General Growth: The Malls Were Full and the Company Still Filed

What happened

General Growth had been rolling short mortgage debt for years when the commercial mortgage market stopped functioning in late 2008. Through February and March 2009 loan after loan came due and was not repaid, on Fashion Show, The Shoppes at The Palazzo, Oakwood Center and others. At the end of March it held $195.7 million of cash against $2.01 billion already past due and a further $4.09 billion lenders could call at will, while the malls kept earning. It filed for Chapter 11 in April 2009 along with roughly 158 of its shopping centres, and the mall subsidiaries stayed in the case.

The case, start to finish

A maturity ladder is a promise that somebody will still be lending three years from now.

Full malls, closed credit market

On the morning General Growth Properties filed for Chapter 11, its malls opened as normal. That is the fact the whole case hangs on. This was the second-largest US mall owner, with an ownership or management interest in over 200 malls across 44 states, roughly 200 million square feet and more than 24,000 stores. First-quarter 2009 revenue was $788.6 million, down 5.0% from $830.3 million a year earlier: a recession dent, not a collapse.

What was wrong was not the business. It was the maturity schedule. Each mall carried its own mortgage and the corporation sat on top of a stack of property-level loans, $24.70 billion of mortgages, notes and loans payable at a weighted-average rate of 6.09%, with a weighted-average remaining term of 2.79 years. The company had financed long-lived assets with short-dated debt on the assumption that it could always be rolled. That assumption held for a decade and then, in late 2008, the commercial mortgage market stopped functioning.

Illiquid, not insolvent

Through February and March 2009 loan after loan came due and was not repaid: Fashion Show at $648.2 million, The Shoppes at The Palazzo at $249.6 million, Oakwood Center, Chico Mall, Jordan Creek and others. By March 31 the balance sheet said everything. $195.7 million of cash on hand. $2.01 billion of debt already past due. A further $4.09 billion that lenders could accelerate at will. Quarterly interest expense of $328.5 million.

Look at those numbers as an operator rather than an accountant. $195.7 million does not answer $2.01 billion, and no amount of rent arriving on time closes that gap in the ninety days available. Insolvency and illiquidity feel identical from inside and have opposite treatments. The chief executive said as much in the filing release: the core business remained sound and was performing well with stable cash flows, and the collapse of the credit markets had made refinancing outside Chapter 11 impossible. Both halves of that morning were true.

Filing while the assets still had a bid

The alternatives all failed on arithmetic. Selling malls quickly would have meant selling into a market where buyers could not obtain financing either, at the opportunistic bids that were the only ones available; the quarter already carried a $331.1 million impairment provision, so the marks were moving. Issuing equity at a collapsed price would have wiped out existing holders far more thoroughly than the bankruptcy did.

So on April 16, 2009 GGP and roughly 158 of its shopping centers filed in the Southern District of New York, funded by a $375 million debtor-in-possession facility committed by Pershing Square. That facility was expensive, carrying a 3% LIBOR floor plus twelve points, a $15 million commitment fee and warrants for 4.9% of the equity, and it was worth it, because what the filing bought was the one thing no negotiation can produce: time. The automatic stay stopped foreclosure and froze the acceleration clauses on the spot, and gave the company nineteen months to restructure roughly $15 billion of property-level debt loan by loan rather than at gunpoint.

It was not uncontested. Certain lenders moved to dismiss individual property subsidiaries from the cases, arguing the criteria for bankruptcy were not met at those entities, which was an attempt to keep the healthy properties out and break the company into pieces. The company fought them.

Why early mattered

GGP emerged on November 9, 2010. Roughly $15 billion of project-level debt restructured. $6.8 billion of new equity raised on the way out. Every creditor claim paid in full, and shareholders left holding stock in two listed companies: the reorganized GGP, still owning more than 183 malls in 43 states, and the spun-off Howard Hughes Corporation. In large Chapter 11 cases that outcome is close to the rarest one there is.

It was available because the properties were still performing when the petition was filed. The rent kept arriving, so the estate never had to sell anything at a distressed price, and the reorganization could be a refinancing rather than a liquidation. Note how the equity raise finally happened: not in March 2009 at a collapsed price, but eighteen months later from a position the process had restored.

For anyone running something smaller, the transferable part is the diagnosis, not the courthouse. Ask which disease you have. If the operations work and the schedule does not, the problem is refinancing risk, and the honest question is how early you are willing to act while your assets still have a bid. The companies that wait until the rent stops are the ones that get liquidated.

Timeline

• Late 2008 The commercial mortgage market stops functioning. GGP has been rolling short mortgage debt for years; the weighted-average remaining term on its loans is 2.79 years.
• February–March 2009 Loan after loan comes due and is not repaid: Fashion Show ($648.2M), The Shoppes at The Palazzo ($249.6M), Oakwood Center, Chico Mall, Jordan Creek and others.
• March 31, 2009 $195.7 million of cash on hand. $2.01 billion of debt already past due. A further $4.09 billion that lenders could accelerate at will. Quarterly revenue: $788.6 million.
• April 16, 2009 GGP and roughly 158 of its shopping centers file for Chapter 11 in the Southern District of New York, with a $375 million debtor-in-possession facility committed by Pershing Square. Malls open as normal the same morning.
• Mid-2009 Certain lenders move to dismiss individual property subsidiaries from the cases, arguing the criteria for bankruptcy were not met at those entities. The company contests them.
• October 21, 2010 The plan of reorganization is confirmed.
• November 9, 2010 GGP emerges after nineteen months: roughly $15 billion of project-level debt restructured, $6.8 billion of new equity raised, all creditor claims paid in full, and shareholders left with stock in two listed companies.

You're in the owner's chair

March 2009. Your malls are open, rent is arriving, and quarterly revenue is down only 5% year on year. You also have $195.7 million in the bank, $2.01 billion of mortgage debt already past due, and no functioning market to refinance it in. What do you do?

• File Chapter 11 while the properties still perform
• Issue equity — dilution is better than default
• Sell malls quickly to raise cash and pay down the maturities

General Growth Properties at March 31, 2009

• Cash on hand: 195.7 $ millions
• Revenue, quarter just ended: 788.6 $ millions
• Debt already past due: 2,010 $ millions
• Further debt lenders could accelerate: 4,090 $ millions

Against $24.70 billion of mortgages, notes and loans payable with a weighted-average remaining term of 2.79 years. The company filed sixteen days after this balance sheet date.

Business model

Own regional shopping centers and collect rent. At the filing GGP had an ownership or management interest in over 200 malls across 44 states, roughly 200 million square feet and more than 24,000 stores. Each mall carried its own mortgage; the corporation sat on top of a stack of property-level loans.

Revenue model

Minimum rents from anchor and in-line tenants, plus tenant recoveries for taxes and common-area costs, plus overage rent tied to tenant sales. First-quarter 2009 revenue was $788.6 million, down 5.0% from $830.3 million a year before: a recession dent, not a collapse.

Cost structure

Property operations, taxes and maintenance are modest against rent. Interest is not: $328.5 million in the first quarter of 2009 alone, at a weighted-average rate of 6.09% on $24.70 billion of mortgages, notes and loans payable. The business was a rent stream wrapped in a refinancing habit.

Strategic challenge

Nothing was wrong with the malls. What was wrong was the maturity schedule. GGP had financed long-lived assets with short-dated mortgages on the assumption that they could always be rolled, an assumption that held for a decade and then did not. With $195.7 million of cash against $2.01 billion already past due, the company had no way to buy time in the market. Its CEO put the position plainly in the filing release: the core business was sound and performing, and the collapse of the credit markets had made refinancing outside Chapter 11 impossible.

Key decision

File while the properties were still performing, and use the process for the one thing it does better than any negotiation: imposing time. Chapter 11 stayed the foreclosures, froze the acceleration clauses, and gave GGP nineteen months to restructure roughly $15 billion of property-level debt loan by loan rather than at gunpoint. The DIP facility that funded it was expensive (a 3% LIBOR floor plus 12 points, a $15 million commitment fee and warrants for 4.9% of the equity), and it was worth it.

What worked

Filing early enough that the assets were still worth something. Because the malls kept trading and the rent kept arriving, the estate never had to sell anything at a distressed price, and the reorganization could be a refinancing rather than a liquidation. The outcome is the rarest one in large Chapter 11 cases: every creditor claim paid in full, $6.8 billion of new equity raised on the way out, and existing shareholders receiving stock in both the reorganized GGP, which still owned more than 183 malls in 43 states, and in the spun-off Howard Hughes Corporation.

What failed

The capital structure that caused all of it, and the years of decisions that built it. Short mortgage debt against twenty-year assets is a bet that the lending market never closes. The first quarter of 2009 also carried a $331.1 million impairment provision, so the marks were already moving. And the process was not free: nineteen months of professional fees, a punitively priced DIP loan, and a fight with lenders who argued their individual property borrowers should never have been allowed into the cases at all.

Risk factors

Refinancing risk disguised as leverage risk: the loan-to-value looked survivable, the maturity ladder did not. Property-level lenders whose interests conflict with the parent's. A DIP market that in April 2009 barely existed. And the possibility, contested in court, that bankruptcy-remote subsidiary structures would keep the healthy properties out of the case and break the company into pieces.

Lesson summary

Insolvency and illiquidity are different diseases and only one of them is about the business. GGP was earning $788.6 million a quarter when it filed; it went in because $195.7 million does not answer $2.01 billion. Chapter 11 is a tool for restructuring obligations, not a verdict on operations, and it works best used early, while the assets still have a bid. The companies that wait until the rent stops are the ones that get liquidated.

Key data

• $195.7M Cash on hand, 31 Mar 2009
• $2.01B Debt already past due
• $4.09B Additional debt lenders could accelerate
• $24.70B Mortgages, notes and loans payable
• $788.6M Quarterly revenue, Q1 2009
• $328.5M Quarterly interest expense, Q1 2009
• 19 months Time in Chapter 11
• ~$15B Project-level debt restructured
• $6.8B New equity raised on emergence

Sources & basis

The company here is real and named, and nothing about it was invented to make the story land. The list below is where each fact came from — public filings, court records, published reporting — so you can open a source and check it against the sentence that used it.

1. General Growth Properties, Form 8-K and Exhibit 99.1 press release, April 16, 2009 — Chapter 11 filing, ~158 shopping centers included, $375M Pershing Square DIP terms, portfolio statistics, "Our core business remains sound" View source ↗
2. General Growth Properties, Form 10-Q for the quarter ended March 31, 2009 — $195.7M cash, $2.01B past-due debt, $4.09B accelerable, $24.70B mortgages/notes/loans payable, 2.79-year weighted-average term, schedule of past-due loans, Q1 revenue and interest expense View source ↗
3. General Growth Properties, Form 10-Q for the quarter ended June 30, 2009 — motions by certain parties to dismiss individual Debtors from the Chapter 11 cases View source ↗
4. General Growth Properties, Form 8-K Exhibit 99.1 press release, November 9, 2010 — emergence after nineteen months: ~$15B project-level debt restructured, $6.8B new equity, all creditor claims paid in full, Howard Hughes Corporation spin-off, 183+ malls in 43 states View source ↗