Move by General Growth [Properties, Inc.] Rattles Malls' Investors

Wall Street Journal ^ | 15 May 2009 | KRIS HUDSON and LINGLING WEI

[Lorianne]

When General Growth Properties Inc. sought Chapter 11 protection last month, it took a step its biggest debt holders had believed was impossible: It took 166 of its malls into bankruptcy with it.

The surprised debt holders had believed the malls would be insulated from the parent's bankruptcy because of the way General Growth had structured the assets.

General Growth's action has rattled investors throughout the $700 billion market for securities backed by commercial mortgages, or CMBS. Investors in other deals had also figured their investment was insulated from a parent company's bankruptcy. Now they're worried that General Growth's move will set a precedent that could affect them.

General Growth is the single largest CMBS borrower in the U.S. The CMBS market has grown up over the past two decades to become the major source of financing for commercial real estate.

Some of General Growth's biggest lenders have filed objections to the company's approach in bankruptcy court. A hearing is scheduled Friday to consider, among other things, whether General Growth can use cash flow from the 166 malls as part of its restructuring.

"The filing for so many of these well-capitalized, performing malls is an outrage," says Richard Jones, a lawyer at Dechert LLP, which represents some secured creditors in the General Growth bankruptcy case. "The company is doing something that would damage the entire CMBS industry."

[olrtex]

There are probably some authors of legal opinions out there who are rather worried at this point, especially if they failed to make sure that General Growth Properties, Inc. could not replace the directors of the so-called “bankruptcy-remote” entities. Of course, what would really be nice would be for the Bankruptcy Judge to refuse to put up with this nonsense and/or for the directors of the so-called “bankruptcy-remote” entities to be held liable for agreeing to put the entities in to bankruptcy for purposes that are not in the best interests of the entities.

[genghis]

interesting times
interesting article
thanks for posting

[BobL]

Good article, it shows what Obama has unleashed by re-writing bankruptcy laws, unilaterally, regarding Chrysler.

[achilles2000]

It was clearly a mistake to fail to draft the relevant documents to prevent the holding company from being able to replace the directors. Having said that, I agree that it is highly likely that the corporate drones put on multiple boards had large conflicts of interest and probably flagrantly breached their fiduciary obligations. Another interesting question concerns their right to indemnification in a bankruptcy, whether their actions preclude them from being indemnified, and whether they have any E& O coverage...(probably not, and there would be coverage issues if they have a policy because of the conflicts and fiduciary issues) Heh, Heh...