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GGP Plans to Exit Chapter 11 Without Major Sell-Offs, but Merger Talk Persists

Just as many industry observers predicted when General Growth Properties (OTC: GGWQP) filed for Chapter 11 bankruptcy protection eight months ago, the Chicago-based REIT seems poised to exit its restructuring in one piece.

Last week, the firm filed a reorganization plan with the bankruptcy court and announced approximately $800 million in loan extensions, in addition to the $8.9 billion in extensions announced in November. The extensions mean not only that the REIT will likely be able to reorganize successfully and fairly quickly, but that it will be able to do so without having to sell its best assets, say industry insiders.

On Dec. 2, General Growth revealed that it has reached extension agreements on a total of $9.7 billion in secured mortgages, encompassing 92 properties. The average extension term is for 5.2 years. The REIT also filed a reorganization plan with the Bankruptcy Court in the Southern District of New York. Confirmation of the plan is currently scheduled for Dec. 15.

Once General Growth exits Chapter 11 protection, however, it might face the prospect of a buyout bid by either Simon Property Group (NYSE: SPG), an Indianapolis-based regional mall REIT, or Brookfield Asset Management Inc., a Toronto-based global asset manager. The two firms have reportedly independently been buying hundreds of millions of dollars of the REIT’s unsecured debt in the hopes of converting that debt into equity stakes in the company. Some observers believe the firm could be carved up with Westfield Group being mentioned as a third suitor, although the Australian limited property trust has not made any overtures toward General Growth.

The jockeying by Simon and Brookfield is a bit of a replay of the Mills bidding war in 2007 that previously pitted the two firms against each other. In that case, Simon emerged victorious. Both firms have plenty of cash at their disposal—Simon, for example, has some $7 billion in liquidity, although it tapped some of that in in acquiring Prime Outlets Acquisition Co. for approximately $2.3 billion. Both Simon and Brookfield declined to comment on their intentions towards General Growth.

Other observers, however, believe that General Growth is unlikely to broken up.

“I think General Growth will either emerge [from reorganization] as a whole company or will be bought out as a whole company,” says Todd Sullivan, a Massachusetts-based investor and author of the Value Plays blog. Sullivan has closely tracked General Growth’s bankruptcy. “I don’t see them doing any material selling of assets. They might sell some here or there just to dump some debt, but it will not be quality assets; which means that if you are Brookfield or Simon, your only option in reality is to buy the whole thing.”

Brookfield and Simon can use their unsecured debt positions in several ways, according to Jeffrey Krieger, partner in the business and bankruptcy group of Greenberg Glusker, a Los Angeles-based law firm. If either firm ends up with more than one-third of the total dollar amount of General Growth’s unsecured debt, it will get blocking rights over the REIT’s reorganization plan—a powerful negotiating position, says Krieger.

Or, if the unsecured debt has been purchased at a discount and Simon or Brookfield express an interest in buying a large portion of General Growth’s assets, they could use debt forgiveness to make their bid more attractive than an offer that involves only equity.

The most likely scenario, however, according to several sources, would involve the use of unsecured debt to establish a stake in the company. In spite of the long-term extensions, General Growth still faces billions of dollars in debt obligations, notes Rich Moore, a REIT analyst with RBC Capital Markets, who does not currently cover General Growth. “Just because you get an extension, doesn’t mean you’ve de-levered,” he says. “Everybody else has issued lots and lots of equity and they have yet to do that. So you sort of ask yourself: what will they do to de-lever?”

One option would involve public stock or debt offerings. But given the current economic climate and weak property values, it would make little sense for a REIT just out of bankruptcy protection, says Sullivan. That leaves a debt-for-equity swap as another tactic. In that case, anyone with a substantial portion of General Growth’s unsecured debt would become a major shareholder in the company; possibly, even the owner of the REIT, notes Krieger.

If Simon and Brookfield fail to buy up enough of the unsecured notes, however, they would have to offer attractive terms to make a merger happen with the reorganized REIT. While General Growth remains under bankruptcy protection, the potential bidders’ hands remain tied, Sullivan explains. The General Growth board of directors has the final authority over the reorganization plan and since most of the board members are also shareholders, they will likely insist on a shareholder-friendly deal. Meanwhile, if General Growth emerges from Chapter 11, the REIT’s top notch portfolio can be used to raise additional cash through joint ventures.

“They have a lot of options, being the size and scale that they are,” says Sullivan. “They’ll emerge as a very healthy company after all this.”

General Growth did not return calls seeking comment.

–Elaine Misonzhnik

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