Credit Markets and Rating Agency 'Refinement'

This is a follow on from my analysis in May into the credit markets and rating agencies, when Fitch assured that it would continue to monitor GGP assets in the context of bankruptcy proceedings (although the implication was for further downgrades).

Rating Agency Antics Fuel Uncertainty
This process continued last month when Standard & Poor's began to tighten their criteria for rating CMBS, with figures quoted as high as $235bn worth of commercial bonds under threat of losing their AAA status.  Now in the WSJ today, Standard & Poor announced that it has just reversed "its evaluation of a clutch of mortgage bonds backed by commercial property." It has re-rated a number which are part of the GG-10 benchmark securitization back to the crucial AAA status required for TALF legacy eligibility - and all just a week after downgrading them.

GG-10 is a large $8bn commercial mortgage backed security bond, that has large numbers of loans resecuritized each year across the market by dealers - so ratings on this baby serve as a bellwether for the health (or problems) of the wider commercial credit market. Looking into S&P's published methodology refinement in more detail, the Fed's desire to support commercial real estate is certainly a possible factor in this turnaround.

If so then that should come as no surprise - the impartiality of rating agencies has always been questionable. Note: for more on this, I highly recommend reviewing this great commentary by Linda Lowell of Housing Wire, on the ratings agencies and their impact on CMBS markets (particularly how S&P could not provide any meaningful backing to JP Morgan analysts regarding their previous change that lead to the downgrades). 

Suffice to say that the late June rally in CMBS resecuritizations was impacted by the ratings downgrade rumours and counter-rumours, as dealers were unable to price with certainty, unsure that triple-A paper classes at the time still would be so for much longer.

What Are S&P Changing?
So behind all this, quoting from the S&P methodology changes announced, the following key aspects are being amended:

• Amending how losses and recoveries resulting from 'AAA' rating scenarios for super-senior classes in US conduit/fusion CMBS are assessed.
• Differentiating the timing of losses from 'AAA' term and maturity default tests when cash flow modelling transactions.
• Spreading out losses that are applied to a transaction's certificates over a longer period of time.
  
  

The latter is the most meaningful change, since it allows for exceptional short-term losses to be effectively averaged, and hence to smooth out rating changes and thus reduce the occurrence of short term rating changes that are subsequently reversed.

S&P Methodology Outlined
For those interested, from Standard & Poor's own paper is the refined 3-step approach that they will be using for rating conduit and fusion transactions:

1. Aggregate recoveries from defaults in the 'AAA' scenario and credit impaired assets up to the crossover date. [NB Crossover date is the time where allocation of principal and losses to the super seniors change to pro rata from sequential]
2. For cash flow modelling, assume loans will not default for 3yrs and apply a 24mth recovery period before losses up to 30% would be applied (at the end of the fifth year). Any additional losses applied the following month, expect losses due to maturity.
3. Use Trepp's cash flow model to apply recoveries through the capital structure of the transaction to determine which certificates had an ending balance of $0, and would therefore retain their 'AAA' ratings.

Credit Market Evolution
This report on Sribd from Deutsche entitled 'The Future Refinancing Crisis in CRE' is another one worth reviewing, to understand the refinancing challenges within CRE right now. 

On a side note, the markets have been changing the structuring of resecuritisation in the last few years, in order to juice up tranches and create more AAA-rated bonds as assets became distressed.  How?  By moving away from the much maligned CDO to re-REMIC's (REsecuritization of Real Estate Mortgage Investment Conduits).

To see how these can be misused, take a look at this crap published by Fannie Mae back in December 2007 - see page 2 for the re-REMIC's section in which they state:

"Market participants know that almost any type of MBS can be used as collateral for Fannie Mae REMICs."

I think we're starting to see part of the problem Fannie, when you openly state almost any MBS will do. How to mortgage the future of the next generation in America through incompetence in one easy step. Let's take a look back at how the process used to work for the banks in the good old days...

"So, if I offer you this enormous stash of our sub-prime mortgage backed securities, you'll give me REMIC's in exchange?", asks the disbelieving banker.

"Sure, we luuurve you guys - you're one of our biggest clients, and we just keep on buying these.. cos.. hell, I don't know but we do. Anyway, the government wants us to buy 'em." replies the Fannie Mae redneck employee.

"I love this job.. ok fine in that case here's $50bn of our worst shit we couldn't sell to Bernie Madoff, and in exchange we'll have those nice AAA-rated Fannie re-REMIC's and sell them onto clients. As a sweetener, we'll even throw in vouchers for you and your family to have a 3 course meal at Cracker Barrel." 

"HELL YES!" replies the Fannie Mae redneck. "If there's Cracker Barrel in the deal, then you've got yourself one."

However back to reality, and re-REMIC tranches are attained in a different way to the particularly special blend of bullshit that the banks came up with previously to produce AAA-grade paper from sub-prime toxicity. Rating levels now are attained with a heavy emphasis on collateralisation - hence why rating changes like today increase uncertainty and problems.

For example, triple-A paper in recent offerings has had the most extraordinary 50% subordination levels; in English that means these would still be AAA rated if half the underlying properties burned down and none of them were insured (which they are). At least in theory, these CMBS are almost unnecessarily safe, thus should not ever be downgraded.

A trader is quoted in a Commercial Mortgage journal as stating that: "The life insurance companies are driving this. For regulatory capital reasons, they benefit from holding bonds that have more ratings stability."

Credit Future
This activity had lead to tighter spreads in the resecuritization market for super-senior bonds, leading to increases in their prices on the market and a general upturn in activity at last. However the junior tranche CMBS going out onto the market still have a significantly higher 30% subordination rate, which is a lot better than the triple-A class deals of old.

To me that is a sign that the quality of the bonds is improving to instill genuine confidence in the AAA-rating once again, and rightly so. Going back to the rating agencies, these sorts of problems then derail such progress by increasing the spreads.

GGP
Despite this, looking back at GGP, this is all part of wider series of moves by the government towards improving the credit markets and is to be welcomed by shareholders as a further means of assisting the firm in restructuring.

Indications continue to be reported that the government is open to reassessing TALF terms and conditions, but these mostly are around an extension to the scheme time frame, not a meaningful change to the criteria. Talking of GGP, there has been little going on besides some arguing between GGP and Hugo Boss relating to the latter wishing to terminate a signed lease early due to delays. Boss are likely to have that dismissed and are just trying their luck with a filing like this.

Otherwise the rulings today are largely unimportant, or have already been made (e.g. around the Success Fee). Somebody needs to slip a bottle of whisky to the good judge and tell him to hurry up and make his decision on the SPE inclusion issue…

The Art Of (Self) Assessment

It's that time of the year once more, when bankers are expected to select a number of colleagues who we have tenuously worked with over the past year, and ask them to provide constructive, impartial feedback on our performance.

In the name of self-assessment, we seek to better ourselves as individuals.. to make the world a better place. And more importantly determine the size of our bonuses.

The whole process is about as impartial and representative as reading the average pile of resumes that are ending up on my desk for a role we've got open - i.e. nothing more than a partisan sales pitch. Assessments are more an art than science.

The key for any graduate wondering how to climb the greasy pole, is to always select your assessor targets early in the year. I started buttering up a select few around March - inviting them out for drinks on me for example. It's amazing how much goodwill a bottle of champagne buys. A couple of tickets to a football game is a virtual guarantee of performance inflation.

Most important of all, is to combine all of this with being unjustifiably nice to them throughout the year, even when they deserve a verbal slap for incompetence.

Such self control means the end result is always fun to behold; by next month, as the glowing reviews flow in for me, others who don't prepare in advance repeat the same cycle of suddenly realising too late that they've spent most of the year pissing off people that now matter to them in a way that really matters - financially.

"Emerging Investor is a wonderful chap, a credit to the bank - and clearly one of a deserving elite that requires a fat cheque to retain his services."

Having had a browse of the Yahoo board for the first time yesterday, the above would be a lot more constructive feedback than the first comment I noticed about one of my early GGP legal analysis posts. Not anything about what I actually said - no, just some waffle about not liking the white text on a black background - clearly the author is senior management material.At this stage of the year, senior managers also frequently apply another subtle tactic, as they realise the value in being seen to 'deliver something' impressive by November. Typically from now the industry sees a flurry of small projects kicking off, combined with a hiring spree as consultants are pulled on board with no regard for cost or efficiency - all in order to further aforementioned manager's potential bonus.

Only minor rumblings on the GGP front: the judge has ordered the firm to pay Deutsche Bank the full amount of the non-default contract rate for two malls. The headlines cite the additional $2.89m GGP must pay, but at LIBOR +6% this is an entirely fair ruling.

The only other news is that GGP have applied to extend the time frame allowed within Chapter 11 to finalise and submit a restructuring plan. This will be heard on July 22nd, along with hearings to approve the success and DIP financing fees. This request to extend has been triggered due to several factors. Firstly the underlying complexity of GGP's credit structuring, and sheer number of individual creditors, means that completing this task by mid-August was always ambitious at best.

Otherwise though, the cynic in me cannot help but observe that Chapter 11 protection is an advantageous position for GGP to be in right now. While it remains here, partially shielded from the slowly passing economic downturn, its pressing need to refinance is removed, and it can happily sweep its excess cash flows from all its entities centrally, and use these to fund operations and loan repayments - all while continuing negotiations.

It is now the creditors on the back foot and more interested in seeing GGP restructure and refinance so that they can at least re-access the principle from their CMBS's, which is a good example of Chapter 11 positively incentivising.

Oh, and do take a moment to read this classic story doing the rounds right now. The Goldmangate scandal relates to a dodgy Russian programmer (referred to as a 'strat' internally at GS), who decided to further the national stereotype with some good old corporate espionage. Old Twinkle Toes Aleynikov, hatched a plan to download all of the algorithmic code for Goldman's infamous 'black box', which is actually a swarm of machines that make automated trades in response to news and events, and which brings in millions of dollars of pure profit each year.

Every major bank has a black box, but Goldmans is the most famous as they were an early and prominent pioneer of algo trading. Unfortunately Aleynikov seems to have not been especially bright, and either assumed the security around this was not high (picture a financial Fort Knox in reality), or that his idea of zipping, encrypting and sending out in smaller chunks to an external server was subtle.

Of course, that triggered the internal alarms and the rest is history with the FBI.

"..if you think about it, instead of getting their panties in a bunch over a coupla jacked megabytes of data, the Masters o' the U should be looking at this whole thing as a source of pride. Everybody wants a piece of their shit." Bess Levin, Dealbreaker

You can always trust Dealbreaker to say it like it should be said.

Exploiting Loopholes

The golden rule with tennis, as with finance, is to always put your money on the Swiss. Tough luck on poor old Andy Roddick though, the guy was rightly gutted and is too good to only win a single major in his career so let's hope he comes back and wins another.

So the final legal submissions have now been made - this includes General Growth's post-hearing submissions against MetLife and against ING Clarion and Wells Fargo. The Committee of Unsecured Creditors, and the unsecured lenders ING Clarion, Helios AMC, and of course MetLife. They are really just summarising the arguments already put forwards, although additionally MetLife submitted a motion to dismiss evidence submitted by GGP because the "Movants [MetLife] were not provided with a copy to review."

The evidence itself is a summary of the MetLife Debtor groups that own the two malls in question in this appeal. Ultimately they were included to provide evidence of the consolidation benefit to GGP that would come about from their inclusion in Chapter 11. Again, whether this is accepted or rejected is arbitrary and will have little bearing on the overall decision.

Additionally I recommend reviewing two interesting analysis papers discussing the impact of the GGP bankruptcy on the CMBS industry. The first is entitled The GGP Bankruptcy So Far: Grounds for Concern, Sources for Hope, (thanks to GGP Freak for bringing that to my attention - you mentioned it is from a post on one of the boards so perhaps you could post the link). Either way, the article provides an interesting additional summary from legal experts.

It agrees that the notion of 'bad faith' is unlikely to stand up to analysis and sway the impending decision, although here the authors focus on the eleventh hour dismissal of independent directors as the other key factor instead of GGP's ability to prove its decentralised structure and hence requirement to include SPE's in Chapter 11 not directly in default. As I have said previously, many of the arguments being made in this case are being made for the cameras, and this view is clearly shared:

"in the GGP bankruptcy, it seems that the independent director issue may not be fully pursued because of the practicalities of the situation. In the view of some, even if the motions to dismiss are not granted, it is important that these arguments are made, if only to force a decision that will at least provide a benchmark against which lenders can attempt to structure and price transactions going forward."

Also interesting is this observation on the impact of the agreed DIP financing loan from Farallon Capital Management, part of which will be used to pay off the Goldman Sachs loan: "Using the $400 million DIP loan to retire the Goldman Sachs facility effectively increases the leverage on these assets by almost 100 percent."

The second article 'CMBS Bankruptcy Remote Structuring and the Recession: Revisiting the Benefits', was published last week by the Bureau of National Affairs. It provides a much more detailed analysis of CMBS structuring, and crucially an analysis on how the GGP rulings to date are impacting the industry. One telling remark is that the SPE bankruptcy remote structure has been "largely untested" to date, and only once these are resolved will the credit markets be able to move forwards with confidence and accurately rate and price risk into credit investments.

Where this article is useful is in summarising key ways in which SPE's "theoretically mitigates" risks:

1. Independent Directors to vote/approve the commencement of bankruptcy proceedings - the controversial one that we know about from its alleged 'misuse' during GGP's filing, which illustrated contractual holes.
2. Limits Debt that an entity can incur - both secured and unsecured, the court rulings have upheld this concept and ensured that GGP will not be able to load them up with additional debt as a result of their inclusion in Chapter 11.
3. Ensure that SPE assets/liabilities are not consolidated with those of a parent or affiliate that is involved in a bankruptcy - in reality this has not taken place in GGP's case from their inclusion in Chapter 11 either, although there would be a significant benefit from consolidation of net cash flows and of course negotiations.

As if anybody needed confirmation that the markets were being presumptuous about CMBS's, the article comments: "CMBS sponsors and lenders, supported by many of the credit rating agencies, relied heavily on the assumption that the remote bankruptcy provisions, specifically the independent director provisions, in the SPE’s governing documents would provide protection against an SPE borrower filing for voluntary bankruptcy."

Where the article becomes much more interesting is an examination of the circumstances in which GGP has been able to utilise cash flows as a collateral. Normally it would not be allowed, unless the lender consents, or the debtor convinces the court that "the lender’s interest in the cash collateral is ‘adequately protected.' "

This notion of 'adequate protection' means proving to the court that "the collateral is not being dissipated to the ultimate detriment of the lender. Typically this condition is satisfied if the property continues to generate cash flow and the lender is given a lien on post-petition income to replace the cash collateral that is expended." Despite the turbulence in commercial real estate valuations, it is fair to assume that the value of the assets exceeds debt in all cases before the court at present.

As such this is precisely what the Courts have awarded all of GGP's lenders who have appealed for their respective malls to be removed from Chapter 11. Despite a lien on cash collateral not being as appealing to lenders than instant access to the cash flows from the malls, income is safeguarded by the decisions made by Judge Gropper, by ensuring they are serviced and repaid in the event of liquidation.

The article concludes a summary of ways in which the GGP rulings to date are impacting the industry and a realistic assessment of the next steps relating to restructuring. Ultimately the ability of GGP to control the independent directors of its SPE's is seen as a key weakness in the current structure of SPE's. The legal authors point out that despite this it is very much legal, :

"Despite the fact that the removal and replacement of the independent directors may have violated the spirit of the original agreement with the lenders, GGP’s actions were permitted under state law and do not appear to have been prohibited by the organizational documents of the SPE borrowers."

In fact, the article even advises lenders able to who have the opportunity to "revisit the governance terms of borrower SPEs, would be well advised to consider modifying the 'remove and replace' provisions relating to the independent directors."

In many ways this suggests that GGP's bankruptcy is unique in another sense, due to timing and its ability to exploit weaknesses in the contracts that will be closed in the future. That being the case, any investors contemplating on taking positions in other REIT's in a similar position to GGP should exercise caution. It would be unwise to simplistically assume that other companies will necessarily be able to exploit this loophole for long, and so need to investigate the underlying SPE structures and contracts.

And finally:

"As the GGP bankruptcy progresses, given the uncertainties in the valuation of commercial real estate in the current markets, it will be interesting to see whether GGP attempts to reduce required interest payments based on the current market value of its properties and, if it does, how the bankruptcy court will determine the valuations of these properties and how reduced values will affect the commingled use of cash collateral."

Bear in mind how early into the bankruptcy process this all is - decisions made now can be amended throughout GGP's period in Chapter 11 on appeal. Meantime all of the information is before the court, suggesting a ruling is impending.

Addendum: just tidied up this post - you could tell I wrote and posted it during the Wimbledon Final, what a bloody mess it was...

Greed Guarantees It Will Happen Again

It is interesting how everything in life is cyclical. You're born a disgusting, wrinkly ball akin to the stomach parasite from Alien, unable to speak or wipe your own bottom - and if lucky you end up that way again by your late-80's.

On the subject of cycles, do we truly learn from mistakes? Perhaps on a generational level, but surely not beyond that, which is why so many of the problems we are seeing now have happened before. It is the same point raised in the book 'The Millionaire Next Door', which observes how the wealth acquired by self-made millionaires through frugality is usually lost within a couple of generations, as their offspring piss it all away pursuing a materialistic utopia.

Anyway my point was actually around the whole Bernard Madoff fraud, and the absolute certainty that it will happen again in the future. I don't care what politicians and others in the press state about controls to prevent it, that is simply not the case. Wherever there are naive and/or lazy investors, there will be largely unregulated, opaque funds promising fabulous returns that seem too good to be true

In one sense everything is legal until you are caught - something that Enron illustrated impressively - although not a position I agree with, despite notions of 'right' and 'wrong' being grounded solely in perspective.

So it was with some interest that I got some perspective when I chanced upon a CMBS securitization dealer from another bank over at a Corney & Barrow champagne reception last Friday. It was completely random, at a wedding drinks bash: not mine, and sadly and not corporate - the days of charging everything back are sadly not yet there again.

I was most surprised to find out the trader worked for RBS, who having notched up losses to rival Citibank, and really are a basket case in the world of banking these days. My first question to him of course, apart from the standard piss-take "what's it like to work in the public sector these days?", was what he was still doing there with a job?

He confirmed my suspicions by admitting to being the only one left of a team of 25 a year ago. An interesting illustration of another factor reducing the CMBS transactions taking place, given the headcount reductions to support the transactions. In effect though, he is minding the shop with respect to their existing CMBS portfolio - but did add he is still an originator.

Obviously I had to bring up the subject of General Growth, more to see if he knew anything about it and the potential impact of the SPE ruling. He knew enough for me to have some fun ripping his industry apart, as I reminded him what a joke the previous contracts and sales processes had been.

He did not disagree, but gave the inside perspective - namely that it was really for the clients to complete the due diligence as they were the ones impacted. That is fair enough, but as I reminded him that is not really a valid view given the $50bn loss RBS took last year - it might just be arguable that they were impacted as well. He also confirmed the rumours I have heard that the industry is busy co-ordinating a complete re-structuring of SPE's and associated contracts that will supersede what is currently on the market.

Hardly a surprise, but what that does suggest is that when we finally receive a ruling it will not have nearly the ramifications that some would suggest. There is otherwise little news on the GGP front besides some minor legal applications ahead of future hearings.

Good news for me is that the functional spec will (at last!) be finished by the weekend. It has taken me about 2.5mths due to work, and after drafting up a high level technical spec next, I could in theory get it built in the next couple of weeks. However I will be moving onto the biggest job of all next - populating the site content. Rather more important at this stage, and given the site will provide industry grade investment research papers to registered users (for free), that is going to take time to get ready. I will be covering everything from corporate finance to investment products, market psychology and all trading products on the market, whether investors have access to them or not.

The key to successful investing, particularly for those aspiring to reach high net worth status, is building strong foundations - and that goes beyond simply building knowledge. Either way this site is going to be a more intelligent alternative to the main investment tabloids.

Decision Time Legalese

What a week.. if ever I needed a reminder why I want to set-up my own business and get out of the sector, working for one of the supposed 'elite' banks (aka 'slave driving bastards'), this is it.

I am on course to notch up a 70 hours week, which is just unhealthy - never mind it also equating to having no life.

I don't have much time to comment on anything, unless anybody cares more than I do about the centre pieces design. Wedding preparation intensity is non-stop: women have an amazing capacity to focus at such moments I have discovered. Work.. wedding talk.. sleep.. wedding talk.. work.. wedding talk.. sleep..

Without enough time to get back to researching other investment opportunities, I am back onto GGP for now, and there has still not been much movement on the key decision in the Court case, although it should be very soon. Judge Gropper has clearly had a busy week ploughing through the mountain of GGP motions submitted.

Most are minor, procedural changes proposed by GGP in light of it entering Chapter 11, so are unimportant to the outcome. On Wednesday we saw MetLife's motion to dimiss several of it's SPE's from the Chapter 11 filing go before the Court. The day before, GGP filed an objection to limit the testimony of MetLife's experts relating to refinancing, which they submitted here.

GGP questioned the expertise of the witnesses that MetLife sought to call for evidence, citing their lack of being on the MetLife Real Estate Investments Committee, which is "the decision-making body with knowledge of this topic." They also cite their 'lack of preparation' in reviewing the key issues in the weeks leading up to the hearing, such that they could not be deemed suitable to provide advice.

General Growth also sought to draw on the Court's expressed desire to fast-track GGP's case as a reason to dismiss them:

"Given the expedited nature of this hearing and this Court’s expressed desire to resolve the various motions to dismiss rather than hold yet another round of hearings, MetLife’s failure to provide witnesses with knowledge about this area of inquiry cannot be excused, and should not be without the typical consequences i.e., MetLife should be barred from presenting any evidence regarding what MetLife would or might have done with regard to extending or refinancing any of the loans at issue in MetLife’s Motion to Dismiss. Put differently, MetLife should be held to what its corporate representatives testified to -- and nothing more."

Well I am not convinced, but it is worth a try. Yesterday saw this response from MetLife, and I recommend reading the introduction if nothing else, because the language is strong by legal standards and quite a laugh. MetLife's attourney's, Greenberg Traurig LLP, seem beside themselves with anger at GGP's attempt to have their evidence dismissed before it is even heard.

The motion to limit MetLife's testimony representatives is described as "nothing more than a desperate attempt by the GGP Debtors to exclude evidence that demonstrates that their entire premise for the filing of their chapter 11 cases is simply untrue." MetLife go on to forcefully suggest that GGP's case almost entirely rests around its argument "that refinancing was not available to them in the face of upcoming maturities."

In reality that is not the case - just have a browse through my previous analysis for examples of the range of other arguments that GGP have put forwards. MetLife again state that refinancing was not an issue with the malls in question here "and they [GGP] know it". They go on to state:

"The testimony that the GGP Debtors seek to exclude shows that MetLife would have been, and remains, interested in discussing refinancings or extensions of the loans to the MetLife Borrowers."

'Retrospectively interested' seems more accurate to me. MetLife point out that they have refinanced "similar loans of similar properties within the relevant time period" but I suspect that is unlikely to stand up to inspection, as they were not for REIT's in technical default. It is also highly unlikely that MetLife refinanced those with equivalent maturities so far into the future, given the tax exposure factor that is cited in the Wall Street Journal as a flaw preventing many early refinancing negotiations to open.

MetLife suggest that the only reason GGP have submitted the request to exclude these testimonies is because of their 'devastating' nature to GGP's case. Indeed "the GGP Debtors are desperately seeking any pretext to prevent the Court from considering this important evidence." Yet if the other refinancing is not truly comparable as outlined above, then that is not valid at all.

More likely GGP were busy rocking the boat and seeking to exploit a weakness in the case by having witnesses removed. Either way, it is not yet known whether this motion was upheld or not, but I feel that it is unlikely to sway the ultimate decision on this issue, despite MetLife's claims.

Even if MetLife were allowed to provide witnesses who claim refinancing was a possibility, most of their evidence is conjecture and therefore debatable. This also does not counter the case that large numbers of SPE's did refuse to even open negotiations, which combine with factors such as GGP's claim of a need to remain integrated and proactively seek a means of negotiating with all lenders.

To my mind, if the motion to dismiss the witness exclusion was overturned then the strength of GGP's original case is unchanged - but if it was upheld then it undermines MetLife's case, which is probably at the root of their vehement response.

The hearings on Friday are largely not part of this more important issue, but expect a decision soon - I am still expecting a favourable outcome for GGP.

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 IV: GGP's Final Response

Okay this is starting to get excessive, but then this run up to the court hearing tomorrow has seen some interesting arguments going on behind the scenes. Yesterday GGP submitted their final response to the creditor's case ahead of the hearing on Wednesday, which is a baby at a mere 100 pages.

One key part of that was a dissection of the motion to dismiss the Chapter 11 case of the Fox River Shopping Center LLC by FRM Funding. FRM Funding had by then already submitted a motion to withdraw its objections to inclusion in Chapter 11. Although no reason was given, the case is covered in GGP's submission, and in all probability it was an assessment by FRM's legal team on the strength of GGP's case that lead to the withdrawal.

A quick review of GGP's final response to the creditor case:

1. MetLife / FRM funding 'bad faith' arguments fundamentally flawed
GGP point out that just because certain GGP subsidiaries are operationally sound with strong cash flows does not mean they could ignore the realities of the credit markets or their duty to maximise value. In other words willfully waiting until default and potentially being forced to liquidate individual entities would be an abuse of their duty to all.

GGP's team reiterate that the wider market problems meant that anticipating future problems refinancing all loans was nothing more than a realistic assessment of the credit markets, and hence the Chapter 11 filing was made in good faith. Additionally they note that the debtors do not even attempt to show that GGP's chances of a successful "reoganization is objectively futile."

GGP also refute that Chapter 11 is being used as a "sword" to gain a tactical advantage in negotiations with secured lenders (note: it is in reality, but let's ignore that), and instead refer to it as a "shield" that will protect the firm as it restructures the debt. In that case is Bill Ackman a knight in shining armour and MetLife the evil dragon?

It does illustrates the highly subjective nature of filing under bad faith. You can argue it both ways, but you need to have definite proof to make the mud stick, and the creditors case is not strong enough. Weil Gotshal & Manges also point out inconsistencies between creditor cases, with MetLife arguing the credit market problems persisting for a year or more is "sheer speculation" by GGP, while ING and Helios agree that the CMBS market has disappeared.

2. GGP filed for Chapter 11 protection for the same reason that ING and Helios debtors filed
This being the collapse of the CRE financing markets and the advantage of "participating now in an integrated, consolidated restructuring of project entities". This makes an effective point by illustrating that other creditors were filing against GGP by this stage, and undermines suggestions by those creditors objecting just because GGP filed first that taking no action was a viable option.

3. GGP filings included loans that had already cross-defaulted
Hence did not give GGP "a reasonable prospect of refinancing before maturity, and certain other loan characteristics that further exacerbated the need for a restructuring." This point is again particularly strong, as it demonstrates the financial stress that GGP was indeed under during the months of financial limbo when it moved into technical default on loans without declaring Chapter 11.

Additionally GGP dismiss this further by arguing: "There exists no basis in law or in fact for overriding these reasonable business judgments made by the Subsidiary Debtors [GGP] on the advice of sophisticated financial, restructuring, and legal experts."

The 'loan characteristics' referred to above are covered in more detail in this WSJ article from yesterday, which shows an increasing recognition by the wider industry and US government now that there are problems with the entire CMBS market. This goes back to the point that ultimately (due to tax reasons, as it turns out), many of GGP's lenders were largely unwilling to even discuss refinancing of any loans not due within a short period of time - a fundamental structural flaw of the credit markets.

GGP has to my mind received a significant boost from these potential plans to amend the tax laws to enable lenders to talk earlier. This gives a powerful argument that GGP really was forced into Chapter 11 due to market failings and exceptional circumstances, and hence should be fast tracked back out.

4. Dismissal for lack of good faith should be granted "sparingly, with great caution."
The defence elaborate further with previous court decisions that support GGP's case, stating that a petition for bad faith should only be granted when: "it is clear that on the filing date there was no reasonable likelihood that the debtor intended to reorganize and no reasonable probability that it would eventually emerge from bankruptcy proceedings."

The defence then go into detail dismissing all of the bad faith arguments that ING, Helios, MetLife and FRM have made in their filings, claiming none have merit.

5. GGP filings for bankruptcy had full corporate authority
GGP move onto FRM's claims around technicalities in the Fox River SPE filing, and rebuff with some telling quotes back from the original derivative contracts.

For those who have read my previous comments on the CMBS industry and how contracts used to be sold, you will know I have long said that nobody did any due diligence in the good old days. It was a zip 'em and sell 'em on mentality, and frankly nobody in the banks cared as long as people bought them. Only now are people running around complaining.

Let's face it, if you did due diligence you would never have sold CMBS contracts with this explicitly in the wording:
"Nothing contained herein or omitted herefrom shall prevent the shareholder(s) of the Company [GGP] from removing an Independent Manager with immediate effect at any time for any reason."

GGP's lawyers state that the loan documents include no legal opinion regarding whether Fox River was bankruptcy remote. Even more damning, and probably the final nail that forced FRM to withdraw their motion was the legal assessment of Fox River, which refutes the notion Chapter 11 would not enable any substantive consolidation (of assets and liabilities).

6. MetLife's 'speculation' on the outcome
In MetLife's recent response, they made a convincing case about GGP acting in bad faith, but a key point was that it was indeed based largely on speculation on their part. At the heart of this was an argument that there was no point moving into Chapter 11 because when it comes time to approve any restructuring plan, "there might not be any other impaired creditors and it [MetLife] might vote against a plan."

This response from GGP is all you need to say on the matter:
"..if creditors could get a bankruptcy dismissed at the start of the case simply by claiming they may not agree to a plan of reorganization, as MetLife claims, then chapter 11 would be rendered useless as creditors can always assert they will not agree to any impairment of their claims."

The defence conclude that all of the creditors seeking dismissal of the bankruptcy petitions are seeking "to impose a requirement that debtors face imminent collapse before seeking chapter 11 protection. But no such requirement appears in the actual text of the Bankruptcy Code."

Everything continues to point towards a favourable outcome for GGP, although law is a hornet's nest, so you never quite know what will come out when you start playing with it.

Legal Analysis III: Creditors Make The Case

Well, L arrives into Heathrow tomorrow morning after her indulgent week of girliness in Chicago at the Bridal Shower. As such I had better spend today tidying up this dump - it's amazing how a week without the missus demotivates me in keeping the place clean.

The final part of this legal analysis series takes a look at the arguments being submitted before the Court next week by the creditors, with respect to having various SPE's (and hence malls) removed from inclusion in GGP's Chapter 11 filing. This gives the other side of the case, and hence an opportunity to assess how convincing this and their chances of overturning the earlier decision really are.

This article focuses on the case being proposed by MetLife, and the investment fund Clarion Capital, which are two of the group of secured creditors being heard on Wednesday 17 June by Judge Gropper. Examing the various arguments proposed by the creditors:

1. Chapter 11 cases not filed 'in good faith' - the specific loans in question were all current and not in default. Upon closer examination, the creditor's claims around the filing are unconvincing in this respect. As GGP's defence team state in their response, calling it 'woefully inadequate' in establishing the burden of proof, I agree having reviewed everything they have put forward.

The creditors give evidence from previous claims to back them up throughout of course, and suggest that GGP is ineligible in this case, due to it being financially healthy and not insolvent:

"..given the enormous powers a chapter 11 debtor is given by virtue of the automatic stay, the exclusive right to file a plan, and the ability to discharge debts, these powers should be limited only to those facing financial stress."

If all GGP's problems due the credit market turmoil of the last 9 months do not equate to financial stress then I am not sure what does! The creditors then go on to cite the recent court ruling that has allowed a construction company to file a lien against General Growth to recoup owed construction costs, despite being in Chapter 11. In that case, the court stated:

"They [GGP] do not need a litigation respite, as do many chapter 11 debtors... Nor are they financially troubled debtors that seek in good faith to avoid a preclusive judgment in State court that would prejudice legitimate efforts to preserve value for the benefit of all of their creditors."

Insolvency is not a requisite for filing Chapter 11 anyway, as the creditors admit. The above Court ruling is quite different from establishing bad faith and I see nothing that suggests proof that GGP are doing anything other than attempting to sort out their problems. The only point worthy of consideration is below, although it is more than debatable that this is an abuse of Chapter 11, since it is precisely what the legal code is there to do - facilitate the move out of bankruptcy:

"The Debtors’ use of chapter 11 as a sword to obtain a tactical advantage in any negotiations to extend the Loan, when such Loan was not in default and does not mature until a year and five months after the Petition Date, is an abuse of chapter 11 that the good faith requirement is designed to prevent."

2. Loans in question were not due to mature for a significant period of time - as such there was "no present need [for] the.. debtors to file for relief under Chapter 11 of the Bankruptcy Code." Additionally MetLife claim that GGP "did not contact MetLife, one of the largest insurance company providers of real estate capital, about a loan extension prior to the Petition Date."

This point has been refuted in evidence submitted by GGP, regarding widespread creditor unwillingness to discuss extensions on all but loans due imminently. This cites that in some cases GGP were even refused the names of underlying creditors to contact. Thus, GGP may in this case have not been able to identify who to contact - either way, this point is secondary in the context of point 4 below.

3. The malls in question do not have any other significant creditors - thus GGP will not be able to cramdown a plan over the Lenders' objections.

This is a particularly weak point; citing dimissal of this SPE because it is primarily comprises a single lender, hence there is no advantage in Chapter 11 inclusions since GGP will still have to fully service them and negotiate with a single lender.

That again is refuted by the evidence submitted by GGP regarding how unwilling many lenders were to renegotiate loan terms and extensions pre-Chapter 11. It also ties back to the point that individually, lenders act within their own interests, which are not directly aligned with those of the company, other creditors (especially unsecured), shareholders or wider credit markets.

This Providence Journal article also suggests MetLife argued that GGP's attempt to 'cramdown' a wholesale reorganization plan for its mall properties will "hurt the insurer's financial interests." I do not see how that can be argued, nor have I found this point being made in the court submissions.

Being negatively financially impacted cannot be realistically argued as a motion to dismiss, beyond it 'hurting' MetLife and other creditors ability to negotiate: they do not wish to be forced to the table without holding all the cards. However all are having their loans fully serviced by GGP throughout the period at pre-bankruptcy rates, thus in theory should not lose out at all financially.

4. Chapter 11 were not filed with any reorganisational purpose - "the Debtors filed bankruptcy to improve their negotiating position by increasing the pressure on the lenders to accept refinancing terms."

Here is the reality of this entire dispute, and the primary reason for arguing for their inclusion is to obtain leverage in efforts to extend the maturity of loans. The rest is largely window dressing, and this is directly opposed by General Growth's claim of operating a centralized business model. I do not hold much credence with GGP's claim in this respect, but it can be very effectively argued and elaborated upon on the day in court, without creditors being able to disprove it.

The heart of the argument is that the creditors will continue to be fully serviced and do not lose out, whilst GGP gain the useful leverage from an automatic stay, and can utilise additional cashflow from the assets while enhancing their ability to restructure and negotiate loans.

Ultimately Judge Gropper has already indicated willingness to agree with the need for keeping GGP's "centralized business model" in tact, and for considering this case in the wider context rather than just those of some self-interested lenders. I see nothing submitted to the Court by MetLife or the creditors that will change that decision, and expect a favourable ruling for GGP next week.

Addendum to original post: late yesterday Wells Fargo issued this direct response to GGP's defence. Here they reiterate the original two points that prove 'bad faith' (inclusion of an SPE that generates sufficient capital to service its creditors, and inclusion of loans not imminently due to mature is unnecessary).

Additional points raised:

• Wells Fargo cite the US government actions and potential expansion of TALF as an unknown, and that should have been relied upon by GGP as a reason to hold off declaring Chapter 11 and certainly including subsidiaries - a bizarre argument that will be rejected.
• The Debtors [GGP] "brazenly replaced their Independent Managers on the eve of their bankruptcy filing in order to obtain a unanimous vote in favour of the bankruptcy filing."
• SPE Operating Agreements require the Independent Managers "consider only the interests of Subsidiary Debtors and, therefore, are precluded from considering the needs or concerns of any entity other than the Subsidiary Debtors."
• GGP's claim that the SPE's were essential as part of the GGP 'family' filings is "completely undercut by the fact that numerous affiliates of the Subsidiary Debtors were not placed into bankruptcy."

Key points here are that General Growth's actions in replacing directors was legal - it is expressly allowed under the terms of the CMBS contracts - and that although filing Chapter 11 is in the wider interest, it is intended for a positive reorganisational purpose that would benefit the entity too, so is therefore not 'bad faith' as interpreted in the spirit of the law.

The final argument around not all subsidiaries being included is the most interesting point, and refers to the joint ventures and other such subsidiaries not able to be placed into Chapter 11. This provides a strong argument against GGP's slightly dubious 'centralized business model' excuse, so it will be interesting seeing how this impacts the Court's decision. I see this as the main factor that could swing a decision against GGP next week.

The latter point is expanded upon by citing that GGP's explanation of the filings being "done to maximize the value for all stakeholders, including the employees, lenders, vendors and equity" is untrue, and instead were "solely for the purpose of maximizing the value of equity." That is correct, although it is arguable that employees, lenders and vendors will also benefit at a collective level from the GGP group having a greater ability to restructure.

In summary, I think the key issue around good versus bad faith is that (as quoted in Wells Fargo's submission), this is "a balancing process between the interests of debtors and creditors which characterizes so many provisions of the bankruptcy laws and is necessary to legitimize the delay and costs imposed upon parties to a bankruptcy."

In other words - was the decision to include GGP subsidiaries in Chapter 11 in the best interests of debtors and creditors, and does that legitimize the delay and costs? The previous Court ruling suggests that this decision has already been made, and in that context despite creditors whinging about it being unfair, it will not be overturned given that the 'cost' to them is actually only in terms of their leverage when negotiating with GGP during restructuring.

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.

Legal Analysis: GGP Make The Case

I found Goldmans claim for administrative expenses against GGP for making a DIP offer (and having it rejected) highly amusing - if ever you needed an illustration of why they make so much money..

On 31st July, there will be a hearing to determine the extent and value of the lien by the creditor George Reed Inc (GRI), which are secured by the property 'Elk Grove Town Center LP'. What makes this case more unusual is that Elk Grove, and ergo GGP, owe more than $1m in unpaid progress payments (construction costs) to GRI. The deadline is being contested by GGP due to insufficient time to respond, which "failed to comply with procedures".

I have just finished reviewing GGP's court defence, and a summary is below:

1. GGP and its subsidiaries are "a fully integrated organization"
Therefore General Growth requires the revenues generated by the project-level subsidiaries for the servicing of their debts.

2. The CMBS Market GGP Relied Upon To Finance Its Properties Is "Dead"
This point is made to illustrate that it was standard CRE practice to refinance mortgages before they came due and for lenders to sell these onto the CMBS market. This is gone under current conditions, and approximately $9.9 billion of GGP's project-level subsidiary debt matures between now and 2012.

3. Unable To Renegotiate, Each Of The Debtor-Subsidiaries Determined That Chapter 11 Protection Maximized Value
A key point, is that when each of the individual entities acts within its own interest, this does not necessary act within the wider interests of the company or markets:

"When GGP approached several of the master servicers to discuss loan restructurings, it was told that the servicers would not even consider discussions unless the loans were within thirty to sixty days of default."

"Amazingly, in some cases the master servicers were even unwilling to reveal the identity of the special servicers whose consent was required for any loan restructuring."
GGP Court Submission 'OPPOSITION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO MOTIONS TO DISMISS OF ING CLARION CAPITAL LOAN SERVICES LLC AND WELLS FARGO BANK'

4. The Debtors Filed For Chapter 11 Protection
Due to the crisis, GGP and its subsidiaries (boards of the entities) met for over a month "to evaluate the data and determine whether filing for bankruptcy was in the best interest of that entity." As expected, the crux of the defence is that this is in everybody's wider interest:

"GGP entities whose mortgages were to mature in the next few years determined that filing was the best way to maximize their company’s value for all stakeholders, including employees, equity holders, and secured and unsecured lenders."

5. The Movants Remain Adequately Protected
In other words, the creditors asking for SPE removal from Chapter 11 should be paid in full anyway, and as even they cannot argue, all have been fully serviced so were not in default. Additionally GGP has "more than sufficient cash flow to service its debts to Movants."

The defence also goes into some detail around how the Movant's secured interests remain intact and protected, given the Court has upheld the need for each Debtor-Subsidiary to continue paying interest on loans at the non-default contract rate.

GGP makes a highly convincing argument in my opinion. It cites that the movants have failed to establish bad faith (a legal term, but ultimately this must be 'proven' by the Movant's to overturn the original decision). The lawyers have a field day shredding the creditor's case:

"Movants thus fall woefully short of discharging their burden of establishing the 'substantial evidence' necessary to prove bad faith. The 'bad fath' standard is meant to weed out bankruptcy petitions that seek to abuse the bankruptcy process."

As I have commented on previously, the industry overstated objections regarding the impact of this case, and stretched credibility. Here GGP's legal defence make the same point that arguing bankruptcy filings by all of the Property Owners will 'wreak havoc on the structured finance markets if permitted to proceed' is baseless:

"Movants offer no evidence that the filings have disrupted markets. Indeed, this Court has acknowledged that their concerns are 'hyperbole.'"

Overall the case seems very strong, and I cannot find anything in the objections that comes close to overturning this. It supports an industry source who confided that the credit industry objections are largely for the cameras (read: the clients). The reality is that CMBS sold to date did not come with adequate legal protection - as such they have too many legal holes for GGP not to win this argument.

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.

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.