The Court submissions by GGP are lengthy enough to warrant further summary and analysis. Most interesting are the statements outlining the anticipated path through Chapter 11 by Adam Metz, CEO of General Growth Properties, and James A. Mesterharm, the restructuring advisor and MD of AlixPartners.
Thanks to Ryan for pointing out that I forgot to link to the source in my previous post - this can be found here, and as a warning is a weighty 200 page document.
ADAM METZ - Chief Executive of Corporate Propaganda
Metz's lengthy statement is here on Scribd, and it almost feels like Bill Ackman drafted passages, some of it sounds so familiar. There are assurances that GGP has a viable operating model that "is performing well with stable cash flows."
Adam Metz goes into a lot of detail on the circumstances leading up to the filing, which I will not bother to reiterate here. Additionally he repeats many of the points summarised in my previous post. However Metz does so to highlight key facts that the Court may take into account when making its decision, including:
- GGP properties are performing well - certainly this is true relative to peers, with GGP having the second highest occupancy rate in the sector despite its problems. Additionally the firm expects to not be resiliant during the weaker economic environment.
- GGP employs approximately 3,700 people directly - as well as having a significant impact on communities. I am not sure that will pull Judge Gropper's heartstrings, given the same could be said for most large bankruptcies, but you can't blame them for throwing it in there.
- GGP operates a centralized business model - somewhat tenuous, the argument is that the services offered to national client (retail chains) and decision making are out of Chicago, and is an integrated model that would suffer if effectively broken up. This ties in with the case for including SPE's in the Chapter 11 filing.
- GGP has filed to restructure its finances and de-leverage its balance sheet - placing the blame firmly on the collapse of the credit markets: "GGP did not commence these Chapter 11 cases because its operational model is flawed or because its properties are undesirable or performing poorly."
- Credit refinancing problems are market wide and not specific to GGP - "even properties that have been performing well with strong credit quality are unable to attract refinancing" and "GGP's ability to divest assets is severely limited because prospective buyers also have limited or no ability to finance acquisitions."
- Failure to negotiate refinancing terms with lenders was also due to the structure of the CMBS process - specifically that this "impeded those efforts." This goes back to the first post, and that when a single lender acts in its own interest, that is to go bankrupt and claim, despite it not being in the wider interest.
- Chapter 11 will provide a forum for negotiations - GGP envisage this effectively forcing its diverse groups of secured and unsecured lenders to the table, with "the protections necessary for the company to preserve and enhance value by continuing its operations uninterrupted, and the tools necessary to achieve a sustainable, long-term capital structure."
According to Metz, GGP is aiming to achieve the following under Chapter 11 - again none of this is surprising:
- Reduce and restructure GGP's debt - effectively deleveraging the balance sheet as much as possible.
- GGP will present its business plan to the Court and key constituencies "in the next few months", and begin reorganisation negotiations.
- "Seek a consensual plan of reorganisation with its mortgage lenders, bondholders, and other corporate-level creditors." If this is not possible, then apply the Bankruptcy Code to push through an agreement for GGP to "reduce its corporate debt, extend the maturities, adjust rates, or otherwise restructure the company's mortgage debt."
- "Explore strategic alternatives, including sales of assets, and.. available sources of capital", which means they will be open to limited asset sales, particularly offloading joint ventures.
- Proceed through and quickly emerge from Chapter 11 - and there I was thinking they were going to take their time.
JAMES MESTERHARM - Restructuring Tsar
Mesterharm goes into similar details around the causes of GGP filing - namely that it is not a result of the company performance per se, but due to the credit markets. He comments that "there currently is no capacity in the real estate finance markets to refinance the GGP Group's debt on terms that are commercially acceptable."
This section confirms that GGP reported 2008 consolidated revenue of approx $3.4bn, with $29.6bn assets versus $27.3bn in total liabilities, of which $6.58bn is unsecured. I recommend browsing pages 62-66 of the document to give an idea of all the debts that are maturing between now and 2012.
As part of proving the case that GGP have done everything that can reasonably be expected to avoid filing for Chapter 11, Mesterharm highlights the wide ranging operational changes to conserve and improve liquidity, including hiring new management and cost reductions. They even made the sacrifice of "terminating two airplane contracts" - I wonder if poor old Adam has to slum it in cattle class with the chavs these days?
Mesterharm then moves onto how the $375m of DIP financing will be used. One point of note on that is that GGP state they have sufficient cash to not need an interim order to access the DIP funds "prior to entry of a final order" - a good indication of their cashflow strength. Otherwise the DIP loan is intended to provide sufficient working capital during Chapter 11, and repay the Goldman Sachs $225m loan from last year.
Unfortunately there are not yet any actual specifics on that all-important restructuring plan, but overall it has been reassuring to review GGP's submission and not find any skeletons in the closet.
Thank you. Its not that I dont belive you....I just wanted to bulldog my way through them so I can learn from the primary sources.......its going to be a great weekend.
ReplyDeleteNo problem Ryan, they are well worth reviewing. Let me know if you come across anything I missed, and have a errr.. fun weekend!
ReplyDeleteThank you for all the info. Ackman's presentation tells only half the story of his portfolio strategy. Given that he has no control of macro risk, he shorted two stocks and boughts CDS against his long GGP position (this is from his last investor letter). Although he doesn't disclose which stocks were shorted, it is probably safe to assume that one is SPG. This combination is far superior than being long GGP alone as SPG is unlikely to have much upside unless: 1. things really improve in the macro picture but in that case it is likely that GGP will also do very well; 2. GGP goes into liquidation and SPG is the only mall game in town, which is very unlikely but should not be completely dismissed. f the macro sees substantial further deterioration SPG will not be in a comfortable position even with recent capital raises.
ReplyDeleteWe can go into numerous combinations but I find it difficult to come up with a scenario where SGP does really well and GGP doesn't do better or much better. But of course they exit statistically at least.
GGP redux: if we assume that retail sales, mall occupancy, operating expenses, etc stay about the same the only variable that matters is tenure and cost of debt. This is what Ackman is focusing on. All the rest put together can potentially be interesting/valuable but not in the first innings, as for example the hidden values he found. All in all the market is not that inefficient with GGP at $2 given all the uncertainties. But Ackman is a formidable player. If anybody can pull this over, and will work incessantly to do so for monetary and even more important in his case, reputational gain, it is Ackman.
Hi Groucho
ReplyDeleteYes that is a good conditional to add around Pershing Square's portfolio strategy, and an convincing case around the reasoning behind SPG being the most likely company to short as a hedge.
I agree with you that given the current level of uncertainty and hence risk, that the significant increases to $2/share represent an approximately fair value at this time. It was when it was at half that level of less that it seemed ridiculously cheap.
A positive or negative ruling this week in relation to SPE inclusion will significantly change the fair value level, as will details of the restructuring proposal.
Overall as you say though, the crucial underlying factor is tenure and cost of debt, and due to mutual interest, Bill Ackman's appointment as a Director is positive news for common shareholders.
I agree that the June 17th ruling will be important and odds seem to be towards denying creditors' claims. Having Bill Ackman elected to the board is of absolute importance as it shows that management and the controlling shareholders take him very seriously, to say the least. As you pointed out Metz's deposition sounds very familar to whomever went through Ackman's presentation.
ReplyDeleteMoreover, I believe that the reorganization plan will be filed much faster than usual in BK cases as we are dealing with a liquidity and not solvency issue. Of the little I know of Bill, he and his team are working around the clock seven days a week to accomplish that. Naturally no guarantee of success but if it is really a liquidity only issue this will be a great investment for years to come.
Finally, one apology and one (unrequested and hence worthless) piece of advice: I have only now read all your posts, congrats, you know the story really well; as to the advice, do not be tempted to sell this at $5 or $6 because if it gets there it is going much higher. I could go on interminably about leaving really serious money on the table in distress situations after making excellent returns in the short run...
Hi Groucho - thanks for your comments (and taking the time to read every post!). Wise words of wisdom relating to investment strategies that we should all heed.
ReplyDeleteI agree with you completely, if GGP rises into the $5-6/share range, then the factors that will have driven it there will make it far more likely to rise much higher still.