GGP about to start some heavy lifting -- what a workout!

Sorry, I could not resist that head to my post. This article sums it up pretty well. Lenders want their money back from GGP, in full, and now. GGP wants a seven year extension and favorable rates.

The judge has been siding with GGP so far, from what I can tell, and the bankruptcy guru of gurus said it best when commenting on the judge's refusal to take some of the properties out of the BK:

"The judge encouraged all parties to commence negotiations as soon as practicable in light of the decision," said James Sprayregen, partner with Kirkland & Ellis LLP, General Growth's co-counsel.

Some think GGP's best outcome is an acquisition by Simon and/or Westfield, both of which companies I understand have dry powder. This has been done before, especially in combo, as you may recall when Urban Retail/Rodamco's assets were split up by a troika. Now you could have more antitrust problems with consolidation and all that.

Others want to see the company survive, meaning there may be some very heavy lifting and long nights ahead for bankers and GGP execs on the business side if they want to make this work. And as I have said before that spectre of substantive consolidation hanging over the lenders almost like a Sword of Damocles.

Read more »

GGP - people didn't see this coming?

You can't be serious. The way this case is going, and now with a plan delayed for quite some time, we see this:

[GGP] at a hearing said it was considering ways to treat some of its subsidiaries as a single debtor and override their status as separate companies, according to a transcript of the hearing.

Perhaps even more stunning is this howler:

"This was a surprising development that was probably saber-rattling on General Growth's part," said Daniel Rubock, a senior vice-president at Moody's, who attended the hearing.

Saber-rattling, yes? But surprising? Not in my humble opinion, as I think I alluded to some months ago. From a tactical legal standpoint it makes a lot of sense to me, and I know I am not alone in saying that you could see this being at least a thought in the back of someone's head. I readily admit to happily not being an expert in substantive consolidation, but the mere fear of it in the eyes of the lenders -- even if it is an uphill battle for GGP to get it -- might make some kind of global settlement more likely, as the story quite correctly points out.

Speaking of fear, if you've read this far I think you know this goes way beyond GGP. If the company were to go to that nuclear option and then even succeed, then every other distressed borrower will copycat on to that theory and create what could be a complete disaster at the end of the day. It almost goes without saying that this would mean "pop" goes the loan market, such that it is these days anyway.

Read more »

Wednesday Tidbits - 6-17-09 Edition

Busy day today...but here are a few items on my radar screen this morning:

A Chicago panel says the worst is yet to come. They've obviously seen a bid-ask spread. That and lenders have to start lending again. Don't believe what you are reading about that topic, in my opinion.

Mark Walsh is back. You heard that right. "[T]he lead executive who loaded Lehman Brothers Holdings Inc. with toxic property investments, is part of a group chosen by Lehman to take over the bankrupt firm's real-estate private-equity arm." Read the comments in this story if you want some entertainment.

Motions to dismiss a number of the SPE bankruptcy filings of GGP by some of the lenders are being held today. Read about the lenders' positions here.

When is the last time you saw a headline like this: "Commentary: Extended Stay Bankruptcy Is An Exercise In Stupidity." Don't hold back now, folks. Tell us how you really feel.

Finally, without mentioning names or blogs, why are so many blogs about business, especially those written by lawyers, written so dryly, without any flair whatsoever? Is it a personality thing? Are they afraid of upsetting current or future clients? As for me, I'd rather not write if there was not at least a modicum of what I think is interesting. This blog's for fun, not profit.

Read more »

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.

Read more »

Ackman and GGP - somebody help me out here

Maybe I am just getting old and confused. I thought Bill Ackman was saying before that bankruptcy was the solution to GGP's woes. Now he is saying that the answer lies in a seven year debt extension. As we know, management was already trying to get extensions before the filing. Or was his real game plan a BK and then a forced extension to the creditors? You tell me, because otherwise I will never know.

I do know this: I hope Ackman's right about the bankruptcy judge for his sake and for others, including the human beings who still work there. I'm not sure a liquidation would be pretty right now. Actually, I am sure it would not. And if he is right, Ackman says that even at a 9.4 cap (compared to what - a 5.3 on the EOP portfolio?) he stands to make a 1300% cash on cash return. Nice money if you can get it.

Read more »

More on GGP, independent directors and substantive consolidation

While getting ready for work this morning, I found two excellent posts here and here at Zero Hedge. As you can see, these posts are from last month, but they still bear reading.

Why? It states what may be reality tomorrow, depending on the judge: that General Growth may be able to consolidate its SPE malls into the GGP bankruptcy. If that succeeds, chalk that up in part to good lawyering.

They are saying this is a procedural consolidation only, but is that really true? I'm honestly not sure. I readily admit that, while I worked on a number (say, a dozen or so) of these opinions over the years, I do not live, breathe and eat non-consolidation. No thanks. Here are some D&B thoughts, by the way.

Are there remedies? There could be insurance out there, I suppose. And law firms have, in every case, rendered legal opinions about non-consolidation. These, however, are reasoned legal opinions and while it may not be feasible to go after a law firm for its opinion, don't be shocked if someone tries to go after a possible deep pocket.

You may recall that I really didn't want to see GGP file, because of the human element and because of the very messy roll of the dice that BK can be. The problem is that this could bode a really tough future for lending, because of the impairment of the lender's ability to go after a single property. And here it just may be coming true....

Read more »

Sheldon Good & Co.'s BK

Well, I had no clue on this one. I know it happened the other day, but now that I am back home from vacation I cannot help but say a few words (beyond my previous tweet) about the Chapter 11 filing by Sheldon Good & Co., the Chicago-based real estate auction powerhouse.

The company says its filing can be blamed upon its late Chair and CEO, Steven Good, who sadly took his own life in January. Millions of dollars may be missing. Ouch. (By the way, a link to Steve's book and his web tribute are still on the website.)

Those who follow the company had to assume there had been some down times just because the market is in the tank, but you might also think the company might do some volume on liquidations caused by the economy. In fact the filing makes me wonder where the auction business is.

We also know there'd been a long standing fight between Steve and his father, company founder Sheldon Good, that led to the elder Good's departure from the company. (Crain's says he's listed as a creditor.) Here's an update with a quote from the senior Mr. Good.

In any event, this just adds to the sad course of what's going on in the market. I wish Alan Kravets and his team (some of whom I have met at business and sales lunches in the past) nothing but the best. I've always thought they did a great job for their clients, even when I was on the buy side of a deal they were selling.

Read more »

GGP files Ch. 11

Well, it happened, but not without making a good run at trying to stop it. General Growth Properties filed for Chapter 11 bankruptcy protection this morning. I am reading this: "The filing affects properties owned by the company but does not impact its third-party-management business and some centers owned in joint ventures." Here is the press release that says "broken credit markets" require this filing. (Well, that and levering yourself to the hilt. Wonder how certain former CFOs feel today.)

Now, not all the malls are in this 11:

Of the 158 regional centers included in the filing, some high-profile properties stick out, such as Ala Moana Center, in Honolulu; Faneuil Hall Marketplace, in Boston; and the Grand Canal Shoppes at the Venetian and Fashion Show Mall, both on the Las Vegas Strip. Of the about 60 properties that aren’t part of the filing, some big-name centers are Water Tower Place, in Chicago; Oakbrook Center, in Oak Brook, IL; and Glendale [CA] Galleria.

What next? Perhaps a mega-restructuring of debt, together with the sales of some properties to others at a good price. The sales may bring some cash out of the wood works and maybe some lenders to go along with it. Apparently 20% of the workforce has already been dropped previously, and I hope for people I know who are still there the axe does not cut at all or too deeply. What troubles me about this one is that real estate deals can sometimes be very complex, and this BK might take time and a lot of money to sort out. I was hoping not to have to test this theory, but here we go. The NYT shows a copy of the petition and the organizational charts, which themselves make for entertaining reading. I wonder whether those charts were made internally or if GGP paid $500/hour for a law firm associate to create them. Yes, folks, that happens. Take my word for it.

Read more »

Cramdowns - fact or fiction?

Here's a thought-provoking article on real estate bankruptcies in commercial real estate put out by Proskauer Rose LLP.

The gist? In the 1990s borrowers filed a lot of bankruptcies as a negotiation tactic and to shield assets from foreclosure. Bankruptcy laws have changed since than, and many deals (especially in CMBS packages) will contain springing guarantees against the principals. (That said, I have seen a deals outside this market that are much less onerous against the borrowers, with guarantees only for so-called "bad boy" acts such as fraud and environmental problems.) There are other considerations to this, but I'm not going into them here.

The article also gets into the issues of SPEs, independent directors and managers, bankruptcy remoteness and the like. It does not get into the more complex issues of substantive non-consolidation, Delaware single member LLC opinions, etc. Thank goodness for that. And query whether, if BK filings so start happening, whether there will be a rash of (a) challenges to consolidation in BK and (b) lawsuits on opinion letters against law firms. Again, these issues arise most frequently in the CMBS deals we saw so much of this decade. Give it a read if you this piques your interest.

Read more »

And there goes Circuit City

I know no one is shocked that CC is calling it quits. I can't remember the last time I walked in one. The bleeding never stopped and unless there's a last minute white knight the liquidation begins tomorrow, and 30,000 people will be unemployed. Sad.

The dirt is often a significant factor in what kills these companies. As today's Journal states,

Retail experts have cited the 2005 overhaul of the U.S. bankruptcy code as one reason so many chains are closing their doors. One such change shortened the period in which a retailer may accept or reject store leases. Retailers used to get a year or more to make those decisions. Now they are given 210 days. Once they accept a lease, the landlord then has an administrative claim against the bankrupt company.

On the flip side, though, landlords get hosed waiting and waiting for retailers to decide whether to accept or reject. So who's next?

Read more »

GGP - to file or not to file?

That's apparently the discussion had between GGP and its lenders at a New York meeting on Monday, according to the Journal. While not imminent,

even if General Growth succeeds in extending those debts further, the company is facing so many other loan maturities this year that some analysts speculate the company eventually will seek bankruptcy protection. In all, General Growth has roughly two dozen separate loans totaling more than $2 billion coming due in 2009.

It looks like Kirkland and Weil, Gotschal have been giving sage advice to Metz, Nolan & Co. (Oh, and the Bucksbaums, too.) In short:

[I]n bankruptcy court, General Growth would save money by forgoing interest payments on its unsecured debt but would also incur costs from the bankruptcy process and big tax bills if it liquidates its holdings. They added that, outside of bankruptcy court, General Growth could determine its own path free of the whims of a bankruptcy judge, according to people familiar with the talks.

In non-legal parlance, I like to call this the "Come to Jesus" meeting. In short, I think GGP is telling its lenders, "Listen, we're in trouble. And if we're in trouble, so are you. We do not want to exercicse the nuclear option, but we will if we have to, and you know what pain that will bring. So, help us refinance what we can, sell what we can and restructure what we can, and maybe we can all get out of this together. If not, then you get to own a lot of shopping malls."

I could be wrong, but that is my spider sense on this one. It is what I would do. And yes, I'll be keeping an eye on doings on North Wacker Drive.

Read more »

Sorry Sam - still no subscription for you

Yep. Yesterday, advisers, today, a Chapter 11 filing for Tribune Corporation. Even the Grave Dancer, much as I admire him, can't win them all.

"Over the last year, we have made significant progress internally on transitioning Tribune into an entrepreneurial company that pursues innovation and stronger ways of serving our customers," [Sam] Zell said in the [press] release.

"Unfortunately, at the same time, factors beyond our control have created a perfect storm -- a precipitous decline in revenue and a tough economy coupled with a credit crisis that makes it extremely difficult to support our debt," he said.

The Journal's Deal Blog tells us this was never a good idea and people said so:

To many people, the math never worked from the beginning. Tribune’s revenues had been falling precipitously for years. Zell offered a generous $8.2 billion offer for Tribune to win against two other billionaires halfheartedly bidding for the company. From the beginning, his plan was that the price tag would be paid through the pensions of Tribune’s 20,000 workers, held in an employee stock ownership plan, or ESOP. The ESOP structure was designed to reduce Tribune’s taxes to nearly zero and it lowered Zell’s own price tag to $315 million. Unfortunately, it also left a $12 billion debt load to pay just as the newspaper industry as a whole is largely cratering on lower ad revenues. The principle — that the company could hoard its declining cash flows to pay down this enormous debt — was flawed. Cash flows declined, and tax savings couldn’t help. A populism-friendly redesign did little to goose revenues.

It isn't dirt, unless you count Wrigley Field, Tribune Tower (Zell them for Condos?) and ancillary stuff. But the Tribune, the Cubs and WGN are Chicago institutions, so this is news to me.

That said, I don't watch WGN-TV much anymore. They've blown Cubs coverage by putting the games all over the dial. The only good thing they've done there is to add Blackhawks games. The radio side? Still ok, I guess. I have to wait and see on John Williams in morning drive.

But the newspaper? Good grief. It is literally unreadable since the redesign. I tried it for a couple of weeks and then canceled my long-standing subscription. And I'm not coming back. Sorry.

Notably, the Cubs are not part of the filing. Get the team sold already. I know, I know, taxes, taxes and more taxes. But get real and get it done.

UPDATE: Here's a link from the LA Times of the memo to Tribune employees.

Read more »

A tale of two bankruptcies

Bally Home Fitness is belly up again. After a prepackaged 11 last year they filed another one today, with the goal of conserving cash in a sale scenario or a reorganization.

The gym business is utterly cutthroat competition. You have the higher-end places that can charge (a little) more but have fewer members, and you have the others (such as Bally) that rely on large numbers and low fees. In either event the gyms rely heavily on additional services to make more money and in this economy...you get the picture. With those numbers, it is hard to make things work. But Bally's been around a long time.

Kimball Hill Homes is also in Chapter 11 and has been since the spring. Alas, the local builder is calling it quits and winding down its operations after a prospective buyer walked away. The company is emphasizing that this will be an orderly process, with all existing construction being finished. This is made sadder by the death this summer of David Hill, the founder of the company named after his father.

Read more »

Thursday Tidbits - 11/20/08 Edition

GGP has hired Sidley Austin as BK counsel. Now, this does not mean they will file. But, they've got over a billion in debt coming due by month's end, and the company's worth about $100 MM right now (not that there's any correlation; I just like to say that, and hey, lenders are worried too). I'm actually surprised this hadn't come out sooner.

Why else this is a problem? Because spreads are insane, apparently driven by two deals possibly defaulting early in the loan cycle. Take a look at the underwriting and you'll see why. Maybe this is the sell signal we need to get people buying something, albeit at dirt cheap rates. But lending has tightened even though bankers claim they are lending.

As for me? I think I will apply for bank status and then fly to DC in a private jet and ask for TARP money. What the heck? And what word should I use for this? Irony? Hubris? Stupid? All of the above?

UPDATE: the contraction of lending activity is 53%. I just could not find the link earlier.

Read more »

Never mind - just liquidate

Are changes in the bankruptcy laws causing this? Instead of reorganizing, companies these days are just liquidating. Let's see...Linens and Things, Value City, Bennigan's...now apparently Steve & Barry's (H/T Traffic Court) only three months after a private equity rescue, and some think Circuit City's conversion to a Chapter 7 is only a matter of time. Or is it that PE players are just scared of the economy right now and figure they better cut their losses? Maybe not here, since the hedge fund that bought the company is going to lose its investment.

So, the best answer may be lenders. In the case of Steve & Barry's, "Cerberus Capital Management LP, whose Ableco lending unit provided a loan to finance the deal, expects to be paid back in full, according to people familiar with the deal." Want to bet a nickel the lender said, no more money -- we want ours and unless you PE guys put more skin in the game, close this puppy down.

Now the question is whether we all have the intestinal fortitude to see this happen in Detroit, or whether we will hold on to what many consider to be a broken business model.

Read more »

You know things are bad when

you read this. I know the Blixseth divorce started cordial, went sour, and now this? Whew.

BILLINGS, Mont. (AP) — The Yellowstone Club, an exclusive mountain retreat for the ultra-rich, said it filed for bankruptcy Monday after failing to secure new financing — underscoring that even the elite can't escape the country's current economic troubles.

Read more »

And now, the dreaded going concern statement for GGP

Yup. GGP has released its 10-Q with the following statement:

In the event that we are unable to extend or refinance our debt or obtain additional capital on a timely basis and on acceptable terms, we will be required to take further steps to acquire the funds necessary to satisfy our short term cash needs, including seeking legal protection from our creditors. Our potential inability to address our 2008 or 2009 debt maturities in a satisfactory fashion raises substantial doubts as to our ability to continue as a going concern.

What does that mean? Bankruptcy if some big loans are not extended or refinanced. And these deals are requiring big bucks, including lower LTVs and higher interest rates. This double whammy may mean that even if the loan agreement is on the table the deal may not be able to be done. The CC bankruptcy didn't help. And some say it is time that GGP go away.

(AIG had a going concern statement in its 10-Q, by the way. But it gets a bailout.)

Read more »

Circuit City turns to Chapter 11

First they announce store closings. Now bankruptcy, albeit Chapter 11 for the time being. Is that the whole story?

The interrelationship is more than meets the eye from the wire stories. There is definitely a real estate component to this filing.

When they announced the store closings, the question you had to ask was: how? Do the leases for the closing stores have termination rights? Landlords aren't just going to walk away smiling. A retailer with the clout of CC usually negotiates a "go dark" provision that allows the store to close but you still have to pay rent.

But under Chapter 11, the retailer can reject the leases it does not want and walk away. See this from the press release:

Under the protection of Chapter 11, the company plans to build on these recent restructuring initiatives. Through the additional flexibility that the bankruptcy process provides the company to restructure its operations, the company will continue its real estate rationalization by taking immediate steps to reject the leases at its previously closed locations. Further, as part of its restructuring efforts, the company will continue to assess the productivity of all assets, review additional cost-cutting initiatives and explore strategic alternatives to maximize the value of the business.

I also noted that company believes it will have cash for unsecured creditors, making the dirt angle even more credible. Now the question is whether this company, which has been battered by Best Buy, will make it even with this restructuring. Let's hope so.

UPDATE: Deal Junkie makes an excellent point about the inflexibility of the CMBS market in this post.

Read more »

Is it me, or is this obvious?

Holland & Knight has some really good real estate lawyers. They do. And they give good advice to their clients.

Here's some they gave recently:

Banks are willing to work with commercial real estate developers on projects before trouble arises, and bankruptcy should not be part of the equation for either side. That’s the opinion of lawyers with Holland & Knight LLP, which discussed options for a down market with both groups during breakfast Thursday at the firm’s local headquarters.

Don't get me wrong: I absolutely agree with this advice. I just find it utterly unfathomable that any troubled developer would file an 11 or a 7 without trying to negotiate a workout with the bank. And I'll bet a nickel that this is what the lawyers said or at least implied.

The story, at least to me, just came off as overstating the obvious, and I'm confident that was not the complete thrust of what was going on at these meetings. Maybe I'm just not getting it -- it's Friday, after all. I don't have a single client that wouldn't talk workouts, nor do I know a lender that doesn't do the same. So maybe my clients are sophisticated enough to plan ahead for contingencies, both good and bad.

Read more »

Linens & Things finally pulls the Chapter 11 trigger

It was really a matter of when, not if, right? 20% of the stores are closing, they have DIP financing and may even be able to pay some creditors.

Four stores are closing in Chicago: three in the north/northwest 'burbs (Palatine, Schaumburg and Skokie) and the Michigan Avenue store at 600 N., a location that commands high rents. What typically happens in a Chapter 11 is that the leases get rejected by the debtor, leaving the landlord out of luck.

This probably won't be the last BK, even if the economy picks up. The question now is who is next.

Read more »