Small Bang Time as GGP Takes Control

I have got far too little time at the moment with the Time Wasting Insolvency initiative nearing its crescendo - hence the lack of entries. Still it's the weekend, it's not like L had plans that might involve taking up more time with wedding preparations surely...

General Growth Properties Extension
A very big plus this week was the news on Tuesday that GGP got the hoped for time extension for the exclusion period to file a restructuring plan, along with a less important extension to the time allowed to file schedules of assets and liabilities.

So what does this actually mean? To Absolutely Confidential's question, yes the commentator you mention did get carried away with regards to General Growth Properties now spending the next six months piling up cash.
General Growth proposed in the original cash collateral motion back in mid-May to continue their prepetition cash management practices. Unless the SPE inclusion decision is overturned - still no formal news on this, but the extension suggests this has been made - then this means GGP has committed to the following as part of the ruling:

• continue the practice of a centralised cash sweep from its various sub-entities into the central firm accounts
• provide 'adequate protection' of creditors cash collateral by providing a replacement lien on intercompany loans - this is the notion of ensuring there is no substantive consolidation of CMBS
• continue to pay interest on CMBS loans at the non-default contract rate
  

It looks like somebody else made the same point in the comments, including referencing back to the Cadwalader court commentary. Sullivan's response: "correct but there is approx. $5B in default that is now another 7 months from being resolved and I believe another $8b that will fall into default during that time frame.."

Just because more loans will fall into default during the next period does not mean they will be treated differently from those pre-bankruptcy. Presumptuous at best, although in most cases firms within Chapter 11 cannot service debts and so do use this period as an effective 'breather' (a significant criticism of Chapter 11, since it can provide weak companies with an unfair competitive advantage during the process).

However GGP have committed to not doing so, partly to illustrate the viability of the existing business model and add credence to extensions being a viable solution.

Regardless this is excellent news for the stock in increasing incentives of creditors to negotiate - and was rightly reflected in a 10% upturn in share price since the announcement. It is striking that every bit of news since General Growth filed for Chapter 11 has been positive.

Industry Changes to Structured Credit Products
Related to changes in the credit markets that I have mentioned previously are the industry protocol updates made by the International Swaps and Derivative Association (ISDA) for restructuring events of credit derivatives. Firstly there was the release of the Big Bang protocol in April 2009, which has been designed to add certainty for investors when defaults occur. Something as we are seeing in recent months has been a significant grey area with existing products when finally tested with a default event.

Big Bang was the final step in a process known in the industry as 'hardwiring', which has crucially incorporated auction settlement terms into standard CDS documentation for the first time. The big bang protocol includes the following:

1. Introduces auction settlement as a means of settling transactions - eliminates the need for defining credit event protocols for every potential scenario to cash settle Credit Default Swaps.
2. Makes resolutions of the Determinations Committees binding by adding into standard CDS contracts - for issues including i) dispute on whether a credit event has occurred, ii) whether obligations are deliverable, iii) whether an auction should be held.
3. Adds credit and succession events (aka backstop 'look back' provisions) into the CDS documentation - to provide a common standard effective date for CDS transactions.
   

Further refinement to resolving restructuring disputes has been added by Small Bang, which took effect on Friday, details of which are covered in this ISDA web presentation. Key additions are to provide buyers with a five day window (sellers with two days) to trigger a credit event after a restructuring has taken place. Once triggered the evidence is then presented to the Determinations Committee to argue the case - a combined arbitrator and judge in the process.

It is all about clarifying how credit derivatives will work in future, and ensuring that buyers and sellers have a clearer idea of what protection (and liability) they are entering into. For those interested in finding out more about what credit companies companies will be entering into over the coming years, and how disputes will be handled, take a look at this analysis.

Additional Reading on re-REMIC's
For recommended additional reading on how structured products are evolving and what are impacting the recovery of the credit market this Bloomberg article illustrates how re-REMIC's are being used by the banks to refinance real estate. This article by Deloitte into re-REMIC's is dry but provides a very detailed examination of how these function and their impact.

Finally this report by Andrew Cuomo into bankers bonuses has to be the least surprising set of observations since the credit crisis of October 2008 plunged the world into recession, although this is the choice quote:

"When the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well."

Welcome to my world Andy...