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Talking about General Growth Properties (GGWPQ), Oil (USO), Gold (GLD), Natural Gas (UNG) and Red Sox/Yanks

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Disclosure (“none” means no position):

June 17th. D-Day for many lenders in the General Growth (GGWPQ) bankruptcy case. Why?

From Reuters:

group of creditors and loan servicers is scheduled to ask U.S. bankruptcy Judge Allan Gropper on June 17 to dismiss about a dozen malls from the case.

Chicago-based General Growth set up each mall as a special purpose entity — a separate company — that protected General Growth from each of the malls’ obligations. Each SPE was be governed by independent directors, and each entity’s cash was to be managed separately. They were intended to be “bankruptcy remote.”

During the hearing next week, the creditors of the SPEs will argue that General Growth put the SPEs into bankruptcy in order to give the company more leverage from which to negotiate loan modifications and extensions.

The commercial real estate and the lending sectors will be watching this hearing and the overall bankruptcy, said experts speaking at the Commercial Mortgage Securities Association conference in New York.

“I think the debtor (General Growth) is inclined to fast track this, and we will have to wait to see what proposals come out short of a dismissal to see if the a negotiated exit is possible,” Cross said.

When General Growth filed for bankruptcy protection in April, it swept 166 of its malls along with it, replacing the directors with new ones who voted to put the SPEs into bankruptcy. The entities in bankruptcy were facing $24 billion of debt, about $15 billion of which consisted of commercial mortgage-backed securities.

The remainder of General Growth’s other 200 or so malls are joint ventures and are not in bankruptcy nor is the General Growth’s management company.

Will the judge rule to consolidate or not?

When a corporation files for bankruptcy, the court must address a fundamental question: Are these entities legally distinct or should they be collapsed?

Substantive consolidation is the pooling of the assets and liabilities of technically distinct corporate entities. For the purposes of confirming a Chapter 11 plan or for liquidating assets under Chapter 7, the creditors of the previously distinct subsidiaries are creditors of a single debtor. Although courts use language akin to “piercing the corporate veil,” the doctrines are quite distinct—instead of pooling assets vertically (e.g. parent and subsidiary), substantive consolidation pools asserts horizontally (e.g. subsidiary and subsidiary).

Is this valid in the GGP Chapter 11? In many instances, yes. What we have brewing is a ruling of the lending agreements vs the actual structure and operations of the SPE. In many instances in the malls in question, there was no defined separate director (or whether or not there was one is debatable) and cash flows were not managed independently from other operations. This enables them to be consolidated under Chapter 11. The consolidation will be done on a mall by mall ruling but expect many to be folder into the current filing.

How does this effect shareholders. Directly, it doesn’t as we only care about the big picture (what is left after debt claims settled). Indirectly, it does. If GGP is victorious in this ruling, they then will have more sway over debtholders. The more debt that can be extended, the stronger the resulting entity that emerges remains. Also, the fewer moving parts in a filing, the faster it is then able to emerge from Chapter 11.

Disclosure (“none” means no position):

For shareholders of General Growth Properties (GGWPQ) this bit of news is huge….it really is.

From Reuters:

U.S. commercial real estate mortgage servicers are seeking to extend maturing loans for up to five years in a bid to prevent borrowers from defaulting and giving up office, retail and apartment buildings at distressed levels, an industry executive said on Tuesday.

The moves by special servicers, which oversee mortgages in or near default, would sharply increase the maturity of the loans from the six- to 12-month extensions commonly negotiated today, John D’Amico, a senior managing director at Centerline Capital Group, told Reuters after a panel hosted by the Commercial Mortgage Securities Association in New York.

Modifying loans has consumed the $700 billion market for commercial mortgage securities this year. Frozen credit markets have limited refinancings for maturing loans in commercial mortgage-backed securities, resulting in a wave of defaults and exacerbating the impact of the U.S. economic recession.

Loans coming due in CMBS will grow to $42 billion in 2010 and $69 billion in 2011, from $15 billion this year, according to Credit Suisse.

So why is this such a big deal? It is an admission by the industry that market were broken AND that the best way to prevent a cascade of defaults is to materially extend maturities of current debt.

This scenario is the reason for GGP’s Chapter 11 and expected to be the very plan put forward when it files the plan of reorganization later this year. The plan stands a far better chance of acceptance by the court and will resist challenges from any dissenting groups if the plan runs in accordance with already established practices by the industry. Creditors will not be able to argue the plan is “unfair” if what is being proposed is in some form what is already being practiced.

From the article:

The loan “workout” process has often turned “nasty” as servicers try to hammer out terms agreeable to a variety of borrowers, lenders and investors that will limit losses and prevent foreclosures, a lawyer said at the CMSA conference on Monday. Among sticking points, lenders often demand borrowers put up additional equity, and the extensions add risk for CMBS investors because it delays return of their principal.

But with property prices falling and outlooks dire, parties are coming to terms with longer extensions, D’Amico said.

“I think we will see more cases where people will put more (equity) in the properties” to get extensions of up to five years, D’Amico said.

This gives even more credence to the cram-down scenario we brought up here in April. It is not by any means unreasonable to think the court will simply say that since the market is currently operating in this fashion, it is going to handle to Chapter 11 in a similar way and simply extend all debt.

A cram-down in this case that uses existing practices as a general guide would make for an expedited Chapter 11 and give a certain level of stability to a market that desperately needs it. It also is the best scenario to ensure both debtholders and stake holder are kept whole.

Disclosure (“none” means no position):Long GGWPQ