Wednesday, August 12, 2009

GGP: winning in BK, but at what price?

I'm not at all surprised by the ruling yesterday that rejected lender's motions to remove the automatic bankruptcy stay off a number of General Growth Properties' performing malls. As you may recall, several lenders tried to pull their malls out of the BK case on the grounds that the borrowers were special purpose entities. This may put GGP and its team in the catbird seat regarding loan negotiations and exiting bankruptcy next year.

As the Reuters story tells us:

In an opinion closely watched in the credit markets, Judge Allan Gropper ruled that those seeking to have the cases dismissed because they claimed they were filed in "bad faith" were simply inconvenienced by the Chapter 11 filings and that "inconvenience to a secured creditor is not a reason to dismiss a Chapter 11 case."

Moreover, the Wall Street Journal is saying:
[T]he ruling has no bearing on the question of substantive consolidation, which entails combining separate entities of the same corporate parent in a bankruptcy case. The case is being closely monitored by real-estate investors and borrowers, since many securitized mortgages are packaged as special purpose entities.
That is where we get to the interesting part (correctly, in my opinion): the Reuters story is saying that the judge's "decision could pave the way for General Growth to seek 'consolidation' of its subsidiaries, and treat some of its units as a single debtor, overriding their status as separate companies."

Why is that interesting? I don't think it is great news for the credit market -- how do you do these deals now? I'm sure some smart people are trying to figure that out if they haven't already. All along the CMBS market has been relying on non-consolidation as a vehicle to make these deals more creditworthy. That is conceivably off the table, especially if this works and other companies copycat GGP's legal strategy. I remember working on these reasoned legal opinions years ago and wondered about the worth and value of them. Maybe now I know.

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