Foreclosure Plan May Impact GGP

The share price of GGP continues its steady downward slide, as expected, in the wake of continued uncertainty around lending which prolongs the current financial limbo. GGP remains locked in protracted negotiations with a range of lenders including Deutsche Bank and Goldman Sachs relating to loans all now past their due date, and all now beyond the period of foreclosure.

That in effect means that if a single lender decides 'enough is enough' and pulls the plug, there would likely be a domino effect on other lenders that would lead to them all declaring default - and forcing General Growth to file for Chapter 11 bankruptcy protection.

It is interesting to note that yet again none of the wider lender consortium have done so, despite now being as much as a week beyond the foreclosure period, and only illustrates once again that lenders are desperate to avoid pushing such an enormous firm into bankruptcy.

As I have stated previously, this is in nobody's best interests - particularly Chapter 7, which would force immediate liquidation of distressed assets at firesale prices, and lead to all lenders making a loss. This seems to be shared by others in the banks that make up the lender consortium, as this article outlines:

"There seems to be a lot of concern regarding what happens when loans come due in the next couple of years. There are large numbers of loans coming due in 2009 and increasing through 2010 and 2011. J.T Coe, Managing Director, Deutsche Bank states, “Everything’s getting extended, foreclosure is the LAST resort”. Waynebern continues “[Lenders will] Extend, Forebear, Modify loans on cash flow assets.” “The Banks can’t run the business as well as the borrower.” So, the consensus opinion is that the banks will use foreclosure only as a last resort. They simply can’t maximize their returns, or minimize their losses trying to run the businesses themselves, or, liquidating assets in weak markets."

After the widespread market backlash at the lack of substance behind the Financial Stability Plan, news emerged yesterday that Barack Obama will be releasing details of the plan relating to preventing real estate foreclosures on Wednesday. I need to find out whether this also includes commercial real estate, but assume so for now. Either way, of interest is that meantime several banks have openly pledged to stop foreclosures.

At present the future of GGP remains finely balanced. One of Chicago's largest property companies on the brink, partly owned by a wealthy, Chicago-based family and major backers of a new President from Chicago. It is difficult to see GGP being thrown to the wolves when a commercially viable business could be saved through refinancing of its loans - not additional capital.

I remain comfortable with the situation relating to GGP - unlike many small investors who appear to be suffering psychological swings of doubt and worry. Interesting to note how the major institutions invested in GGP view the firm, most notably ones such as Pershing Square.

This presentation on slide 46 gives a good summary of their view of GGP. I remain optimistic that this next month is going to bring some significant news that is going to lead to a huge increase in the stock price.