Friday, April 24, 2009

Follow Up On GGP's Substantive Consolidation

I previously disclosed GGP's extensive intertwined nature within the CMBS universe and considered some of the adverse CMBS implications as a result of bankruptcy remote SPEs being thrown into chapter 11 by GGP LP. The conclusion was that this "substantive consolidation" precedent bodes ill for the general stability of the CMBS market due to the reevaluation of this action's implications for "bankruptcy-remote" entities. In a research report by RBS released yesterday, the bank provides its thoughts on this troubling development.
An Unpleasant Surprise: GGP-Related CMBS SPEs File for Chapter 11 Bankruptcy Protection

GGP LP is the entity through which substantially all of the GGP Group’s business is conducted. GGP LP owns or controls directly or indirectly GGPLP, LLC, The Rouse Company LP (TRCLP), and General Growth Management, Inc. (GGMI). GGP LP, GGPLP, LLC, and TRCLP are debtors in the Chapter 11 filing. Pertinent to the CMBS marketplace, 158 regional shopping centers owned by GGP subsidiaries filed, including some 75 single-purpose entities (SPEs) within CMBS transactions. According to the GGP website, 115 GGP related entities did not file for protection, including GGP's third-party management business conducted by General Growth Management, Inc. and GGP's joint venture malls and office properties.

The CMBS SPE borrower filings could have significant ramifications for the CMBS marketplace. Most SPEs were structured as a single-member, single-purpose, single-asset entity with a general partner and an independent director (sometimes two directors), who must approve an SPE bankruptcy filing. In addition, lender’s legal counsel generally delivered a non-consolidation opinion in connection with the origination of these loans. The establishment of such bankruptcy-remote entities is designed to help keep a property from being consolidated with the bankruptcy of the parent company or legal owner; as such a consolidation could delay or impair the lender’s ability to collect on the outstanding loan. For example, a special servicer would need to seek the permission of the bankruptcy court in order to begin foreclosure proceedings.

The rating agencies have detailed guidelines as to what an SPE must do to establish and maintain bankruptcy-remote status. The establishment of an independent director within an SPE is an important rating-agency requirement. In general, the rating agencies dictate that at least one director or manager of the SPE be ‘independent,’ with no current or prior relationship with the lender or the borrower. Most often, unanimous consent of the directors or managers is required for an entity to file for bankruptcy protection. The single vote of an independent director can prevent the filing. An independent director is generally required to act in his own fiduciary capacity on behalf of all equity investors, shareholders, members and, in the case of impending
bankruptcy, all creditors. What is worrisome in the GGP situation is that it appears that all independent directors associated with the filing CMBS SPEs saw fit to approve the bankruptcy petition. We suspect that creditors will want to verify that all independent director and board approvals were sought and received by GGP.

GGP has filed a motion that the Chapter 11 cases of SPE borrowers be consolidated for ‘procedural purposes only and jointly administered.’ If allowed by the NY bankruptcy court, such actions could represent a ‘substantive consolidation’ that allows GGP to pool the SPEs in with its unencumbered assets during the bankruptcy process. It remains to be seen whether or not the SPEs are allowed to remain in bankruptcy and, if they are, whether substantive consolidation with the parent occurs.
The RBS report goes on to provide some useful fundamental data (remember when not everything traded with a beta of 1?) about GGP's portfolio.

GGP’s reported 4Q08 results highlighted some deterioration in operating performance at its malls, with NOI down 2.4% in 4Q08 versus 4Q07 and occupancy falling to 92.5% from 93.8%. Notably, GGP’s average retail lease term was greater than nine years. Comparable tenant sales and sales per square foot also fell by 3.8% and 4.2%, respectively, on a trailing 12-month basis. Given the sharp overall deterioration in the retail sector, the moderate declines in GGP
mall performance highlight the high quality of the company’s regional malls. Thus it is not the performance of the GGP assets that triggered the company’s bankruptcy filing, but rather its inability to refinance maturing secured and unsecured debt.

GGP has approximately $18.4 billion in outstanding debt obligations that have matured or will mature by year-end 2012. Within the $18.4 billion, 68 loans, representing $9.9 billion in principal, are CMBS loans. In total, there are 114 securitized loans in 101 CMBS transactions with exposure to GGP/Rouse sponsored borrowing entities. The outstanding balance on these CMBS loans is $13.8 billion, and the majority of the loans were originated in 2005 and 2006, post the Rouse acquisition. The average original LTV and most-recent DSCR on the 114 securitized loans are a strong 62.8% and 1.80x. The majority of the loans had original terms of five years, with the average original term of 82 months. What is most notable about these loans are the mortgage rates, which average just 5.2% with some as low as 3.38% and speaks to originator perception of both the quality of the assets securing the loan and the institutional REIT sponsorship.

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