General Growth Ruling Could Hurt CMBS
May 14, 2009
General Growth Properties, which about a month ago filed the largest real estate bankruptcy in U.S. history, has seen conflict and drama worthy of The Jerry Springer Show, which is also based in Chicago. The latest development involves a ruling by a bankruptcy court judge that has CMBS investors upset and another reversal of DIP loan loyalty.
When General Growth Properties filed for bankruptcy on April 16, it did not go alone. It took about 160 shopping centers with it. A week later, on April 22, it announced that another eight shopping centers had followed suit. The company’s plan: to consolidate and draw upon the income of these mall properties, giving it a more stable revenue stream and helping it move through bankruptcy. Last Wednesday, a bankruptcy court judge ruled General Growth could go ahead with its plan.
This was a punch in the gut to holders of commercial mortgage-backed securities (CMBS) that are drawn on these properties. They rely on income from these shopping malls as well, and when the GGP parent company announced that it brought them into bankruptcy and consolidating their revenue, it threw a monkey wrench into the machinery of the CMBS market.
Not Your Average Bankruptcy
Normally, when a parent company like General Growth files for bankruptcy, the properties it controls do not file as well, unless a particular property is in comparable financial straights. The shopping malls dragged into bankruptcy with GGP were by and large healthy, and CMBS investors bought their securities with the understanding that they were “bankruptcy remote.” Objecting to the GGP revenue stream consolidation plan, creditors filed suit seeking to block General Growth from bringing healthy properties into bankruptcy. However, U.S. Bankruptcy Court Judge Allen Gropper ruled against them, a decision that leaves investors with doubts.
“I think it’s a big gray area and this case is a test case,” said Craig Guttenplan, an analyst at Credit Sights. “How bankruptcy remote are these entities? Are they bankruptcy proof? CMBS investors have operated under the assumption that the only reason an entity would file for bankruptcy would be if it needed to, not if its corporate parent needed to.”
The good news for GGP’s CMBS holders is that they will continue to receive revenue, albeit in a consolidated stream. According to Andy Day, an analyst for Morgan Stanley, the preservation of the income stream to the CMBS investors has mitigated many of the concerns they had, though many details have yet to be worked out.
Attorneys representing the Commercial Mortgage Securities Association and the Mortgage Bankers Association filed an amicus curia brief with U.S. Bankruptcy Court, claiming that a decision to allow GGP to take the properties into bankruptcy would have a “catastrophic impact” on bankruptcy precedent and the CMBS market.
The ruling against the creditors or the increased chance of commercial properties being taken into bankruptcy by parent companies could have a lasting effect on CMBS. While the ruling may not be as disastrous as some predicted, it adds a level of uncertainty to the market that will change things. “As an investor that wants to restart the CMBS market, I have to consider these uncertainties,” said Tom Zatko, managing director with Babson Capital Management and head of its real estate finance group’s CMBS business. “All these rulings will be looked at very carefully when investors are looking to craft terms that will protect them in the future. We will see tougher documents. … If you think documents leave room for interpretation, that uncertainty will have to be priced in.”
Market observers seem resigned to a permanent change in the way CMBS investors look at investments from now on. “With each rumbling in the CMBS market, whether it is a Stuyvesant Town or a GGP, bond investors are getting affected in ways they neither imagined nor bargained for,” said a monthly market commentary from New York-based Annaly Capital Management. “Maybe this is the ultimate lesson of the downside of a bull market.”
Loan Pong and Other Debt Fun
The move to bring the shopping mall properties into bankruptcy with it came after the company had already faced a foreclosure on one of those properties. Lenders filed to foreclose on a shopping mall owned by General Growth as the company was in the midst of a bond consent solicitation that ultimately failed in March. Citibank filed papers with a district court in Louisiana to foreclose on the Oakwood Shopping Center in Gretna, La. outside of New Orleans, after General Growth missed a March 16 payment deadline that had been extended from February (LFN, March 23, 2009.
General Growth went back and forth with DIP financing agreements between Pershing Square Capital, led by activist investor William Ackman, and a group called Farallon Capital, which includes Goldman Sachs, Canpartners Investments, Delaware Street Capital and others. After choosing Pershing Square, defecting to Farallon and returning to Pershing Square, the company ended the month-long odyssey and settled with the Farallon group for a $400 million DIP loan May 13. The company will use the proceeds to fund its operations during Chapter 11 and to pay off about $210 million in existing debt owed to Goldman Sachs.
General Growth’s bankruptcy filing followed a long effort to restructure its debt outside of Chapter 11 protection. Back in March, it won consent from lenders to waive default events under its 2006 senior credit agreement for the rest of this year (LFN, March 17, 2009). The company’s forbearance under the 2006 credit agreement was subject to the completion of the forbearance of its Rouse Corp. subsidiary, which it acquired in 2004 for $14 billion. The company repeatedly extended the deadline on its consent solicitation for $2.25 billion in unsecured notes of its Rouse subsidiary, but to no avail. In its statement, GGP cited “broken credit markets” as making its bankruptcy filing necessary.
At the same time, Ackman of Pershing Square predicted General Growth would file for bankruptcy protection this year and said that he wanted to join the company’s board of directors. Ackman advocates a bankruptcy that would leave equity holders like his group intact. General Growth also reshuffled its executive staff to reduce costs and change its operations. Its chief development officer, vice president of investor relations, human resources head and director of investor relations had all left the company by late March.
The Chicago-based owner of more than 200 shopping malls has been struggling to manage the massive $27 billion debt burden it accumulated with large acquisitions over the last several years.
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