Pershing Square Make The Case

I have just finished reading Pershing Square's presentation at the Ira Sohn conference, when Bill Ackman began his PR assault in favour of a 7-year loan extension as the ideal solution for resolving the company's problems.

It summarises the entire analysis and case from start to finish for going long on GGP, and the company retaining common equity value out of bankruptcy. It provides a compelling argument and may well have been behind the significant rise in share price from around $1.20 to a peak of $2.40 on Friday before it fell back to close at $2.02.

I highly recommend anybody holding or interesting in General Growth takes the time to review it here.

Different Worlds, Different Priorities

I had an exhausting long weekend in Chicago for a Jewish wedding, so have spent this week jetlagged and wishing L would give me just 5mins respite from wedding planning. I swear, every evening it's something or other - yesterday selecting invitation designs for the UK reception, another time the cake design or colour of ribbons for the chairs.

It won't get any easier tonight, as L took it upon herself to invite two friends (of hers) over for dinner, leaving me to keep my eyes open into the early hours and feign interest.

As I walked over here to my lunchtime bolt hole to write an entry, on this glorious summers day here in London, I mulled over Bill Ackman's PR offensive yesterday, in which he effectively drew a line in the sand with respect to GGP's reorganisation plan, and how if this was put into place he could see a conservative cap rating lead to a 13-fold increase in his investment return upon emergence from Chapter 11.

The plan that Ackman has suggested is very simple: extending most of GGP's $27bn of debt for 7yrs, which he argues will solve all the company's problems without requiring asset sales.

It certainly sounds feasible, although would be highly unpopular with many creditors. However in principle if the court agreed to such a proposal then that is precisely what could happen. All indications to date are that Judge Gropper agrees that taking decisions that protect the wider CRE market are in the public interest. Widescale loan extensions will nonetheless be fully serviced by GGP due to its viable operating model, so this seems quite feasible.

I had envisaged widespread 2yr extensions with limited asset sales, but Ackman is clearly setting out the case with the ideal scenario for common shareholders.

Anyway, there was a certain irony that I was toying with how it would feel to bag over £1 million profit from a trade as I wandered down one of the City's many backroads, when I overheard a middle aged woman - presumably talking on the phone to her husband - arguing over whether it was him or her that was supposed to have paid the £1000 for the mortgage that month.

Different worlds, different priorities. It makes me realise how much of a bubble I live in sometimes when I overhear a conversation like that.

I think that it is fair to say that the market has started to consider GGP as a potential investment opportunity now, rather than after bankrupcty. This is part of the market reassessment after the Court's positive rulings in GGP's favour relating to the SPE inclusion in Chapter 11, amongst other things, earlier this month. I was disappointed by the lack of market response initially, but I think it took time for investors to digest the implications.. I forget most are not so close to the detail.

The end result on closing yesterday, is that the share price has now risen by exactly 200% since GGP filed for Chapter 11 and opened at 60 cents a share on April 17. Not a bad return in 6 weeks for anyone bold enough to buy that day. Although I am averaged in above $1 myself, I am already sitting on a significant unrealised profit, which feels rather better than a loss, however meaningless.

TALF Legacy Unveiled: Does It Impact GGP?

The eventual expansion of TALF criteria to include broader assets and older CMBS was discussed in government committees back in Jan/Feb, so this has been looking likely for some time. The TALF Legacy was finally announced last night, and the Terms and FAQ are worth taking the time to review.

On immediate reading, it would be easy to get carried away with the news, and assume this is overwhelmingly positive for GGP - it could potentially solve all of its refinancing problems!

Hold on, hold on dear. Certainly it is not negative, since it will benefit the wider credit markets: any thawing of those it to be welcomed, since it provides additional capital for refinancing other loans - the aim of the whole programme after all. In itself GGP's status in Chapter 11 is not the issue here; eligibility for TALF Legacy funding is made at an individual CMBS level, and that is what will impact GGP's ability to utilise this for refinancing of loans.

So how does GGP's CMBS portfolio stack up?

The criteria stipulated by the Fed is that: "Eligible collateral will not include a CMBS that obtains such credit ratings based on the benefit of a third-party guarantee or a CMBS that a TALF CMBS-eligible rating agency has placed on review or watch for downgrade."

Fitch has made several precautionary downgrades of GGP CMBS's since 20 April to reflect the increased potential risk. This Seeking Alpha article summarises without going into specifics, including the Fitch announcement that it downgraded the outlook from Stable to Negative on "63 properties [which] secure 58 loans in Fitch-rated U.S. CMBS transactions."

According to Fitch "the revised Rating Outlooks are in large part due to the Chapter 11 bankruptcy filing of General Growth Properties (GGP) and certain affiliates which are borrowers in CMBS transactions."

That means many are ruled out of eligibility for TALF Legacy at present, and due to the uncertainty at the time, includes all those commercial mortgage backed securities that transferred to special servicing after their inclusion in Chapter 11 - the list is too numerous, but means those collateralised by malls including:

• Boise Town Plaza and Square (Idaho)
• Newgate Mall (Utah)
• Northridge Fashion Center (California)
• Willowbrook Mall (New Jersey)

What is worth noting is that it was the uncertainty around the bankruptcy which was a key factor in the downgrades. The rating agencies may start to respond to the recent ruling for SPE's to remain within Chapter 11 with a reassessment. The primary risk factor cited was that GGP "could seek additional leverage secured by the mortgaged properties to help repay their corporate unsecured debt. The presence of additional debt would put substantial additional stress on the properties and impair the performance of the CMBS transactions."

Judge Gropper's ruling protects the integrity of CMBS pulled into Chapter 11, since the underlying collateral cannot be laden with further debt, so arguably this will require an offset upgrade in future - although rating agencies are frequently cautious, and that by no means implies they would be upgraded to the necessary AAA status required.

Fitch has stated that it "will continue to monitor the performance of the GGP assets in addition to the progress of the bankruptcy proceedings. As the developing situation becomesclearer and as property performance warrants, Fitch will take additional ratings actions as appropriate."

Meanwhile this post here includes an article with some detail around the credit industry reaction to the GGP ruling, and their presence at the ICSC conference.

Time will tell how beneficial this proves for GGP. If I were an agency, I think I would rate this development a Cautious-Positive.

Private Insolvency Management

Well I just got back from an amusing trip out to Zurich, where I gave a presentation to senior management in Private Wealth Management. I did a fine job of summoning faux enthusiasm as I ran through an unnecessarily lengthy presentation, explained how our absurd insolvency scheme could benefit them as well:

"And so, this scheme will enable you to provide your clients with full assurances that they will receive their money back, in the event of an insolvency at some point in the future," I pronounced confidently as I finished.

The PWM managers all looked keen, and agreed they would provide funding to have them added to my insolvency circus project, much to the delight of my Boss when I got back today. More funding equals more work for us - and a higher profile for him as he struggles to try and make MD.

As I packed up in the empty board room afterwards, a manager I used to work with came back in for a chat. He explained that the reason for this sudden interest from PWM is down to the exodus of clients in the last few months. As such, half of the room will be fearing for their own necks when this gets out, and have been looking desperately for anything that might give them an edge when trying to pick up more clients.

When I enquired why they had lost so many, he confessed that PWM have been so busy lying to them about portfolio performance for the last year, that when the bad news had to be finally reported at the year-end, it was the final straw for many.

"Look, the first casualty of a recession is honesty", he said seriously. "My problem with all this is that clients don't believe a word we tell them anymore, so I'm not sure this insolvency protection malarky is going to make any difference."

However bad I think my lot are, it was rather refreshing to get out to the most boring place to work in Europe and find out there is another group of bankers with even fewer morals.

Expenses Scandal Highlights Uncomfortable Parallels

Earlier I drafted up a mock client statement for this ridiculous post-insolvency initiative taking place here at the bank. It looks pretty good to me, but a particularly anal MD just replied back to take issue with my naming the example client 'Dodgy Hedgefund Ltd' (located at 1 Hedgefund Alley, Kensington, London).

Christ, if you can't have a sense of humour in this job then it's time to visit a clinic for some colonic irrigation, miserable old bastard.

On the subject of this initiative, to illustrate how absurd the work is - and current estimates are that it is set to cost over $30 million of the bank's resources to implement, and all the major banks are doing the same - the FT reported over the weekend that the Chancellor is preparing to change laws in this area. "Suggestions that the US operated more effectively than the UK are misconceived," a government official said.

In that case why is the US not rushing to change its bankruptcy laws as well? The problem with the government is that they seem incapable of admitting mistakes, even when they are obvious to all. It is rather like their attitude to MP's expenses, although it would be utterly hypocritical of me to criticise them, given what I have claimed over the years.  

A favourite has to be my generously volunteering to pilot a working from home scheme at a previous bank back in 2002. At the time colleagues smirked at my youthful enthusiasm, but I soon had the last laugh. Without any adequate controls, I went ahead and set-up a full 'home office'.  

That meant decking out my second bedroom (designated as my 'office') with an expensive, new PC of course. I also took the opportunity to furnish the room with a new bed, table, wardrobe and - my personal favourite - a 42" flat screen TV, which I categorised as an 'office presentation device'.  

In fact, there were even further parallels with politicians and their second home allowances now, remembering back. I became particularly ingenious at looking at ways of stretching the 'home office expenses' pot. My logic at the time was much like MP's I suspect, and demonstrates human nature: I treated as unacceptable anything that was refused, otherwise it was open game.  

My team quickly went from ridicule, to amusement, to envy, to applying to join the pilot scheme.

I finally reached the zenith when for 6mths (until they ended the scheme), I charged 40% of my rent as 'office rent'. The logic was infallible: apparently I only lived in a 2 bedroom place because I needed an 'office'. My pad at the time consisted of 2 bedrooms, 2 bathrooms and a main room. So 2 of the 5 rooms were 'office', since the en-suite toilet was also clearly an office expense and a necessity.

I know, all the morals of a politican. I was young.. underpaid.. naive.. how is it that they say it? I made several 'errors of judgement' that lead to 'clerical errors' and 'financial oversight'.  

To you, my internet audience of morality, I throw myself on the alter of judgement.. I have sinned!  Fortunately I couldn't care less about public opinion, so only promise not to pay any of it back.

Round 1 To GGP As CMBS Industry Overplays Its Hand

I will move off so many updates on GGP soon, not least as I am busy looking into other investment opportunities. However there was enough news late yesterday to warrant an update.

Firstly on DIP financing, after swinging between bidders (and worth noting that bidding for DIP financing is in itself a rarity), GGP turned down both Pershing Square and a consortium lead by Goldman Sachs, and instead opted for the group lead by hedge fund Farallon Capital Management.

Details seem largely unchanged from before at $400m of funding with a 12% interest rate and no warrants, apart from a lower exit fee and now a potential 8% equity repayment option - that is subject to GGP's equity value upon emerging from bankruptcy.

At present the exact details of the DIP financing are not available, although The Washington Post quotes Ackman as saying: "This is the best DIP loan that has been done since the beginning of the recession, and it could be the best DIP loan ever in terms of the structural features that are favorable to the company."

All indications had been that the Court hearing yesterday was going to rule in GGP's favour. So it proved, with both DIP Financing approved, and Judge Gropper, presiding over GGP's case, ruling for the SPE's inclusion in the Chapter 11 filing.

This brings the inital phase of proceedings to a conclusion, after much legal wrangling (and whinging) on both sides. Various lobby groups representing the CMBS industry, fearing the ramifications from investors if their products did not deliver on the promised bankruptcy protection, launched into the most hilarious claims.

The end result was that they stretched credibility and overplayed their hand.

"The GGP bankruptcy filing could - if passed - be disastrous for the CMBS [industry] in the US" warned Conor Downey, a partner at Paul Hastings. He then went on to claim that such a ruling would somehow lead to an enormous downgrade of CMBS debt and that none could attain triple-A rating again.

The highly impartial Mortgage Bankers Association also added their voice, stating grave concerns over the 'catastrophic' impact of such a precedent.

An official from the CMSA (Commercial Mortgage Securities Association) also over-exaggerated the situation by stating: "It is not an exaggeration to say that if a CMBS lender cannot get comfortable with the isolation of the real property asset to be financed and hence the cashflows derived from the operation of such asset, then no such financing will occur."

Yes, except that this does not mean CMBS lenders could not get comfortable with isolating the asset being financed. Fortunately the seasoned Judge Gropper was unimpressed with such overstatement. Even earlier in the week, such claims had been dismissed as "hyperbole".

Judge Gropper overruled the objections yesterday, rightly saying that lenders rights were protected and General Growth should have access to cash collected at its subsidiaries. The notion that commercial mortgage backed securites somehow mean lenders have a legal right to control the cashflow is clearly wrong. It would hinder a viable company, capable of fully servicing its debts to those creditors, from moving out of bankruptcy.

Where GGP had been out of line was an implicit suggestion in the bankruptcy loan that the underlying collateral for the existing CMBS loans (i.e. malls) could be used as collateral for the new DIP loan. That illustrates what CMBS do provide - a guarantee that the asset cannot be misused, and will always be there to enable repayment for the creditors, even in a bankruptcy.

Matt Reid, a senior financial analyst at DBRS made a telling observation, by stating that "the GGP bankruptcy is unique in that most of its CMBS loans are performing reasonably well with strong debt service coverage and likely equity value above the mortgage debt."

Additionally Reid concurs with my previous analysis into the motives for including SPE's: "After reviewing the bankruptcy filing documents, we think the motivation for the filing of the SPEs is to generate better negotiating leverage with the special servicer to extract the value above the CMBS mortgages, while keeping such debt current. The plan is to use this cashflow as working capital during the reorganisation process, which could be several years. Such a ruling would be positive for unsecured creditors."

Round 1 to GGP and unsecured creditors then. It will be interesting how (or if) this impacts the share price later today upon opening.

How Much Extra To Move Jobs?

That's the conundrum I have been faced with this morning, following another headhunter call. Of course, the salary levels they claim are usually best-case and designed to hook you into taking it further. This one dangled the prospect of an extra £50,000 increase in my base salary if I moved.

However after about 5mins deliberation, the answer is going to be 'no'. It is certainly tempting from one perspective, but one problem is that the bank in question is terrible: without naming names, one of those suffering from merger pains, combined with being incompetently run for years - hence is on government life support and has made huge losses.

Most of all though, there is more to this than just money. Let me just reassure you that there is no loyalty for the bank, or love for the 'unique team culture' - every bank spouts waffle about it being a giant family and that they are the best. Unfortunately the brutal culling of staff in the last year merely illustrated the fallacy to those corporate clones too stupid to see it before.

Working for yourself is the only place to aim for in life. So yes, an extra £50k now would be nice, but the cost is all of the hassle and risk of a new job. When I factor in work on my business ahead of the launch later this year, I realised what is much more important to me. At present I have got time to work on this almost daily, but that could easily change with a new boss on my shoulder, and needing to forge a reputation at a new place.

Anyway it's an interesting question, and highlights to me how my priorities have changed so significantly since I mentally made the jump towards my aspirations being out of the sector.

Although not yet announced, Pershing Square are about to submit a counter-offer on the DIP financing. It is unsurprising because without the innovative equity conversion option they had included as the DIP financier, they lose a valuable hedge against their significant existing holdings. This will be good news for GGP again, as any competition around terms of financing benefits the firm - I am just hoping to see the equity conversion option dropped, but matching the other loan terms with a lower interest rate is a more likely sweetener.

Otherwise Reuters reported last week that Simon Property Group have raised more capital in another significant stock offering. They cite the reason being for "general corporate purposes", but pointedly there is no longer a denial of interest in future acquisitions, just citing timing.

Due to the market saturation (in the US) of mall owners, all of the REIT's need to expand their market shares through acquisitions. As such, and despite denials, Westfield are also lining up to compete with Simon and Vornado (who have openly admitted interest) for any asset sales that GGP decide to put out there.

As with DIP financing, it is much better to have competition in a sale like this. On an unrelated rumour, the Court will reconvene tomorrow to review the DIP financing options and progress further. For now this is a side show to the bigger issue relating to creditors and the SPE inclusions discussed in my last post.

CMBS Industry Gets A Wake Up Call

I have been following recent events in the commercial mortgage backed security market with interest since General Growth Properties filed for Chapter 11 on April 16.

The headlines have recently been around an alternative DIP financier being announced.  This is good news for GGP, because it has improved terms - in particular relating to potential equity dilution, which is the primary threat to common shareholders. Pershing Square had both a 4.9% warrant and a 5% equity conversion clause linked to the DIP repayment.

By contrast the new DIP terms removes the warrant, although replaces the 5% equity conversion with 6% (and demotes DIP financing to a junior lien on cash collateral - in effect making repayment less prioritised versus other secure debt to appease creditors). The equity conversion is considerably less than previously however, and as I said before ought to have minimal impact on the firm, as this could only be exercised upon successful emergence from bankruptcy. By which time the firm capitalisation should be hugely higher.

Of more interest were the recent details around the degree of investigation and preparation that GGP put into their bankruptcy filing, designed to ensure they maximise leverage when negotiating with creditors further down the line.

Firstly, it should be said that the issue here all comes down to one of expectations. Those lenders who entered into the various credit products being sold by the banks over the last 5 years, such as commercial mortgage backed securites, were reassured during the sales pitch by the way they were structured.

I know because I work with credit sales people at the banks, and their oily schmooze would be enough to convince me that they know what they are talking about, were I not familiar with the legal grey area in the detail beneath the surface.  In the event, salesmen just regurgitate a well-honed sales pitch, whether they're selling CMBS's or used cars.

"Debt is tiered by risk and reward, so if you take out the higher grade debt in this product, you will be first in line for repayment in the event of a default" schmoozes the salesman.

"But what about if they go bankrupt, and take the whole thing down with them?" asks the nervous-but-greedy investor. "Surely then being first in line isn't going to be any use."

"Ah but that is all factored into the inherent design of this product", reassures the schmoozy salesman. "Commercial mortgage backed securities from DodgyBank Inc are structured with the issuer to be held through a 'special purpose vehicle'."

"What the hell is that?" asks the nervous-but-curious greedy investor.

"It's a clever legal structuring of the debt, that provides additional insurance. The holder of the security and underlying collateral is not the company that owns the malls, it's an independent legal entity which is bankruptcy remote. That means if they go under, your asset does not, so you are guaranteed to be first in line if they default as all the cash flows towards repaying you."

"Wow, that's awesome - I can't lose! Put me down for $10 million on one of the really big REIT's.. hmm, that fast growing one 'General Growth Properties' looks good."

Of course, had these idiots bothered to do some due diligence, they would have read the finer print and worked out that the companies had far more control over those special purpose vehicles (aka 'special purpose entities' or SPE's) than they realised.

In GGP's case, they had the power to hire or fire the directors of the SPE's for the underlying assets (malls) as they so chose. As such, they did just that in the weeks leading up to bankruptcy. Unsurprisingly all 166 SPE boards then subsequently backed having their malls enter Chapter 11 with GGP, so this was firstly quite legal.

In papers filed Wednesday in U.S. bankruptcy court in New York, General Growth argued the CMBS investors' objections to including the SPEs "appear grounded in the misperception that 'bankruptcy remote' means 'bankruptcy proof'."

Now the battle ground is set between GGP, which wants to strengthen its position, and outraged creditors that wish to prevent the malls which their loans are secured against being included in bankruptcy (and the cashflows going to elsewhere in the business).

Unfortunately for the creditors, as the Wall Street Journal reports yesterday, GGP have prepared a significant argument to the court by pledging "to continue paying interest on its mortgages, possibly making it more difficult for CMBS holders to argue they should be allowed to foreclose. It also pledged to provide its mortgage lenders 'adequate protection,' meaning they will have an administrative claim in any liquidation scenario to cash flow drawn from their properties by the parent company."

Whatever the court decides will have far-reaching implications for the wider credit markets, but the odds are strongly in favour of GGP persuading the courts to go ahead with this, as it is very difficult to argue this is not in the wider interest of the market and commercial real estate industry to allow this to happen.

Otherwise the only news today is that I snapped after nearly 5 hours of wedding related shopping on the Kings Road earlier.  After a row with L about how all she seems to want to do with time off is go shopping, and how I have better things to do (such as finish the functional spec), she has gone off for a hair appointment, and I'm contemplating whether this is what married life is going to be like.

Perhaps I ought to Google 'marriage pre-nup'...

Shorting For Dummies

With my lunchtime bolthole returning for the forseeable future, it felt rude of me to not pop out of the office and give a quick overview of how the average investor can short.

Of course, with all of the bad press around short selling in the last year - especially its supposed role in the credit crisis, one might reasonably ask why you would want to. One good reason is that a major market rise has now been underway for the past 5 weeks or so, and the apparent euphoria from some financials reporting better than expected results belies the wider economic downturn, and has the hallmarks of a house of cards built on sand.

Markets do typically reach the bottom 6-9mths before we emerge from each recession, so we ought to be there soon, but it is going to be an uneven ride that provides opportunity for profits both ways.

As every day of rises passes, so too does the potential for quick profits from shorting. Individual shorting is a process that the average investor cannot access easily - it requires access to the OTC markets, and additionally extreme caution when combined with leveraging instruments such as futures and derivatives.

In the same way as investing in gold and other commodities is now accessible to the wider market through exchange traded funds (ETF's), so the same principle has been applied for shorting through inverse ETF's. These essentially work by short selling a basket of stocks to mirror their underlying asset class or indices, and in doing so provide an inverse return. Through derivatives, versions even exist which provide a degree of leveraging - hence magnifying the ETF's rises or falls, with equivalent gain or loss for investors.

I recommend reading the Wikipedia article, as while it is simplistic, it provides a useful list of many inverse ETF's, as well as highlighting the higher fees required by an inverse ETF, which make this a strategy that should only be employed in the short-term (unlike conventional ETF's, which are more akin to tracker funds). Additionally this Trading Markets article gives further detail on how to use inverse ETF's, including for all-important hedging.

As with any investment, this is one to research before using and certainly requires caution - not least because the market direction will be upward over the coming years. Having said that, I have concluded that this particular market run is due a downward correction at some point soon, and so shorted the S&P 500 through ProShares Ultrashort yesterday.

A Change Of Perspective

"Woe betide thee, who has a desk move imposed upon them and loses a spectacular City window view and privacy, to face an office cupboard with a sign reading 'Restricted Access Area' while surrounded by irritating colleagues on all sides"  The Emerging Investor

Having been pulled onto this tedious Hedge Fund confidence-boosting initiative at the bank, I was duly forced to move desks to sit with the new team this week. Quite why is beyond me, as I was only sitting about 20 yards away from them before, and in this digital age we mostly communicate through email, communicator and conference calls anyway.

The bank being as tight as it is, rather than paying for the desk/equipment movers to come in, they left it to me to spend 1.5hrs crawling around on my hands and knees to unplug and switch PC's - all while avoiding the mouse traps down under the desks (we have a problem with rodents - both human and otherwise).

I'm mostly not pleased because I was happily working on my site on the quiet at work as I haven't been too busy recently, and the wireframes for the Functional Spec are rather too visible to pass as financial work.  Now I might even have to do some work for my money at this rate.

Anyway it's not all bad news, as the actual site design has been progressing very well, and I am confident that within the next week or so I will have it sufficiently completed to approach vendors.  They are in for a grilling given that part of my daily job is managing incompetence, and I expect nothing less from them with the build.

There is nothing of interest happening yet regarding GGP, besides Vornado being confirmed as a major potential front runner in buying any GGP assets put up for sale, and having raised sufficient capital to make reasonable offers.  Also following on from my last post regarding GGP including CMBS subsidiaries in its Chapter 11 filing, which has major ramifications for the credit markets; unsurprisingly a challenge is being mounted by one of the groups who would be adversely impacted.

The creditor meeting in a fortnight from now should prove interesting, but this is going to be a slow, lengthy process in which patience is the biggest strength any investor can show.

Next time I am going to move back to investing, which will be especially useful for those interested in shorting. It is a question I have been asked by several people recently, and is actually much easier than you would think. Anybody with a standard broker account can do it today, and I will outline how and some of the options.

Raising Eyebrows

"So over the next 6 months, we have been undertaking extensive measures to ensure that key clients are reassured that banking with us is both safe and advantageous to rivals", so droned a Partner to me on Wednesday.

 
I was initially apprehensive when I got a meeting 'invitation' from him, wondering what somebody so senior wanted a one-to-one meeting with me about. As it turned out, it seemed to be to give him a chance to rehearse a speech he is giving to even more senior partners next week, and he wanted input from somebody nearer to the actual work.

It was a hugely boring meeting so I'll skip the detail, but suffice to say that I have been pulled onto an enormous drive to boost Hedge Fund confidence that trading with us won't risk their money in the event of bankruptcy by it getting locked up by administrators as happened with Lehman Brothers.  It's a huge waste of everybody's time, as in the event it won't actually provide any such guarantee - but hey, as long as we can show them 'proof' that it is in place, it reassures them.  

As he droned on, my eyes glazed over and then wandered over his shoulder to the trading floor beyond, and fell on one of the news screens. I squinted and couldn't help saying "ooh, does that say 50% tax rate in 2010?"

I might as well have slapped the Partner in the face for the reaction it had - he stopped his diatribe, turned to read the mid-Budget headline, paled, and then went increasingly pink. I had to keep a straight face as he went out to get a better look, and then came back for a rant as he calculated how much more tax he would now be paying a year. (He ended up confirming it would be £90,000 next year, which for those not so good at maths means he takes home a 'mere' £1.1m - presumably excluding bonuses given that is such an unknown for 2009).

I know, even a part of me had the same reaction: my heart bleeds you lucky, overpaid fat bastard. On the other hand, if we put aside wealth envy for one moment, his subsequent reaction proves the criticism of this move made by many in the press about the potentially limited (and negative impact) of this on the country.  He's a smart chap, and quickly starting mentioning having various income recategorised next year - no details, so I can only assume he means bonus-related and other asset income - and even rebasing to another office, since in theory it doesn't matter where he works from that perspective.

At a high level, people are either assets or liabilities to a country from an economic perspective. Are they net contributors like the Partner, who work hard and pay a lot in taxes, or at the other extreme are they like Karen Matthews, the benefit leech with 5+ children, who lives off the state and costs the country £100k+ each year in benefits?

It clearly makes no sense to incentivise high contributing wealth generators, both in the City and other key industries in which the UK currently has a competitive industry, to seek ways to avoid paying tax by setting it to a level perceived as unfair.  It didn't work in the 1970's and it won't work now.  The real problem is the relative rate, and at 50% over £150,000, this catapults us above all our main rivals, even quasi-socialist states such as France and Germany.

What is most depressing is that the budget seems to have been politically motivated above all, not what is in the best interests of the country.  It was always going to be a nightmare for Alistair Darling. Old Eyebrows finally had to admit that the government have completely and utterly fucked up the economy over the last decade.

I think we all know that our beloved, unelected leader shoulders 90% of the blame for the degree of pain the country is about to experience, and I put that down to the kind of mismanagement that would have anybody in the private sector fired. MP's expenses are another fine example of the double standards.  Still, I must admit that with my wedding to L being only 5 months away, and with my plan to launch the business this summer gaining momentum, I can't help feeling the same as the Partner - perhaps I will just relocate.  After all, blogging's a global game.

Analysis: GGP Declares Chapter 11

Well, the loss of my lunchtime bolt hole has proved a bit of a problem for me in finding time to post in the last couple of weeks. To be fair, I have been working on (and completed) a draft of the business plan, and have also selected a group of vendors to approach in the coming weeks for a build estimate.

Meantime my next major task is completing a functional spec for the site, as there's no way I trust the average coding monkey with the all-important design and usability. Overall it is going very well, and I am feeling really positive that I can create something unique, useful and commercially viable.

Of course the big news of the last fortnight was GGP finally filing for Chapter 11 bankruptcy protection.

The final straw was the combination of the bond solicitation process failing to persuade sufficient Rouse bondholders to extend, and the threat of action from disgruntled creditors ready to file a claim on certain malls - that meant GGP had little choice but to seek to protect its assets from being effectively raided.

GGP filed with $27.3 bln debt and $29.6 bln assets - figures that are of course disputed - and obtained $375 million in debtor-in-possession financing courtesy of Pershing Square.

Bill Ackman is a canny operator, and clearly used this to hedge Pershing's existing position (at 25% they are the third largest shareholder in GGP currently). By providing DIP financing, Pershing yields a healthy 12% annual return on the debt. Additionally Pershing gain warrants to buy 4.9% of the new equity when it emerges from bankruptcy, and most interestingly the potential to convert the $375m DIP into equity.

The latter option has to be admired, as it ensures Pershing Square will be guaranteed equity whichever way the firm emerges from bankruptcy. I am confident however that it remains strongly in Ackman's interests to maintain common shareholder value, although this does now raise the spectre of dilution. I have analysed this in some detail, and believe that dilution risk is a minimal factor: if the event occurs, that means GGP will have successfully restructured, emerged from bankruptcy and the huge upside potential to the shares will offset and limit any impact.

GGP President, Tom Nolan, gave several interviews subsequently, and placed the blame squarely on the frozen credit markets as the primary cause of GGP's current problems. It will clearly form the central crux when outlining the company's argument as to why a loan extension agreement is justified, and increases the likelihood of approval by the courts.

Certainly the fact that no major rivals who wanted to buy some of the best, revenue-generating properties put up for sale could secure funding is a powerful illustration of the wider market problems, and in favour of GGP.

Nolan also stated that GGP does not see an immediate need to tap DIP financing for 8 weeks, due to cash flow business running costs illustrates the relatively healthy position of the business model. Once again, GGP stands out as an unusual case. Bill Ackman also immediately went to the press to rubbish assumptions by many that GGP's weakness would be to the gain of rivals, by effectively meaning Chapter 11 meant liquidation and an eventual firesale of assets.

Today Fitch downgraded some of GGP's CMBS debt, citing that:

"If the properties remain in bankruptcy, General Growth could seek to load up the properties with additional debt to help repay their corporate unsecured debt."

So far, everything has progressed exactly as I had hoped with regards to the Chapter 11 filing, with the exception of Pershing's DIP equity conversion option. Liquidation and/or widescale share dilution remain the only scenarios in which being long in GGP would not produce significant returns.

It will be interesting finding out what the restructuring proposal submitted to the court contains.  The above illustrates another mechanism by which GGP could pay off unsecured lenders and/or the bondholders without necessarily needing to sell properties.  A key point mentioned here but not considered is that GGP are completing a strategic review, with a specific aim of only offering to liquidate lesser malls as part of the court proposal.

A combination of financial re-engineering, some limited asset sales, and a wider extension request for loans until the credit markets recover sufficiently to enable normal refinancing is the most likely right now.

The Price of Advice

With the long Easter weekend now upon us, I am going to use this as an opportunity to plug on with the business plan.  Otherwise though, a quick observation on life at the bank, which has become amazingly boring since I got back from Egypt last month.  It almost feels like the quiet after a hurricane has passed over.. we rats are only poking our noses out of the hiding holes we have been in for essential activity.  

The good news is that, as of last week, all of those I know who have been fired from my bank have now all landed new jobs.  It's a great sign that they have been able to cash in on the ill-justified prestige associated with this place, and secure decent roles even in these tough times.  By chance I had a quick coffee with another headhunter myself mid-week - as I say to all of them, while I am not actively looking, I am always "open to opportunities".

In this case, he spent half an hour ignoring me and pitching a near-identical role to me over at one of the other banks down in Canary Wharf.  I have no desire to increase my commute from West London by another half an hour or more a day, I remember from living down there that Docklands is a gigantic, soulless wind tunnel without any of the charm or benefits of the City.

I explained to him several times that I have no interest in taking the risk of a move to do the same role somewhere else.  As and when I move next (and this is all based on the assumption my web business has not fully taken off by then), I want to use it to make a move into a related but different area.  

A good example was one of the guys on the desk who left last year to join a Venture Capitalist firm - no, not junior trader - he's ended up at that crappy little French bank Calyon, so that hedge fund claim was all bullshit.  Sadly it also means my 10mth punt in the office sweepstake didn't come up.

In one sense I dislike VC's and their predatory, short-termist nature (all they are really interested in is taking a firm to the market as quickly as possible to realise quick returns).  However the entrepreneurial aspects are hugely appealing to me, and his move has made me realise that I do not have to continue with a role that I can do with my eyes closed, and can look to make a move across into something new and fresh going forwards.

Of course, who knows with these times what is or is not possible.  I am a great believer in persistence when told no.  You need to have vision and see opportunities rather than closed doors.  No direct experience in the area?  So what?  I had none in my current role here at the bank when I joined - instead blagging through the countless interviews through a combination of being personable, articulate, some juicy white lies and by not being clueless.  If it worked here, it can work anywhere.

On an unrelated topic, I am going to get up on my soapbox about the quality and impartiality of research reports. I have access to so many as you would expect, and and am constantly amazed by how insubstantial the actual research often is. Whenever I go up to research, those fucking clowns are usually surfing the web - their technique is to cut and paste observations of others before rewording, and otherwise calling up investor relations to get the latest key financial figures to add to their reports.  

The end result looks great, when shoed into a professional research report template.  If ever you needed proof that presentation goes a long way, analyst reports by the banks are it.  The actual content is usually woefully inadequate - weeks behind, or offers little if any meaningful insight and usually regurgitates old news or views.

They almost always go with the mainstream consensus, or safe view as well, rather than even discussing different strategies depending on investor risk tolerance.  A good example is GGP, which naturally is one I know a lot about.  Reports out now do not even consider many of the issues I have discussed on here in their recommendation - just a sweeping generalisation of the REIT market prospects in 2009. 

To anybody who doubts it, believe me that if you take the time to do your own research on any company with information available in the public domain, you can easily put yourself well ahead of those who place their trust in crappy, overpriced analyst reports just because they have a bank's brand name stuck in the top corner.

Speculation Drives GGP

I have been making some positive progress on the business plan for the financial website I am planning to create (sorry, will not be discussing specifics as you would expect on a blog!) A high level plan for its initial marketing and revenue generation has been completed, and since I have brain dumped most of the site ideas, I am going to formalise those along with specifics on the design and structure this weekend in a functional spec.

I have started to look into vendors that can build the site, but am so far fairly unimpressed with the package solutions on offer - not to mention all the bullshit extras thrown in like registering the domain name (and controlling it), that presumably appeal to the average lamer they are targeting. I will be telling them exactly what I want, and otherwise will need full control over the daily content management.

It will require some time and effort to assess what is on offer, but I am looking to approach around about 10 vendors for build estimates, options and support contract costs over the next week. I need that not least so that I can complete the financial component of the business plan, including necessary start-up capital and first year trading costs.

After my last entry on Saturday, discussing my increasing confidence in GGP's prospects - not least from Bill Ackman's recent comments - the share price on Monday underwent such an unusual increase (greater than 200% at one point), that the firm issued a statement on the trading activity to confirm there was no known basis.

I was not entirely surprised to see speculation growing from institutions and others that GGP has significant potential for common shareholders. A 98% discount alone tells you that it is clearly not a fair reflection of value. The price as of today has predictably dropped back to around 85 cents since the highs of $1.35 earlier this week - since I was waiting at around 75 cents for falls to buy more, I am happy to hold and continue waiting for a better buying opportunity (ideally somewhere under 50 cents).

In the meantime, additional support for the notion that GGP will eventually complete negotiations with lenders and file for a prepackaged bankruptcy came in the form of real estate magnate Sam Zell, who commented:

"I do not believe GGP will be liquidated," Zell said at a recent New York University real estate investment trust conference. "I expect the company to file bankruptcy. It will do a prepackaged. It will be reorganized and it will be taken public."

The net impact of this would be a controlled bankruptcy application with a pre-agreed plan of restructuring - this would enable the firm to sort that out under Chapter 11 protection in much less time, and theoretically with less court interference. It would then emerge from this and should see a huge increase in share value.

At the same time, the existing evidence points to TALF funding continuing to trickle down through the system and have an increasingly positive impact on the credit markets throughout the remainder of 2009 and into 2010.

Everything right now seems to point towards GGP being an excellent long hold for anybody not risk averse. Consider this final point: the consensus view in and outside the US government now is that the commercial real estate sector is a huge and vital component of the US credit market that must be supported. As well as CRE being more viable than the multitude of small home owners in the domestic market, many have also commented on the devastating impact that a Chapter 7 (liquidation) of GGP would have - not just on the firm and its shareholders, but more importantly on the wider market.

Too big to fail? I think people are soon about to work out that this doesn't just apply to the banks, and that the major REIT's are also in that same boat.

Increasing Confidence

Another fine, relaxing weekend is in prospect - L is doing what she does best and having a lie-in as I write, and that leaves me with a spare moment to write a quick entry.

So G20 this week was every bit the anti-climax I expected. I wonder how much of that $1tr package was pre-negotiated - all of it I expect, with some hand shaking and breast beating for the cameras. GGP has been equally unexciting in its lack of progress over the last month, although major shareholder and activist Bill Ackman has spoken out again in favour of the company filing Chapter 11 soon and a pre-packaged bankruptcy.

I agree with the approach, provided common shareholder value is left in tact, which it ought to be given (and Ackman stresses), that GGP's problem is the unusual case of insolvency. Issuing shares as a means of raising capital is almost impossible for a company that has seen its share price fall by 98.5% in a year. Combined with the increasing signs that the US government will be stepping in to directly support the US commercial real estate sector, and specifically the REIT's, I am planning to increase my stake in GGP at these bargain prices.

"Bernanke said the eligible collateral for the Fed's $1 trillion Term Asset-Backed Securities Loan Facility, or TALF, will likely expand to include commercial mortgages and securities that aren't newly issued."

Some patience is required to hopefully buy at a really good price on a dip in the coming weeks, but I am looking to buy another 100,000 shares should the right opportunity arise.