The firm of Wachtell, Lipton, Rosen and Katz has put out some very interesting opinions as to the General Growth (GGWPQ) Chapter 11. It goes to the central thesis we have here that the lenders, one way or another will end up extending maturities on the loans. This, in turn, will leave tremendous value for the common shareholders.
First this from 8/12:
GGP WLRK
Here is the applicable section:
Given the novelty of some of these issues, it is not yet clear how the coming wave of real estate restructuring and bankruptcies will play out. While this round went to GGP and against the SPE and CMBS lenders, it remains to be seen where the balance struck by the GGP court between creditors’ rights and the interests of equityholders leads when thorny issues such as cramming down secured lenders to extend maturities and alter pricing and other terms to the benefit of equity are presented to the court, or how negotiation and settlement discussions – both in formal bankruptcy proceedings and in consensual non-bankruptcy restructurings – will play out in the post-GGP era. The prospect of SPEs being included in consolidated bankruptcy proceedings will also raise issues not addressed in GGP, such as whether solvent SPEs will participate in an enterprise’s DIP financing, potentially structurally subordinating mezzanine lenders. Another twist may be the bypassing of the intricate consent and control mechanics in pooling and servicing agreements, with CMBS certificateholders working independently of their servicers.
Whether or not consistent with the expectations of creditors and debtors, the GGP ruling is consistent with the general tendency of bankruptcy courts to be pragmatic and to place substance over form. As the GGP court concluded: “These Motions [to dismiss] are a diversion from the parties’ real task, which is to get each of the [debtors] out of bankruptcy as soon as feasible. The [secured lenders] assert talks with them should have begun earlier. It is time that negotiations commence in earnest.”
Then on 8/24 this:
REIT and Real Estate Restructurings and Bankruptcies – Further Observations From the Front Lines
Again ,the applicable portion:
The “cramdown” provisions of the Bankruptcy Code (colloquially, in the case of a secured creditor, “cram up”) permit a plan of reorganization to be approved over the dissent of a class of creditors if the plan is “fair and equitable”. Even an over-collateralized loan need not be paid off in cash in a bankruptcy case, and in today’s climate of scarce refinancing capital, non-payment and partial payment have become common. With respect to secured creditors, a plan is fair and equitable if, among other alternatives, it allows the creditors to retain their liens and provides for new or “rolled over” debt in an amount, and with a value equal to, the secured claim. However, the appropriate interest rate, maturity and covenants of the new obligations are not specified by the Bankruptcy Code. Most courts refer to the market in deciding such terms, but some courts allow for the possibility that the market is inefficient (a serious risk in today’s financial climate) in choosing terms that will not result in the new instrument trading at par. In addition, the 2004 U.S. Supreme Court decision in Till v. SCS Credit Corporation – a chapter 13 case of uncertain applicability in chapter 11 – suggests that cramdown rates in the range of prime plus 1 – 3% are appropriate. Certain GGP shareholders have publicly floated the notion of cramming up GGP SPE debt with seven-year paper at current interest rates. Whether such terms would pass muster before a court depends on any number of factors. However, in the recent Spectrum Brands case secured creditors facing both a reinstatement and cram-up fight reached a consensual agreement with the debtor that gave them a 250 bps margin bump, a LIBOR floor and an actual shortening of maturity relative to their prepetition credit agreement.
This and other cases settled both in and out of court in recent months suggest that the uncertainty surrounding cramdown tends to lead parties, where debt is secured but cannot be refinanced, to compromise solutions – rates not so high as might be incurred in a refinancing, nor so low as the rates that prevailed in the recent bubble financing years.
It is important that the Judge in the case has a very wide range of latitude as it pertains to remedies. Other than maturity extensions, other options simply make very little sense. The battle now becomes over not whether or not to extend them, but for how long and at what rate. As long as CMBS markets remain as restricted as they are, the maturities have to be pushed out farther or the Judge risks being in the same spot a few years from now and this new debt comes due without a market to refinance it in.
Disclosure (“none” means no position):Long GGWPQ
