Commercial mortgage
bondholders took some comfort after a judge overseeing General
Growth Properties' bankruptcy stopped short of a move that they
say would have undermined the structures of their securities.

The inclusion of more than 160 subsidiaries in the No. 2
U.S. mall-owner's bankruptcy filing in April set off alarms in
the commercial mortgage-backed securities market as investors
feared a judge would consolidate the units. A consolidation
would set a negative precedent in the market, where investors
provide money with knowledge the assets are protected from
events like bankruptcy at the parent or other units.

Judge Allan Gropper on Wednesday avoided taking steps
toward a substantive consolidation, even as he allowed the
company to garner cash flow from its disparate properties.

We dodged this bullet, and I think everyone is breathing a
sigh of relief, said Richard Jones, co-head of Dechert LLP's
real estate group. But this game is not over yet.

A consolidation of assets under special-purpose entities
(SPEs) could still occur as the company looks for leverage to
fix the root cause of its bankruptcy: the inability to
refinance debt, Jones warned.

Chicago-based General Growth (GGWPQ.PK) filed for
bankruptcy after the credit crunch choked off financing for
commercial property mortgages, challenging the company as it
confronted maturities on billions of dollars in loans. Some
three-quarters of its shopping malls joined in the filing,
sparking industry concern.

CMBS provided more than $600 billion in financing for
commercial real estate lending from 2005-2006, and the thawing
of the market is seen as key for preventing a downward spiral
of delinquencies and foreclosures.

In general, (the judge) respected the SPEs, said
Christopher Hoeffel, president of the Commercial Mortgage
Securities Association.

While inclusion of SPEs in bankruptcy is not ideal, the
CMSA considered it a victory that Gropper maintained the
isolation of the property assets, and put no additional liens
on CMBS collateral, Hoeffel said.

Bondholders will continue to get principal and interest
under the bankruptcy.

Many of the malls in the filing are top-quality, and their
inclusion in the bankruptcy puzzled analysts. General Growth
could be angling to use the threat of consolidation as leverage
to get lenders and servicers to agree to restructure long term
debt, Dechert's Jones said.

A substantive motion can be made at any time during the
bankruptcy case, he said.

Next up will be a May 27 hearing during which loan servicer
ING Clarion Capital Loan Services LLC will argue that the eight
malls it represents should be excluded from the bankruptcy. ING
says that not only is each mall owned separately, but that all
of them are current on their mortgages, with some having an
ample cushion to pay.