General Growth Properties: Shareholders Waiting for Saga to End

| About: GGP, Inc. (GGP)
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As lenders seek to remove malls from General Growth Properties (GGPWQ.PK) Chapter 11, there are two questions we need to answer:
  • Will they be successful?
  • Does it matter?

First the news:

From the Providence Journal:

In a filing with the U.S. Bankruptcy Court in New York City, MetLife contends General Growth is trying to “cramdown” a wholesale reorganization plan for its more than 200 mall properties that will hurt the insurer’s financial interests in Providence Place.

“No reorganizational purpose is served by allowing [the mall owners] to have the benefits and powers of Chapter 11,” MetLife states in a recent court filing.

MetLife contends the mall’s net operating income, a standard measure of the cash flow generated by real estate holdings, is more than enough to satisfy the debt payments tied to Providence Place.

General Growth borrowed nearly $400 million from Lehman Brothers Bank on Providence Place shortly after it took control of the retail center in 2004. In August 2005, Lehman Brothers sold a portion of that debt, $104.3 million, to MetLife, secured by the Providence Place property.

According to the court filing, Providence Place generated $9.9 million in free cash in 2008, after subtracting the roughly $25 million in total payments due on two loans on the property. MetLife also claims General Growth made no effort to refinance or extend its loan from MetLife.

The borrowing, on a shopping center that had changed hands only months before for $510 million, is symptomatic of the problems General Growth Properties Inc. (GGP:NYSE) created for itself as it amassed a portfolio of more than 200 properties in 44 states.

General Growth filed for Chapter 11 bankruptcy protection after failing to persuade a majority of its debt holders to give it more time to refinance billions of dollars in debt racked up during an aggressive expansion that included the $11.3-billion purchase of Rouse Co. in 2004. Just months before, Baltimore, Md.-based Rouse had purchased Providence Place for $510 million from the developers who built the shopping center in the late 1990s.

General Growth had about $29.6 billion in assets and more than $27 billion in liabilities as of Dec. 31, according to documents filed with the U.S. Bankruptcy Court in the Southern District of New York.

MetLife’s demand, first made in a May 29 filing, followed similar ones by other lenders to General Growth. On May 7, a unit of Wells Fargo Bank asked the court to pull Boston’s Faneuil Hall Marketplace out of the massive bankruptcy case, citing much the same reasoning used by MetLife.

Wells Fargo-FHM claims rents at Faneuil Hall Marketplace are large enough to cover the monthly loan payments and operating costs at the iconic shopping center.

Clarion Capital Services LLC, which holds mortgages on eight malls General Growth owns in the West, has made the same request in a separate filing.

Where to start? Simply put, in order for the entities to be removed from the Chapter 11 process, they essentially have to prove that GGP engaged in "bad faith" in its filing.

General Growth Council answers this claim:

"Against this backdrop, Movants’ claim of “bad faith” filing is meritless. In this Circuit, dismissal for lack of good faith should be granted “sparingly, with great caution,” In re G.S. Distrib., Inc., 331 B.R. 552, 566 (Bankr. S.D.N.Y. 2005) (Gropper, J.) (internal quotation marks omitted), and only “if both [1] objective futility of the reorganization process and [2] subjective bad faith in filing the petition are found.” In re Kingston Square Assocs., 214 B.R. 713, 725 (Bankr. S.D.N.Y. 1997) (emphasis in original). A bankruptcy petition should not be dismissed unless “it is clear that on the filing date there was no reasonable likelihood that the debtor intended to reorganize and no reasonable probability that it would eventually emerge from bankruptcy proceedings.” Baker v. Latham Sparrowbush Assocs. (In re Cohoes Indus. Terminal, Inc.), 931 F.2d 222, 227 (2d Cir. 1991). The Movants bear this heavy burden, but they do not and cannot satisfy it.

► Reorganization Is Not Objectively Futile. Because they have nothing to say about
this requirement, Movants ignore it. Not only do Movants fail to offer any evidence of objective futility, but the facts they assert and that are disclosed in their depositions – that the project entities presently have positive cash flows and are current on their loans – dispel the notion that a restructuring here would be futile. Rather, these claimed facts establish a reasonable likelihood that the debtors can successfully emerge from bankruptcy. The motions fail for this reason alone.

► There Is No Subjective Bad Faith. The crux of Movants’ argument is that the
filing was in bad faith because the Project Debtors currently are not at risk of imminent default. This ignores that two of the Project Debtors, Faneuil Hall Marketplace, LLC and RS Properties Inc., already were in default before filing for bankruptcy, and is not the relevant legal standard in any event. Rather, a debtor need only “face such financial difficulty that, if it did not file at that time, it could anticipate the need to file in the future.” Cohoes, 931 F.2d at 228. Given the
condition of the credit markets, the boards made a considered and reasonable judgment that filing for bankruptcy and undertaking a coordinated restructuring now would maximize stakeholder value for each Project Debtor. Waiting for a series of anticipated defaults would benefit no one.

Finally, ING speculates that one of the Project Debtors – the Lancaster Trust – is a
land trust and therefore “may not” be eligible to file for bankruptcy. ING is legally and factually incorrect. Like any other trust, a land trust may file for bankruptcy, so long as it engages in some business activity. Here, the Lancaster Trust is an operating business, just like every other GGP project-level subsidiary, and its leasing documents reflect that it is in fact an Illinois business trust. It is, therefore, eligible to file under the Bankruptcy Code."

Now, did GGP make a good faith effort to extend loan before filing Chapter 11?:

As GGP’s President and COO Thomas Nolan testified, “the master servicers indicated [to GGP] that they had no ability to make any meaningful amendments, adjustments, restructurings on the – on the loans and that until such time as a loan went into default, that they weren’t capable or they weren’t allowed under their servicing agreements to engage in any discussion [of] restructurings and that only those matters could be addressed with the special servicer.” (Ex. 3, Nolan Dep. at
29:8-17) Helios’ corporate representative likewise testified that if a borrower had contacted the special servicer concerning the terms of a loan for which a special servicing event had not yet occurred, the special servicer would have refused to discuss the issue: “We would simply explain that a servicing transfer event has not occurred and that our authority under the PSA is triggered only by a servicing transfer event. They – there was no role that we can play in the discussions, negotiations of a loan until after the servicing transfer event.”

In other words, under the CMBS structure, master servicers generally do not have authority to renegotiate loan terms. That authority resides with the special servicers but the Project Debtors cannot talk to the special servicers until the loan is close to, or in, default. The bankruptcy filings thus eliminated one of the fundamental structural impediments to renegotiating CMBS loan terms.29

So then what are the courts parameters in calling a filing "in bad faith" and thus removing entities currently in bankruptcy?

In re Kingston Square Assocs., 214 B.R. 713, 725 (Bankr. S.D.N.Y. 1997); see In re RCM Global Long Term Capital Appreciation Fund, Ltd., 200 B.R. 514, 520 (Bankr. S.D.N.Y. 1996), the court held a bankruptcy petition should not be dismissed unless “it is clear that on the filing date” that (1) “there was no reasonable likelihood that the debtor intended to reorganize,” and (2) there was “no reasonable probability that it would eventually emerge from bankruptcy proceedings.”

The SPEs in a round about way make the case that the Chapter 11 filings, based on their claims that the entities included are viable, make the case FOR GGP that emergence from Chapter 11 was not only planned but likely, thus rendering the "bad faith" argument moot.

Neither of the above conditions apply to General Growth Properties, because of that, based on case law, the motions for the entities to be removed from the Chapter 11 process ought to be denied.

If they are denied, and again, once in Court the outcome is never guaranteed, then a global solution will be more likely for General Growth. A global solution, barring a total collapse of the CRE market means shareholders ought to be happy when this is concluded.

Full Filing:

GGP 705

Disclosure: Long GGPWQ.PK