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.