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More Thoughts on General Growth

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The story continues to evolve on General Growth Properties. The big news, of course, is that the firm's reorganization plan on more than $10 billion in secured debt has been approved. But there's still some more secured debt to take care of in addition to about $6 billion in unsecured debt. In addition, there's the nagging issue of the possible takeover attempts by Brookfield and Simon.

Chicago Business made a key observation on the takeover front. It pointed out that GGP's attempts to thwart a takeover bid include, "denying any premium to unsecured creditors who hold nearly $6 billion in unsecured debt, rather than giving those creditors generous portions of stock."

Both Brookfield and Simon have purchased GGP unsecured debt in recent weeks--about $1 billion each. So this move does seem aimed at slowing possible takeover attempts.

Repaying the unsecured creditors in full would deny them a say in the company's reorganization, under bankruptcy rules. Shareholders, including the founding Bucksbaum family and hedge fund operator William Ackman, would continue to control General Growth and reap the full financial benefits of a successful reorganization of the nation's second-largest mall owner, which has a market value of $3.6 billion.

But General Growth hasn't disclosed how the unsecured creditors would be paid, raising questions about whether the REIT has the financing lined up or is posturing.

The company can't repay unsecured creditors without selling off its best assets, a step General Growth is unwilling to take, says Jim Sullivan, an analyst at Newport Beach, Calif.-based Green Street Advisors Inc.

Instead, "the stage is set for an epic bidding battle for the company," says Mr. Sullivan, who figures there is an 80% chance General Growth will be sold. "It's a grand prize."

Meanwhile, Westlaw Business has posted a lengthy piece looking at implications of General Growth's bankruptcy that are not often discussed. It's a bit technical, but not overly so. It looks at what General Growth's bankruptcy means given the convoluted way REITs are structured and at how special purpose entities are being treated.

[T]he GGP plot, thus far, ends at a place that may be happy for developers, but is decidedly less so for lenders. The upshot of the bankruptcy thus far is that bankruptcy-remote cash flows are remote no longer. Instead, SPE value was allowed to be put in one bucket, that of the parent. General Growth's new and improved Chapter 11 cash management system may allow for each of the Operating Properties to collect cash receipts in a property-specific lockbox…but then swiftly transfers such receipts to a centralized GGP-Parent cash management account from which cash disbursements are funded. This is magic to the ears of developers everywhere. On a contrary viewpoint this would give heartburn to commercial real estate lenders, their attorneys, and commercial real estate debt investors.

...

The loan documents that proved troublesome in GGPs case are likely to drive a facelift to future loan documents to prevent some of the GGP-like events from repeating themselves. In particular, lenders and their counsel are likely to require in the loan documents a prohibition on altering managers or directors of Special Purpose Entities. Lenders will require provisions that govern the ability of the member to replace independent directors or managers. Moreover, the provisions that define the scope of the independent directors' or managers' fiduciary duties will point to state statutory guidance proscribing the state of LLC formation and rights and obligations of independent directors.

Lastly, there's been an ongoing debate between some analysts as to whether to be bullish or bearish on General Growth stock. Business Insider has links to the first two volleys in this debate as well as this third piece.

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Elaine Misonzhnik

Senior associate editor Elaine Misonzhnik has been writing for National Real Estate Investor since June 2006 and has covered commercial real estate for more than 12 years. She first became...
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