Defensive bankruptcy

The bankruptcy of General Growth Properties has challenged conventional wisdom from the start.

When the US’ second largest retail REIT filed for bankruptcy last April, it also took down with it 166 regional shopping centre subsidiaries despite the fact the subsidiaries were structured as “bankruptcy-remote” entities.

It was a move that raised eyebrows among much of the real estate investment community, not least because a majority of the project-level loans were performing and GGP didn’t file bankruptcy cases with respect to its property management subsidiaries or assets owned in joint ventures with third parties.

The motivations of the GGP leadership are unclear, but certainly charges of “strategic bankruptcy” will be leveled by angry debt-holders.

Now GGP is pushing the boundaries of bankruptcy practice again, suggesting it will look to raise external equity while it works through Chapter 11.

GGP is reportedly targeting between $1 billion to $2 billion to help fund an independent exit from bankruptcy – a move the REIT itself admits is “unique”. Bankruptcy cases typically involve debt-to-equity conversions and capital raises among existing shareholders and creditors. GGP bankruptcy court documents, (link to doc) though, reveal it wants to hire UBS to raise exit financing “from sources such as mutual fund, hedge fund, private equity and other institutional investors who invest in equity and equity linked real estate securities”, but not typically during Chapter 11 bankruptcy protection proceedings.

Speculation is, of course, mounting as to who GGP is talking with to help it raise capital. Brookfield Asset Management has been named in several media reports as one of those firms interested in financing the REIT out of bankruptcy as opposed to acquiring it, such as rival retailer Simon Property Group.

Simon, this week, made an unsolicited $10 billion offer to buy the company in a move backed by GGP’s unsecured creditors but rejected by the REIT. However, Simon may have an ace up its sleeve – there have been reports it is in early stage talks with The Blackstone Group as it eyes being a potential co-investor in the deal.

GGP is eager to ensure it emerges from bankruptcy as a stand-alone entity, rather than be swallowed up by a firm it has been battling for market share with for decades. Simon meanwhile sees an unprecedented opportunity to further cement its position as the US’ largest real estate investment trust. With private equity real estate firms lining up on both sides of the equation, the bankruptcy of GGP promises be a closely watched and analysed spectacle.