now as they will be skewed heavily by restructuring costs. We are simply looking at the health of the underlying operating businesses, not the final accounting number.

A 2.1% drop in this environment is simply outstanding. If we are talking about a cap rate to value GGP at, if we take a look at recent CRE deals, we see the current market for grocery anchored strip malls are selling for 8.5%-9% cap rates. Based on that and based on GGP’s results, if one would assume a 8% cap rate for GGP, that would be very reasonable. It also would not be unreasonable based on the historical averages to stretch it to 7.5% but we ought to stick with 8% to be conservative.

Using this we will based some assumptions on Pershing’s valuation table of GGP common post Chapter 11 under certain dilution scenarios. As we move down the Cap scale we find that the value of the common dramatically increases.

As GGP continues to post strong results, the assumption has to be that there will be more left for shareholders post Chapter 11. Occupancy, while up slightly was essentially unchanged at 91% giving credence to the strength and desireability of GGP’s locations.

Remember, GGP need not file a reorg plan until April, 2010. So, if you think the economy will continue a steady albeit slow rebound, then the numbers we see now ought to improve even further by then. If that is true, then the prospects for current shareholfders will improve with it.

Full Report
GGP Q2

Disclosure (“none” means no position):

This is a big win for General Growth Properties (GGWPQ). They now have control over the Chapter 11 process AND more importantly have increased leverage over lenders who want/need payments on debt to continue.

Here is the scenario:

GGP now has until the end of February to submit a plan. That means lender with billions in debt outstanding will be receiving nothing on that debt. GGP now has time on its side and lenders will be more willing to renegotiate loans on better terms to enable GGP to file its plan and resume payments before next February….

This is really good news…..

NEW YORK (Dow Jones)–A bankruptcy judge gave General Growth Properties Inc. (GGWPQ) a six-month extension to file its bankruptcy plan over opposition from a number of the mall owner’s lenders.

Judge Allan Gropper of the U.S. Bankruptcy Court in Manhattan extended the deadline for filing the reorganization plan to Feb. 26, rejecting calls from creditors for a shorter extension.

The extension granted by Gropper gives General Growth exclusive control over the path of its bankruptcy case by preventing creditors from filing rival reorganization plans with the court.

Marcia Goldstein, General Growth’s bankruptcy lawyer, said the Chicago-based mall owner will use the time to negotiate with lenders over a restructuring plan. General Growth filed for bankruptcy in April to lighten its $27 billion debt load.

“Six months is actually very ambitious. We hope to file the plan in this period” and negotiate an agreement with creditors, Goldstein told Gropper. “But that’s going to require a lot of work on multiple fronts.”

The six-month extension, she said, was reasonable for the largest real-estate bankruptcy case ever filed. She told Gropper there would be “chaos” if the court denied the extension because the company could face more than 100 rival plans from lenders to its malls.

Lenders and servicers – companies that handle defaulted loans to the malls on
behalf of lenders – objected to the six-month extension, saying it was too long. Most didn’t oppose an extension, but urged Gropper to approve a three-month extension, which they said would push negotiations forward.

But Gropper said General Growth’s bankruptcy case will be “in a better position” with the longer extension, and he noted that the company made a commitment to provide restructuring proposals to lenders soon.

“The goal should be to have a plan or plans proposed within the six-month period,” he said.

Disclosure (“none” means no position):LONG GGWPQ

The news just keeps getting better and better….

Here is the applicable wording:

The two Northwestern Debtors are essentially single asset real estate entities. The formulation of a plan for these two cases should not be complicated or overly time consuming. Presumably the Debtors will desire to extend the maturities of existing loans and/or work out a consensual rate of interest with respect to the loans following their current maturity. As long as the parties negotiate in good faith and do not “drag their feet” this process should take no longer than 45 to 60 days, assuming the parties can come to an agreement. While Northwestern is not committing to any agreement with the Northwestern Debtors, Northwestern stands ready and willing to enter into negotiations in order to move the process along.

Here is the full filing:
Northwestern GGP

For more explanation, please refer to this previous post from this morning.

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

They clearly cannot speak for other lenders but there is a clear trend emerging here….

Here is the very interesting disclosure:

The 2008 Facility Borrowers are, in the aggregate, cash flow positive by a significant amount after debt service and operating expenses (including agreed management fees payable to other Debtors and affiliates). On information and belief, the same is true of most of the SPE Debtors. In all of these cases, the mortgage loan will be renegotiated and the remaining creditors will be paid in full.

Full filing:
SPE GGP

Now this is far from a victory lap. A lender “willing to negotiate” a simple one year extension at a hefty interest rate really does not do anything for the cause. A minimum of three years is needed and five would be preferable. BUT, it is good to see that for the most part, heals are not being dug in and lender recognize owning the properties is not in their best interest AND there is no market to liquidate them. That only leave maturity renogotiation.

See posts on other lender willing to extend maturities….here and here

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

This is simply wonderful news for shareholders of General Growth Properties (GGWPQ) for a slew of reasons. First, the filing:

Prudential GGP

Again for those not inclined to read the whole document here is the applicable quote:

Prudential reaffirms that it is ready and willing to take concrete steps to reach understandings with Harbor Place, 1160/1180, and Rivertown Crossing with
respect to plan treatment and reiterates that the primary issues to be resolved – extension of maturities and establishment of new market interest rates

Since April I have tried to make the case here that the best scenario for all in this case was a cram down (the extension of debt at new interest rates) and that by doing the Chapter 11 that way, all parties are made as whole as possible.

This agreement by Prudential, should it come to fruition is just that AND gives us a road map for the remainder of the process, should the Judge see fit to go that way with it. It also now put pressure on other lender to follow suit lest they then worry about perhaps receiving an inferior deal down the road as the process unwinds.

What Prudential is seeking in the filing is to simply “get it done now” and understandably General Growth wants to extend the process in order to perhaps (this is my opinion here) come to similar agreements with other lenders. It is also possible that General Growth feels they may be able to obtain a better interest rate in Chapter 11 through a cram down (typically LIBOR + 1%-3%) than what Prudential is offering. None of this has been disclosed but Prudential’s request for a “market rate” interest rate I think may be the sticking point as the original loans were probably well below what a “market rate” would be in the current environment.

Either way, this is a huge move by a lender and the exact scenario I hope to see unfold on a much larger scale as this process moves forward…

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

This is interesting…

CHICAGO–(BUSINESS WIRE)–GENERAL GROWTH PROPERTIES, INC. (GGWPQ) today announced the appointment of Glenn J. Rufrano to its Board of Directors.

Mr. Rufrano is currently the chief executive officer of Centro Properties Group, a retail investment organization specializing in the ownership, management, and development of retail shopping centers with an extensive portfolio of centers across Australia, New Zealand and the United States, which does not compete directly with GGP. Mr. Rufrano led Centro Properties Group through its successful restructuring during the current credit crisis. From 2000 until its acquisition by Centro Properties Group in April 2007, Mr. Rufrano was chief executive officer of New Plan Excel Realty Trust, Inc., as well as a member of that company’s board of directors. Mr. Rufrano spent 17 years as a partner at The O’Connor Group, a diversified real estate firm.

“Glenn’s CEO and restructuring experience combined with his regional shopping mall expertise will be invaluable to the Company as we continue to develop the plan to emerge from bankruptcy. We are delighted to be able to strengthen our Board with this latest addition and look forward to benefiting from his insights and experience,” said Adam Metz, chief executive officer of General Growth Properties.

So, why is this interesting?

Here is Mr. Ruffano’s most recent work:
Centro Completes Debt Stabilisation Agreement

Notice one constant theme? Maturity extension…..the very same thing GGP is looking to do.

It is important to note here that Centro’s action were done outside of the bankruptcy court and, being and Australian company, bankruptcy law there is different than here. The central point remains though that Ruffino does have successful real world experience in the current market environment. That is good as this progresses..

On another note, Robert Jaffe’s (formerly of SAC capital) Force Capital picked up 1.1 million General Growh shares in the most recent quarter according to this SEC filing

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