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GGP’s Extension Feat Bodes Well for Industry

General Growth Properties’ (NYSE: GGP) feat of reaching an extension agreement on a large portion of its maturing loans bodes well for the retail real estate industry going forward, according to observers.

In the course of this downturn the REIT has become a poster child for dangers posed by too much leverage, but the fact that General Growth is working through its debt means it will likely manage to reorganize and emerge from Chapter 11 bankruptcy in one piece. It also means lenders might be willing to work with borrowers to stave off foreclosure if they believe in the quality of the underlying real estate.

On Nov. 19, the Chicago-based REIT announced it reached a principal agreement with its lenders to restructure approximately 70 secured mortgages valued at $8.9 billion. The deal would extend the loans by an average of 6.4 years, in exchange for concessions on amortization and reserve terms on the loans. The restructured loans would represent more than half of the loans involved in the bankruptcy proceedings. When General Growth filed for Chapter 11 in April of this year, it had $27.3 billion of debt on its books.

The speed with which the firm has been able to move to restructure its loans has been impressive, though it’s still too early to say whether General Growth will be able to fulfill its ambition to exit Chapter 11 by the end of 2009, lawyers say. The REIT needs the approval of the Bankruptcy Court and its Class B note holders for the restructuring agreement to take effect.

“They still have some work to do, but the fact that they got this significant amount of restructuring from creditors as quickly as they did is a positive step for emerging from bankruptcy as an intact company,” says Steven J. Lurie, partner in the real estate practice of Greenberg Glusker Fields Claman & Machtinger LLP, a Los Angeles-based law firm.

Meanwhile, CMBS analysts at J.P. Morgan believe that General Growth’s restructuring agreement might serve as a template for other lenders facing defaulting borrowers in 2010. The analysts contend that special servicers working with maturing loans on healthy properties will likely opt to restructure and extend the loans rather than go through the foreclosure process.

“These sound like the type of resolutions we would expect moving forward in the CMBS market on loans that are unable to refinance, but may be otherwise healthy: long extensions in exchange for faster amortization or cash flow sweep provisions,” wrote J.P. Morgan analyst Alan L. Todd in a Nov. 20 note. “We believe this supports our contention that extensions will be widespread beginning in 2010 as special servicers and borrowers alike look to avoid losses where possible.”

This in turn, might help calm the nerves of investors in CMBS bonds, who’ve been too worried about potential losses to buy securitized products in the past two years, adds Todd.

–Elaine Misonzhnik

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