General Growth Properties Inc, the second-largest U.S. mall owner, declared bankruptcy on Thursday in the biggest real estate failure in U.S. history.
Ending months of speculation, General Growth, along with 158 of its 200-plus U.S. malls, filed Chapter 11 while it tries to refinance its debts.
But the ongoing global financial crisis made it impossible for General Growth to restructure outside of bankruptcy and could signal further troubles for other financial institutions who are General Growth creditors.
The collapse underscores the pressure on U.S. commercial real estate with few sources of available funding.
The company received approval on Thursday from federal bankruptcy Judge Allan Gropper to use its cash collateral to operate its businesses during bankruptcy.
Chicago-based General Growth, which owns such valuable properties as South Street Seaport in New York, Fashion Show in Las Vegas and Faneuil Hall Marketplace in Boston, listed total assets of $29.56 billion and total debts of $27.29 billion.
The collapse marks a sad chapter for a company that has been growing since 1954, when brothers Martin and Matthew Bucksbaum decided to expand their family's grocery business and build a shopping center in Cedar Rapids, Iowa.
The company expanded steadily through both building and buying malls, the largest acquisition being the 2004 purchase of high-end mall owner Rouse Cos for $14.2 billion. That deal, financed entirely with debt, added 37 valuable U.S. malls to its portfolio, but also added enormously to its debt load.
There are quite a few companies out there on the buyside who can now buy properties at a deep discount, said Anthony LoPinto, chief executive of real estate executive search firm Equinox Partners. A lot of fortunes are going to be made out of the Bucksbaums' misfortune.
Since November, General Growth had been warning it might seek protection from its creditors due to its failure to refinance maturing mortgages. Earlier this month, the company had tried to restructure Rouse bonds, but failed to get the necessary support.
When we did not achieve the necessary amount of agreement on the bond solicitation, at that point we recognized that it was conceivable that we would not get the time outside of bankruptcy that we had hoped for to work on a restructuring, General Growth President Thomas Nolan told Reuters.
The company's collapse is not expected to be an isolated event. About $814 billion of commercial mortgage debt is expected to mature over the next two years, according to real estate research firm Foresight Analytics.
We will see a significant rise in delinquent and defaulted mortgages in commercial real estate above and beyond what we already experienced, said Sam Chandan, president and chief economist at Real Estate Economics.
The Wall Street Journal reported on Thursday that the Federal Reserve was considering offering longer loans to investors in commercial mortgage-backed securities to help jump-start the market for commercial real estate debt.
SEARCHING FOR ANSWERS
General Growth said in a statement that it would keep exploring strategic alternatives during bankruptcy protection, from which it is seeking to emerge as quickly as possible through a reorganization that preserves its national business.
Its filing in the U.S. Bankruptcy Court in Manhattan makes it one of the largest nonfinancial companies to succumb to the global financial crisis and is the biggest bankruptcy of a U.S. real estate company, according to BankruptcyData.com.
General Growth had previously put several of its flagship properties, including all three of its Las Vegas malls, up for sale.
Analysts and other real estate experts have speculated that mall owners Simon Property Group Inc -- the largest U.S. mall owner -- and Australia's Westfield Group would be interested in buying some of General Growth's assets from bankruptcy.
Their stock of malls in the U.S. is pretty good -- they are decent quality retail real estate. And I imagine the market reaction if there are any sales of their assets will be positive, said Bruce Nutman, UK head of retail capital markets at CB Richard Ellis.
General Growth said its properties would be open for business and operating as usual.
Our core business remains sound and is performing well with stable cash flows, General Growth Chief Executive Adam Metz said in a statement. While we have worked tirelessly in the past several months to address our maturing debts, the collapse of the credit markets has made it impossible for us to refinance maturing debt outside of Chapter 11.
The company's fortunes have not been helped by the slowdown in U.S. consumer spending. While retailers should not see an immediate negative impact from the filing, there could be long-term concerns about leases and property maintenance, sources told Reuters.
ACKMAN AND THE DIP
General Growth has received a debtor-in-possession financing commitment of about $375 million from Pershing Square Capital Management LP as agent.
Pershing Square, the hedge fund run by William Ackman, owns about 25 percent of General Growth shares and had been urging the company to file for bankruptcy.
Activist investor Ackman is joining General Growth's board -- an unusual step. DIP lenders typically do not get involved with managing a company during restructuring.
We're going to be very actively working with the company to reorganize it, Ackman said in an interview with Reuters.
This company is doing fine. Its problem is that it can't get mortgages, but nobody can get a mortgage now, he added.
At the end of 2008, about $15.17 billion of General Growth's debt consisted of mortgage loans that had been securitized into commercial mortgage-backed securities, according to research firm Trepp.
This underscores that real estate companies are most vulnerable to refinancing risk rather than market risk, said Nomura's London-based property analyst Mike Prew.
General Growth shares were halted and eventually suspended by the New York Stock Exchange on Thursday. In premarket trade, they had fallen some 43 percent to 60 cents. The shares hit a 52-week high of $44.23 in May 2008 and a lifetime high of more than $67 in early 2007.
While General Growth bonds were not trading, Rouse's 5.375 percent notes due 2013 rose to 37.5 cents on dollar versus 29.25 cents on Wednesday, according to MarketAxess.
General Growth's refinancing troubles led to the firing of former CFO Bernard Freibaum in October. John Bucksbaum, who succeeded his father Matthew in 1999, stepped down as CEO the same month, but he remained chairman.
The company has hired law firms Weil Gotshal & Manges and Kirkland & Ellis to represent it, according to court papers. Pershing Square has hired law firm Jones Day and lead attorney Robert Profusek to represent it.
The case is In re: General Growth Properties Inc, U.S. Bankruptcy Court, Southern District of New York, No. 09-11977.
(Reporting by Ilaina Jonas and Emily Chasan; additional reporting by Sinead Cruise, Dan Wilchins, Al Yoon, Martinne Geller, Ajay Kamalakaran and Nick Carey; editing by Patrick Fitzgibbons and Tim Dobbyn)