Additional Thoughts On The GGP Substantive Consolidation Threat
Following up on the RBS GGP piece from earlier today, here are some even more specific insights, courtesy of Wachovia. Of particular note is the observation that SPE cash flows are subordinated to Bill Ackman's DIP.
General Growth Properties, Inc., and a number of its subsidiaries filed for bankruptcy protection on April 16. Although the bankruptcy filing was widely anticipated, the inclusion of “bankruptcy remote” special purpose entities in the filing was probably not expected. In terms of CMBS loans, we found 83 loans with a current balance of $8.4 billion initially identified in the bankruptcy filing. On April 22, GGP included eight additional properties in the bankruptcy filing, according a company press release. In general, the GGP loans can be characterized as overcollateralized
with healthy cash flow.
On April 17, the court issued an interim order authorizing the use of cash collateral at the SPEs and setting the adequate protection payments that will be paid to property lenders. Adequate protection payments are a court mandated payment for ongoing use of collateral. Based on this interim order, property lenders will be paid “non-default interest…to be paid when due.” This order is in effect until the final hearing date on the first day motions scheduled for May 8, at which time it may be extended.
There are two significant points about this order. First, there is nothing in the order authorizing principal payments. In our view, this is of particular concern for Anticipated Refinance Date (ARD) loans, where excess property cash flow has been directed to hyperamortizing loans. Second, SPE cash flows are now effectively subordinated to the debtor-in-possession (DIP) facility. In the words of the court,
Each Adequate Protection Claim shall be accorded administrative expense priority in accordance with sections 503(b) and 507(b) of the Bankruptcy Code; provided, however, that the Adequate Protection Claims shall be junior to any superpriority claim granted to the Lenders and authorized by this Court in connection with any postpetition financing extended on account of such financing.
The first of the rating agencies to respond, Moody’s raised questions about the involvement of the independent directors on the SPEs’ boards in the Moody’s Weekly Credit Outlook on April 20, 2009. The agency raises concern over the possibility, albeit remote, of consolidation of the SPEs with the parent company. Also in the report, Moody’s hypothesizes that GGP may use the bankruptcy to extend mortgage maturities. The report concludes that the GGP case represents a “major test of a key building block of structured finance.”
Fitch, on April 21, moved 96 classes across 20 deals to negative outlook in response to GGP’s bankruptcy filing. Supporting the move, Fitch listed concerns that 1) the filing creates a level of uncertainty, 2) special servicers may be prohibited from foreclosing on properties, and 3) GGP may seek to add additional leverage against the properties.
Based on the currently available information, we see the following implications for CMBS investors:
1) Special servicing transfer: We believe properties listed in the filing will be transferred to special servicing. Along with this transfer, loans will incur a 25 bps-35 bps special servicing fee and a 1% cure fee. Along with this, we believe that properties will be subjected to updated appraisals.
2) As outlined above, we believe that investors should consider scenarios under which the hyper-amortization on ARD loans is interrupted.
3) And, looking ahead, it may be helpful to begin considering extension scenarios of three to five years for GGP loans within CMBS, which have maturities in the next two years. Although it is admittedly early in the process, we believe it is reasonable to consider scenarios under which GGP uses the full 18-month period allotted to it to propose a plan of reorganization. This represents a starting point for considering possible extension scenarios, in our opinion.
In thinking about the range of potential outcomes, it may be helpful to be aware of the possibility of lien stripping, although we believe this risk currently applies only to a minority of the loans. For an underwater loan, lien stripping involves reducing the secured claim to the value of the property and converting the remainder to an unsecured claim.
Finally, the worst case scenario for CMBS bondholders is the consolidation of assets and liabilities. In effect, under substantive consolidation creditors look to a single pool of assets to satisfy claims. Clearly substantive consolidations would challenge foundational principles of CMBS. At this stage, we view this risk as remote.