Time to Reassess

What a month! Thanks to those of you who took a moment to post a comment.. it was a fantastic day and three weeks out in California, even if I did somehow come across five bears in Yosemite.

As I sat there sipping champagne on the flight over to Chicago, I did wonder whether I'd miss anything about my job. However I can safely report that with close to a month off I didn't miss anything, which only confirms that I need to look into a move over the coming months now that the job market it picking up to something more rewarding (read: hedge fund).

This is a really rough 'n ready entry, as I have not really had time yet to gather my thoughts on anything properly, much less complete detailed analysis into various companies I have been researching - hopefully you'll find some of the links below interesting.

Crime Pays?
On the subject of hedge funds, I have started taking a look through the speeches from the Value Investor Congress today, and of course started with Bill Ackman. I was amused to see that Pershing Square's latest notable stake is 9.5% in the private prison company Corrections Corp of America.

Recessions tend to fuel demand for life's vices: cigarettes, drugs, alcohol, gambling and of course crime. At the Value Investing Congress, Bill Ackman confirmed that the fund have bought in at "more than $24.50 a share." At this moment CXW is trading at that approximate level, so what is it about the stock at this price which has tempted in a hedge fund?

"This is one of the best real estate businesses in the world. The biggest risk to Corrections Corp is that people stop committing crimes, and I think that's a low probability event." Bill Ackman, Value Investing Congress Oct 2009

Looking at the business sector, crime combined with the prolonged economic downturn and unemployment provides a strong demand for this particular business in the coming years. As such, without yet having carried out any financial analysis of my own, we can see that Corrections Corp appears to be in a strong sector in the current economic cycle.

However where Pershing Square have commented that the real value lies is in the real estate. Combine that with the US government being a tenant, and you start to see why CXW has potential. This post on Market Folly provides some useful commentary on the actual presentation itself, Additionally the actual Ackman presentation is available here.

A quick summary of the main reasons cited by Ackman as to why CXW has significant potential:

1. Industry occupancy is high (94% and rising)
2. New state facilities cannot be built easily in the current climate due to budget constraints
3. Numbers of prisoners is continuing to increase
4. Company history of stock buy backs

Corrections Corporation of America (CXW)

Before just jumping to the latest earnings it is always useful to look at the prior quarter (at least), particularly to give perspective relating to any exceptionals.

The first quarter earnings release for CXW is here and is certainly going to have been a significant factor in influencing Pershing Square to buy into the stock. Earnings of $0.29/share with EBITDA up 9.6% to just under $100m are the headline figures, along with the final phase construction of a new correction centre and being awarded three new management contracts for over 3,800 inmates.

The second quarter earnings financial results for CXW are also positive with improving fundamentals and notably the purchase/redemption of $450m of senior notes due in May 2011. The third quarter earnings are due out on Friday, so now is the time to complete due diligence into this as an investment opportunity, I will let you know my thoughts later this week.

Shorting Realty Income
While looking at various Pershing Square info that has come out in the last month, I came across this presentation into the case for shorting Realty Income, which is interesting and worth reviewing. This article summarizes Ackman's reasoning why this makes a useful pair to hedge the CXW position.

So much to read and catch up upon, either way no more talk of weddings from L (aka 'Mrs EI'), which has to be a good thing...

Business Valuation In Chapter 11

Pershing Square's much anticipated second quarter letter finally leaked onto Dealbreaker recently, and it was interesting getting some perspective from Bill Ackman on the fund's performance, successes and candid admission of mistakes and missed opportunities during that period.

I won't reiterate the various comments made in the section around General Growth Properties beyond two quotes. Firstly the final comment:

"..GGP is a highly leveraged company and there continues to be substantial uncertainty about the potential outcomes for GGP security holders." Pershing Square Q2 2009 Shareholder Letter

It was good to see an appropriately cautionary note raised around General Growth Properties share valuation, and to make sure that those currently looking at recent returns remember that this remains a risky investment. However that is also why in theory despite large rises to date, it still remains potentially excellent value.

The headline $40/share figure that everybody has latched onto comes from Ackman making a very high level statement that the REIT most comparable to GGP is Simon Properties. That is definitely true in terms of size, portfolio quality and overall market position, although obviously not in terms of risk. Ackman uses this purely to demonstrate that assuming GGP risk reduces as Chapter 11 negotiations proceed, and clarity is gained relating to shareholder dilution, then we should look at General Growth eventually trading at an equivalent cap rate.

That gives a $40/share figure based on the current portfolio and capital structure, but crucially assumes a best case scenario of zero dilution for shareholders. It merely highlights potential, and is not intended to be some sort of predication of future value. Anybody reading the report and assuming otherwise would be wise to consider further this comment:

"The balance of GGP's value should inure to the benefit of the company's shareholders. As a result, the company's valuation will likely play an important role in determining recoveries for shareholders." Pershing Square Q2 2009 Shareholder Letter

Determining Value In Chapter 11
So what are the crucial factors that will determine GGP company valuation within Chapter 11, and how is this process going to work?

This e-zine article on determining value within Chapter 11 does make a number of interesting points about factors that could impact GGP. To my mind the key factors are as follows:

1. Valuation Experts
There will be various external specialists within the commercial real estate sector able to provide an accurate market assessment of the current asset valuations of General Growth Properties. Representatives will be put forwards behalf of the creditors and debtor (GGP).

2. Valuation Methodologies
Methodologies will need to be applied, and will be scrutinised by the Court in detail to ensure impartiality and accuracy. These typically consider a wide number of factors: potential competitors available to purchase assets (i.e. market demand), industry trends (i.e. falling property values, occupancy rates and profitability) and general valuations of comparable rivals - this goes back to SPG.

3. Assumptions
Any disagreements will be submitted to the Court for resolution. One example in the article is a case where valuation cited by the creditors applied a 'bankruptcy taint' impairment if the company remained whole - presumably due to reputational damage. In GGP's case I do not think this will apply due to market conditions and the business continue to operate meantime.

4. Asset Liquidation vs Going Concern
Here valuation experts will give an assessment on which scenario maximises value, and will account for extenuating factors such as exceptional market conditions. It may be within this that some sell off of assets is agreed and included in the plan to reduce leverage.

"The premise of value utilized in the valuation process assumes either a 'going concern' or 'liquidation' of the subject. The Bankruptcy court utilizes the outcomes of these different assumptions-based approaches to make its determination."

Company specific risk will be the main consideration here, and in the case of GGP, there is a particularly strong case for its viability as a going concern: i) positive cashflow generation, ii) ability to raise DIP financing in a distressed market, and iii) voluntary servicing of creditors despite an automatic stay.

The coming months will see some interesting discussions around the above points, and it will be this determination of value and willingness to extend maturities that will ultimately decide how much or little equity value is retained by common shareholders.

Big Fish Tantrums

I was dialed into the steering committee meeting yesterday for the post-insolvency / time wasting project , and who should dial in but the COO of the bank!

To put that into context, for those unfamiliar with working in the sector and the sheer size of the big investment banks, imagine a combination of a medieval king and Paris Hilton all rolled into one. Vast power, able to behead on a whim, combined with plenty of preening and a vast ego.

Thus he had not stopped by to listen and learn, only to be heard. Aww, bless him - isn't he cute?

We were treated to a 15min speech, although I wasn't bothered as I am not running this whole affair; it certainly didn't stop me reviewing the latest Court docs from GGP while he rambled on. In short though, he had dropped by to tell us all how pissed off he is that we have been beaten to the punch in delivering our insolvency solution by a major rival (announced in the WSJ on Tuesday).

Never mind the fact that ours will be far superior, applying not just in the US but globally, and crucially enabling Hedge Funds to margin securities rather than having to fully fund their positions - the whole point of Prime Brokerage after all. Nope, at the top this was a big corporate race, picture all the CEO's lined up in their sacks and jumping as fast as they could to the finish line. In his eyes we have lost - the trifling details are an irrelevance.

So the Court decision relating to GGP is going to take more time to reach a conclusion. Given the length of my four legal analysis posts, which in themselves are a hugely condensed summary of the arguments put forwards, I would have been surprised had the Court managed to review all of the submissions that have been flooding in right up until the last minute, much less reach a considered opinion so quickly.

The only public information out there is that the Court could take until the end of June before deciding on whether the proceedings by MetLife, Wells Fargo and ING Clarion Capital to remove their underlying collateral from the GGP bankruptcy filing are upheld. This ruling is important, as it would of course enable GGP to negotiate from a position of greater power with many more creditors, while using the combined cashflow as required, and should be able to secure more favourable extension terms. Regardless of the decision however, it will be useful for GGP to focus on its restructuring plan - expected that some time in August.

In an unrelated announced on Wednesday, Jim Graham, GGP's Director of Public Affairs also announced that the company had "very recently" made the decision not to sell the Bridgeland development as previously planned, and instead develop the site itself. This directly reflects the improvement in GGP's position since it filed for Chapter 11 and received DIP financing.

No longer is the firm desperately seeking ways to avoid Chapter 11, and is instead making considered decisions in-line with both Adam Metz and Bill Ackman's comments about there not being any rash asset sales. An encouraging sign that demonstrates mutually aligned interests with common shareholders.

Other minor points of interest this week:

• Pershing Square submitted a motion on Wednesday for their Chief Legal Officer, Roy Katzovicz, to start receiving paper copies of all notices and papers going forwards. No reason is given, but it suggests that the fund will be taking an increasingly active involvement in GGP's legal maneouvering, planning and positioning over the coming months.
• GGP have settled the DIPS financing claim with Brookfield Financial LLC and Goldman Sachs. The original claim was $5.78m, and the settlement is for $2.75m, and is fully supported by the committee of unsecured creditors.
• Ahead of the deadline for objections by unsecured creditors, various claims have been filed. This includes the occupant at various malls J.C. Penney, filed a limited objection and reservation of their rights to the inclusion of related SPE's into the GGP bankruptcy filing. They add nothing to the actual case beyond suggesting GGP's inclusion of relevant malls "blatantly ignore the due process rights of numerous Lien holders - including J.C. Penney - who have Liens in or on property owned by the Debtors [GGP]".
• A similar limited objection claim has been filed by A&K Endowment Inc, and many others - mostly around proposed amendments to establishing alternative procedures under Chapter 11.

Legal Analysis II: GGP's Plans

Well, I will start to get back to posting on topics other than GGP from now on, but it has certainly been an interesting period.

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."

GGP's Chapter 11 Goals
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.

NAREIT Annual Investor Forum

What a week. Excessive work, excessive socials, and excessive wedding drivel courtesy of L. I just cannot summon up enthusiasm for all these preparations around cakes, colours, invitations and seating arrangements. After all, I'm just turning up to merge my assets with her liabilities and stamp on a glass.

Thankfully L has gone off to Chicago for the next week for something called a 'Bridal Shower' - it seems to be some sort of American fad that involves the Bride getting even more gifts ahead of the wedding. Don't get my wrong: she's the one, I love her to bits, but I can't wait to just get all these months of preparation over with.

Either way, it makes for a very pleasant weekend for me, and I might even have a rare chance to use my evenings productively this week and finish off the functional spec, which is taking longer than I had intended.

On a side note, it has been another spectacular week for GGP's share price, which ended the week near $3/share, and is now close to 400% up on the opening price on April 16, when it first opened after moving into Chapter 11 protection. This may well be bolstered further next week by the announcement yesterday that Bill Ackman is finally about to join the board.

That has some limited significance for common shareholders; Ackman was already a powerful champion for preserving value. Pershing will now undoubtedly be taking a more central role, helping General Growth to shape a reorganisation plan that pushes towards loan extensions, and possibly limited asset sales to reduce unsecured credit levels.

The annual NAREIT Investor Forum took place this week in Manhattan, and I thought those following the fortunes of General Growth Properties would be interested in the key themes that came up. None of it is particularly surprising, but then these events are mostly an opportunity for industry execs and analysts to get together for drinks.

1. Mergers and Acquisitions
At the conference there was plenty of discussion on the impact of asset sales, particularly at attractive cap rates. This was fueled by the REIT Macherich, which announced at the conference that it plans to raise capital through selling three joint ventures with cap rates of 7-8.5% on NOI. The key point there is the cap rate pricing, as these provide a viable route for raising significant capital for reducing unsecured debt.  

This gives an indication of which assets GGP may also look to sell as part of its restructuring plan.  

2. Deleveraging / Restructuring REIT Balance Sheets
It is worth bearing in mind that despite the state of the credit markets, the commercial real estate sector has managed to issue over $10 billion in equity and refinance over $10 billion of loans in the last 4 months. The price to funds from operation (FFO) ratio across the sector has markedly changed during this period to reflect these changes, having moved from lows of 6x up towards the longer term trend level of around 10x.

Various analysts have continued to emphasise the obvious: that options in the capital markets remain limited for those REIT's perceived as most at risk from leverage. Current levels are around 8.5x debt to EBITDA, and need to fall towards the long-term trend of around 5x. I think the only takeaway is that the entire sector will be continuing to deleverage balance sheets strongly throughout 2009/10 in particular.

3. Poor REIT Yields
Historically REIT's have yielded around 100 basis points above the 10yr US Treasury. Looking at the sector as a whole, there is still widespread concern that the (necessary) decision to reduce REIT dividends or payout in stock instead of cash will seriously impact the inflow of new investment capital for the foreseeable future. This may hamper the efforts of those REIT's not in Chapter 11 as they attempt to deleverage, and force others to seek protection.

4. CRE Fundamentals 
Occupancy rates are expect to fall by 3-4% by the end of 2010; along with rental declines of up to 30% for the lowest quality malls gives some indication of the pressure that will continue to build. That will act as an offset as the capital markets continue to unfreeze, and as I have mentioned in my previous assessment of the TALF legacy, while criteria are set at AAA assets only, this is going to have a limited impact on relieving the sector.

5. Raising Additional Capital
Focus at NAREIT has also been on ways of generating sufficient market interest beyond dedicated REIT investors, to enable the commercial real estate sector to recover. From what I have been able to determine so far, there does not seem to be any particular strategy beyond time and the fact that as income levels stablise, generalist investors will return.

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.

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.

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.

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.

Inspirational Example

Our holiday has been most pleasant, as is knowing I have another 5 days to go. I've been quickly logging into work occasionally to keep my inbox from overflowing - and to remind myself how much better life is away from the place.

The best part of the holiday was surprisingly spending some time flying elsewhere to meet up with L's cousin, who is currently managing a 2yr old baby girl with two 5mth old twins. It was a fantastic lesson in the benefits of birth control, and has convinced me there is no rush just yet to sign away my life. Just to illustrate the point, now that we are back in Sharm, I stayed in bed until 10am this morning.

What was most interesting and enjoyable for me however, was the chance to meet with the husband of L's cousin on the evening we stayed. Peter is actually an American from the south, so has a fantastic drawl in his accent, and as I was forewarned, was a 'serial entrepreneur' (a phrase he actually derided as ridiculous as in his opinion if you are an entrepreneur you will continuously set up businesses - he's right of course). In his case, he has set up all manner of businesses in the past, from a restaurant, real estate and haulier businesses, to his current bio-tech company, which is involved in stem cell research.

What was most heartening is that when talking to Peter was that I felt like a kindred spirit - we agreed on absolutely everything, and it made me realise how close my mindset is to that of an entrepreneur. I even outlined at a high level my business idea, which he thinks has a lot of potential - and I think he is the kind of person who would have picked holes and been honest rather than tip-toed around.

As an entrepreneur he was very impressive, and it really was an inspirational, lightbulb discussion for me. Seeing somebody who has gone out there and done it - in his case without a college degree and no background in biochemistry, made me realise there and then that the only way I can avoid being my Boss in 10yrs time is to make this happen. I need to devote significant amounts of what little free time I have towards completing the business plan, I need to oversee the site development, build initial partnerships, revenue streams, and push all this forwards so that when we emerge from the recession I have a site ready to capitalise fully on an inherent need from investors.

Some other good news since I have been away was discovering that two people who were fired from my bank at various points last year have now picked up new jobs. It must be a huge relief for them both, and does illustrate how there are jobs out there, even in these tough times. One has moved out of London and finance, the other is a wily old fox unable to do anything else, who has picked up a role at one of the more successful fund management groups.

Otherwise the deadline regarding GGP and bonds was extended by a week until today to give them more time to confirm or reject the proposed extension to the year-end. Meantime Bill Ackman, head of the activist hedge fund Pershing Square has given another interview reaffirming his belief that controlled bankrupty is the best solution both for GGP and the REIT sector as a whole (given that liquidation would have disastrous ramifications for US commercial property prices).

It was heartening to see that Ackman is pushing to join the board of GGP, as his interests are well aligned with shareholders in increasing value. Here's to a profitable outcome, meantime patience on this prevails.

I'm off now to join L at the pool and then down to the beach. I'm not really a beach or sun person but do this occasionally for her - and have an interesting book called 'The Millionaire Next Door' that Peter left for me when we returned the next morning to say goodbye. It seems to be a detailed analysis of the mindset of the 'average' millionaires in society, who are anything but the flash, opulent 'well to do' living people most would expect - actually it comes as no surprise to me, but then I understand the importance of saving, investing and living below your means. Should help pass a few tedious hours as I try to avoid burning...