Bruce Berkowitz & Fairholme Invests in General Growth $$

This is an interesting move for Fairholme (FAIRX). Hat tip reader Shaun.

ValuePlays favorite Bruce Berkowitz has made a bet on >$500m of General Growth’s (GGWPQ) unsecured debt.

Berkowitz has picked up $394m in GGP convertible bonds, $110m in a tranche loan and $94m in Rouse bonds. The weighting of this debt in Fairholme’s portfolio is 5.2% of it

Seeing as the plan (at least the one must publicly discussed) is to convert these bonds to equity PRIOR to emerging from Chapter 11, Berkowitz buying these bonds should be construed as a bullish case for the company and its common shares.

Here are the details:

Exchangeable Senior Notes

In April 2007, GGPLP sold $1.55 billion aggregate principal amount of 3.98% Exchangeable Senior Notes (the “Notes”) pursuant to Rule 144A under the Securities Act of 1933. Interest on the Notes is payable semi-annually in arrears on April 15 and October 15 of each year, beginning October 15, 2007. The Notes will mature on April 15, 2027 unless previously redeemed by GGPLP, repurchased by GGPLP or exchanged in accordance with their terms prior to such date. Prior to April 15, 2012, we will not have the right to redeem the Notes, except to preserve our status as a REIT. On or after April 15, 2012, we may redeem for cash all or part of the Notes at any time, at 100% of the principal amount of the Notes, plus accrued and unpaid interest, if any, to the redemption date. On each of April 15, 2012, April 15, 2017 and April 15, 2022, holders of the Notes may require us to repurchase the Notes, in whole or in part, for cash equal to 100% of the principal amount of Notes to be repurchased, plus accrued and unpaid interest.

The Notes are exchangeable for GGP common stock or a combination of cash and common stock, at our option, upon the satisfaction of certain conditions, including conditions relating to the market price of our common stock, the trading price of the Notes, the occurrence of certain corporate events and transactions, a call for redemption of the Notes and any failure by us to maintain a listing of our common stock on a national securities exchange. The exchange rate for each $1,000 principal amount of the Notes is 11.27 shares of GGP common stock, which is subject to adjustment under certain circumstances. We currently intend to settle the principal amount of the Notes in cash and any premium in cash, shares of our common stock or a combination of both. See Note 15 for information regarding the expected impact on our comparative consolidated financial statements to be issued in 2009 as the result of a FASB staff position issued in May 2008 relating to certain convertible debt instruments.

Why buy the debt over the common now? Possibilities?

  • Common has run >2000% perhaps he would rather take the 4% -7.2%  interest payments while waiting to be converted into equity
  • Buying the debt over the common gives him a seat higher up the food chain in restructuring talks
  • He now sits at the table with Ackman, Brookfield Asset (BAM) and Simon Properties (SPG) as known unsecured debt holders.

Not knowing what he purchased them at, I am guessing that they were decently below par so he got a “catch up” value for when they convert to equity at par, then he can ride the common with the rest of the shareholders, plus he gets an interest check in April.

Now we can have some fun speculating. Berkowitz recently took a 24% equity position in Winthrop Realty Trust (FUR) worth $27m.

Winthrop Realty Trust (the Trust), formerly First Union Real Estate Equity and Mortgage Investments, is a real estate investment trust (REIT). The Trust is engaged in the business of owning real property and real estate related assets, which it categorizes into three specific areas: ownership of operating properties; origination and acquisition of loans and debt securities secured directly or indirectly by commercial and multi-family real property, including collateral mortgage-backed securities and collateral debt obligation securities, which it refers to as loan assets and loan securities, and equity and debt interests in other REIT securities (REITs). It acquires assets through direct ownership, as well as through entering into specific strategic alliances and joint ventures. On March 25, 2008, Winthrop Realty Trust announced that it had sold all of its interest in Lexington Realty Trust.

Could this be another bidder form some of GGP? Winthrop’s CEO Ashner is as sharp as they come and a “Davidson” favorite. Located in Boston, I can think of a few premier GGP properties that Winthrop would more than likely love to be involved with (Faneuil Hall, Natick Mall).

Just speculation but hey, that is what makes this so fun….. (ps. if it turns out to be correct, please refer to this as a “prophetic prediction”)


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