Monday, June 1, 2009

GGP phrase of the day: "Relief from the Automatic Stay"

That's what lenders want. They want out of the quagmire so they can foreclose or do whatever they have to in order to protect their secured interests. Here's a great summary of what the lenders think:

Attorneys for Metropolitan Life Insurance Co. and KBC Bank N.V., a unit of KBC Groep N.V., wrote in their motion to dismiss entities related to White Marsh Mall in Maryland: "It is clear that the petitions of the White Marsh debtors were not filed with any reorganizational purpose; they were filed solely to obtain leverage and a tactical advantage in any future efforts to extend the maturity of the loan."

General Growth legally created its malls as special purpose entities (SPEs), separate from the parent company. This prevented it from being on the hook for any of the SPEs' obligations.

"In determining to underwrite the loan, MetLife and KBC relied on the separateness and credit worthiness of the borrower and the underlying property, especially because no parent company repayment guaranty was required," attorneys for White Marsh wrote.

It gets better...wait for it....
The SPEs are governed by independent directors. But some of them, including SPEs related to Fox River Shopping Center in Wisconsin, say General Growth fired the independent directors minutes before the bankruptcy filing.
"Governed" really isn't the precise term. Usually the independent person(s) only step in to approve a bankruptcy or similar filing. But that's besides the point. Creditor-friendly judge or no, the firing of (possibly recalcitrant?) managers on that timeframe is very interesting, at say the least. Assuming that was permitted by the loan documents (and I have seen deals that would have allowed this so long as the new directors met the independence test), then there was some very good lawyering on GGP's behalf when the loans were documented.


Doug Cornelius said...

It will be interesting to see if all that SPE mumbo-jumbo is really as effective as lenders thought it would be. I spent many man-hours dealing with these provisions, scratching my head wondering if the lender's counsel really thought they were doing anything meaningful.

So far in GGP, the answer is no. But I am sure there is more to come. I wonder if the lenders are going to go to the mattresses to protect their view of SPEs and get some law on their side. Or nor risk it and take some off the record relief.

David Stejkowski said...

Certainly the law firms who opined as to the effectiveness of SPEs are hoping so. Thanks, as always, for your insightful thoughts.

Doug Cornelius said...

I don't think the law firms should be worried. Non-consolidation opinions are reasoned opinions, so there is unlikely to be a cause of action against the law firms that gave them. Unless they were negligent in giving the opinion.

David Stejkowski said...

I agree that reasoned opinions are not worth much. But I was indeed thinking negligence based on how we both know many of these deals were thrown together.

What about the lenders' lawyers or the rating agency lawyers? I haven't really thought much that. Again, I think it is tough to say they knew or should have known SPEs would not work.

Maybe someone is willing to take a flyer at a deep pocket and roll the dice, though any such case is an uphill battle to say the least.