Fitch: General Growth Chapter 11 Ruling a Mixed Blessing for Bondholders

The special-purpose entity structure that has helped to power real estate finance in recent years remains intact after recent court decisions tied to the General Growth Properties Inc. Chapter 11 bankruptcy filing. However, the rulings may turn out to be less than a total victory for bondholders in the long run. In a research note published Thursday, Fitch Ratings argues that the cost of defending bondholders’ positions will take a toll on subordinate bonds and limit the control over the process usually enjoyed by special servicers. “Positions taken by GGP to date lead Fitch to believe that certain CMBS bondholder protections may be in jeopardy in the future,” explained Huxley Sommervile, managing director & head of Fitch Ratings’ CMBS group for the United States. His comment followed the May 13 ruling by the Judge Allan Gropper of the U.S. Bankruptcy Court for the Southern District of New York. The court approved $400 million in emergency debtor-in-possession financing from Farallon Capital Management L.L.P. General Growth obtained financing in order to improve liquidity and help refinance its secured debt. The court’s decision enables the special-purpose entities to maintain their separate identity during the bankruptcy process rather than being lumped together with the rest of General Growth’s assets. The court stopped short of permitting Farallon to prime existing mortgages or place liens on the SPEs’ assets. That will continue to protect the investors in those retail assets from losses. And in another plus for bondholders, Judge Gropper approved an administrative lien on the excess cash flow in the main collection account. That technical will provide funding for interest payment to the SPEs. Still, Fitch noted that the rulings limit the leeway available to the special servicer. Ordinarily, special servicers leverage their control over cash accounts to obtain concessions from the borrower during workouts or modifications. But since General Growth included SPEs in its Chapter 11 filing, the bankruptcy court–rather than the special servicer–will make those decisions instead. In the near term, Fitch predicts, the complicated, time-consuming Chapter 11 process will have the greatest impact on General Growth’s CMBS bondholders, Fitch predicts. In particular, loan modification, special servicing and legal costs will take a bite out of bond values.