The past few weeks have been a busy time for General Growth Properties (OTC: GGWPQ), as the REIT announced further mortgage restructurings, brought in a new financial advisor and asked the court to extend the amount of time it has to present a reorganization plan. The moves appear to be aimed at increasing the company’s chances of raising enough equity from traditional real estate investors to forgo a large debt-for-equity swap. And that would enable the REIT to avoid outside takeover bids and exit Chapter 11 bankruptcy protection as an independent entity.
On Jan. 25, General Growth revealed that, subject to bankruptcy court approval, it engaged Swiss investment bank UBS to help it evaluate various options for raising enough capital to complete its reorganization. The announcement came on the same day that the REIT completed the restructuring of 74 secured mortgages totaling $9.4 billion. Coupled with previously completed transactions, General Growth has dealt with almost all of its secured debt. It has just 16 loans totaling $2.1 billion that still need to be restructured: a process that, according to the company, will be done in the next few weeks.
The bigger issue the firm faces is that it still has $6 billion in unsecured debt that must be refinanced or restructured. That includes debt that has been gobbled up by potential bidders Canadian asset manager Brookfield Asset Management Inc., and Indianapolis-based regional mall REIT Simon Property Group. To that end, on Jan. 29, General Growth asked the bankruptcy court to extend the exclusivity period for the filing of its reorganization plan by six months, until the end of August. The extension means General Growth would remain the only party that can submit a reorganization proposal in the case.
How the REIT will end up refinancing its unsecured debt is important because in a bankruptcy scenario unsecured debt holders have a great deal of power over the fate of the bankrupt entity and can end up owning most of the company in the event of a debt for equity swap. In addition, holders of unsecured debt will get to vote when General Growth’s plan for exiting bankruptcy is presented to creditors.
“It sounds [like] their plan right now is to get enough exit capital to take out the unsecured creditors so they don’t have to deal with the problem,” says Jennifer Tullius, partner with Raines Law Group LLP, a Beverly Hills, Calif.-based law firm. “I think the goal is for GGP to maintain as much control over their assets as they can. The [preferred reorganization] order is: raise money; if that doesn’t work, convert debt; and if that doesn’t work, look for a merger partner.”
For its part Brookfield has reportedly purchased close to $1 billion in General Growth’s debt and Indianapolis-based regional mall REIT Simon Property Group, meanwhile, has purchased an undisclosed amount. In addition, last week, Bruce Berkowitz, president of securities investment firm Fairholme, purchased $500 million of the company’s unsecured debt, including $394 million in convertible bonds, a $110 million tranche loan and $94 million in Rouse bonds. Berkowitz has ties to investor William Ackman, whose firm, Pershing Square Capital Management, owns a 25 percent interest in General Growth, and as a result of the transaction might sit along Ackman on the REIT’s board of directors, notes Todd Sullivan, a Massachusetts-based investor and author of the Value Plays blog.
“Maybe they are interested in the New England part of the portfolio,” he says. “That’s all speculation on my part, but a lot of dots connect.”
Sullivan suspects General Growth might already be getting low-ball bids for the company and the request to extend the exclusivity period on the filing of its reorganization plan, along with the introduction of UBS into the picture, might be a way to show it has options outside of a merger. He thinks General Growth would prefer to raise the capital needed to pay off its unsecured debt through a combination of direct sales of non-core assets and a debt for equity swap.
“I think they have a pretty good game of chicken with anyone who might want to buy them right now,” Sullivan says. “They are saying ‘Negotiate in good faith or we are going to walk away.’ I would imagine by the end of February, early March, we’ll start to get some really good ideas of what’s going on.”