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16Apr09
General Growth files for bankruptcy protection
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 more than 200 U.S. malls, filed for Chapter 11 protection from creditors while it tries to restructure some of its debt. Its joint-venture properties and third-party management business were not included in the bankruptcy.
The Chicago-based company, which owns such valuable malls as Fashion Show in Las Vegas and Faneuil Hall Marketplace in Boston, listed total assets of $29.56 billion and total debt of $27.29 billion.
Since November, General Growth had been warning that it might seek protection from its creditors due to its failure to refinance maturing mortgages. Earlier this month, the company had tried to restructure bonds from Rouse Cos, a high-end mall owner that it bought in 2004. But General Growth failed to garner 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.
General Growth's collapse is emblematic of the enormous pressure on U.S. commercial real estate, as there are few sources of funding for sales or to refinance maturing debt.
"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 research firm Real Estate Economics.
About $814 billion of commercial mortgage debt is expected to mature over the next two years, according to real estate research firm Foresight Analytics.
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.
General Growth's filing in the U.S. Bankruptcy Court in Manhattan makes it one of the largest nonfinancial companies to succumb to the global financial crisis. It is also the biggest bankruptcy of a U.S. real estate company, according to BankruptcyData.com.
Before filing for bankruptcy, General Growth had 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.
"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."
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. Ackman has said its shares could rise even in bankruptcy because the market value of its assets far exceeds their book value.
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 on the New York Stock Exchange on Thursday morning, but in premarket trade, they had fallen some 43 percent to 60 cents. The bankruptcy helped push down the entire real estate investment trust sector, as the benchmark MSCI U.S. REIT Index fell 2.1 percent.
Bankruptcy fears have not hit European mall owners. Europe's biggest mall owner, Unibail Rodamco, was up 2 percent at 118.69 euros, while Anglo-French retail specialist Hammerson was down 2.4 percent at 299.75 pence.
High-Quality Malls and Tenants
General Growth started when brothers Martin and Matthew Bucksbaum decided to expand the family grocery business and build a shopping center in Cedar Rapids, Iowa, in 1954.
The company grew through both building and buying malls, the largest acquisition being the 2004 purchase of Rouse Cos for $14.2 billion. That deal, financed entirely with debt, added 37 valuable U.S. malls to its portfolio.
General Growth's refinancing troubles in the frozen credit markets led to the firing of former Chief Financial Officer Bernard Freibaum in October. John Bucksbaum, who succeeded his father Matthew in 1999, stepped down as chief executive the same month, although he remained chairman.
The company has hired law firms Weil Gotshal & Manges and Kirkland & Ellis to represent it, according to court papers.
The case is In re: General Growth Properties Inc, U.S. Bankruptcy Court, Southern District of New York, No. 09-11977.
[Source: By Ilaina Jonas and Emily Chasan, Reuters, NY, 16Apr09]
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