The Bankruptcy of General Growth Properties

Transcription

1 The Bankruptcy of General Growth Properties Changing the way we think about bankruptcy remote, single-purpose entities August 8, 2010 H. Scott Miller

2 Historical Perspective The downturn of the early 1990s Last significant real estate downturn occurred in the early 1990s Direct mortgages secured by individual projects Secured lenders were typically whole-loan lenders Series of individual negotiations concerning individual borrowers and individual properties Guidelines for substantive consolidation start to be delineated by the courts 2

3 Historical Perspective The rise of structured lending and securitization Securitization began in early 1990s and peaked in the 2000s. Corporate bond-like method of providing real estate financing Lending structures became inherently complex Easy capital and rising real estate values helped sponsors grow larger and larger Strength of sponsor carried importance, but structured transactions relied principally on underwriting separate assets Attempted to insulate loans from bankruptcy risks 3

4 Historical Perspective Basic SPE structure If followed, separateness covenants should prevent an entity from being drawn into another bankruptcy Prevents a company from engaging in business other than owning a specific property Prevents a company from commingling its assets Prevents confusion in the identity of the company Bankruptcy-remote structure attempts to prevent borrower mischief through bankruptcy Vote of independent directors required for bankruptcy filing Goal is to ensure that a non-recourse lender gets the basis of its bargain - which doesn t include a bankruptcy filing 4

5 The General Growth Bankruptcy The properties are filed GGP filed 388 entities, including the project owners of roughly 166 of its 219 malls Only a handful of the 166 malls were in default; all other properties were performing Filing was effected by removing and replacing independent managers First-day hearings involved GGP s continued use of a centralized cash management system with pooled cash collateral 5

6 The General Growth Bankruptcy Administrative vs. substantive consolidation Each of the GGP entities were administratively consolidated into one proceeding Court goes out of its way to state that no substantive consolidation is ordered Pooling and use of cash collateral in the centralized cash management account was the status quo Court states that the act of filing the enterprise is appropriate Court acknowledges separateness of entities and expressly notes that it is not granting substantive consolidation 6

7 The General Growth Bankruptcy Separateness concepts: Lender s perspective GGP s property-level filings were improper: Individual assets are specifically underwritten Bankruptcy is not the basis of the bargain: in exchange for no personal liability, lender gets the property when something goes wrong Performing properties with distant maturities Resulted in transfer of value from lenders to GGP s equity 7

8 The General Growth Bankruptcy Separateness concepts: GGP s perspective GGP s property-level filings were perfectly proper: Lenders relied on strength of core GGP functions Lenders required sponsor guaranties and the refinancing of balloon payments at maturity; each required sponsor strength Perceived inability to refinance in the future would make corporate reorganization impossible Inability to negotiate with most lenders because of sponsor s financial issues Cash collateral and cash management orders simply preserved the status quo and avoided a massive forfeiture Exactly what bankruptcy is designed to prevent 8

9 The General Growth Bankruptcy Separateness concepts: Historical perspective Separateness documentation became industry standard before: Lenders ability to work out loans were constrained by securitization rules, complex loan structuring, intercreditor documentation and accounting rules The remarkable growth of real estate enterprises as a result of easy capital and rising real estate values The General Growth bankruptcy was the first test of these standards in today s industry climate: Avoided a massive forfeiture, which courts abhor Complex real estate cases, with plenty of collateral and good recordkeeping, are easily handled by courts 9

10 The General Growth Bankruptcy The effects on bankruptcy-remote documentation GGP plans of reorganization modifications: Changes to separateness covenants to account for centralized cash management Lender consent required for independent managers, unless hired from a corporate services provider Notice to lender prior to removal of independent managers Other proposals: Full lender consent over identity of independent managers Requirement for pre-filing negotiations with lender Minimum standards required to effect a filing No removal of independent manager unless for cause 10

11 For Additional Information Contact H. Scott Miller

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