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Nations second largest mall operator files for bankruptcy
By Chris Miller
Posted on [2009-05-08 16:46:58]
What started as a crisis in the residential real
estate market has spread into commercial real estate. Experts suggested
that many companies would experience hardships as the recession slows
consumer spending and forces employers to cut staff.
The second largest mall owner and operator in the county;
General Growth Properties announced that it filed for bankruptcy
protection on April 16. The company has been severely wounded by the
distressed financial markets and in February their past due debt
accrued to $1.8 billion. General Growth wasn't able to reach an
out-of-course concensus to deal with its debt and cited that another
$4.1 billion could also be accelerated.
General Growth acquired a large portfolio within
the last two and a half years that required a very large financing
package, which during that time was not an issue for the mall operator.
The first portion of the money owed came due in the last few months
with the second larger portion coming due by the end of 2010.
The Chicago-based company bargained for months with
its creditors and held fewer options for reconciling its more than $25
billion debt.
"The fact is that CMBS (Commercial Mortgage Backed
Securities) has been, technically, non-existent for the last six
months," explained Edward Mermelstein, Esq., real estate attorney and
founder of Mermelstein20and Associates based in Manhattan. "We're
talking about billions of dollars and it's almost impossible to
refinance millions of dollars, let alone billions of dollars."
Mermelstein noted that there were no other
mechanisms in place for General Growth other than to count on the CMBS
market to absorb something to this magnitude. No private money existed
to be able to come in and rescue the company and General Growth wasn't
able to sell off any of its major malls that were put into the market
within the last year.
General Growth's filing in a Manhattan federal
bankruptcy court included most of the company's malls, which will
continue to operate. The company has already suspended its stock
dividend, incorporated a 20 percent reduction in workforce, and
discontinued any plans for new development.
The company's bankruptcy is most likely due to the
poor economic climate and poor decision-making. One major issue was
that General Growth Properties relied on short-term financing instead
of long-term financing and general growth.
"They were refinancing a major portion of their
loans at two-year and three-year intervals, which is a problem when you
head into a market that is such a mess," said Mermelstein. "They had
made some major acquisitions in the last two to three years and that's
what is causing the pressure during a difficult time when it's almost
impossible to refinance anything."
More retail and office space landlords are seeing an increased number of vacancies.
According to statistics provided by research company Reis, the mall
vacancy rate at the end of 2008 was 7.1 percent - a 1.2 percent
increase over 2007's figures.
General Growth stated that its core business
remains sound and is performing well with stable cash flows. The
company's CEO Adam Metz said that a chapter 11 is the best process for
restructuring maturing mortgage loans, reducing the company's corporate
debt, and establishing a sustainable and long-term capital structure
for the company.
"The bankruptcy forces lenders to work with them,"
Mermelstein stated. "They (General Properties) are very cash positive
and their malls are doing quite well in terms of occupancy rates."
He added that its not, necessarily, a question
of the second largest mall operator being in financial trouble in terms
of business operation, rather General Growth is in the unfortunate
position of not be able to refinance their outstanding loans.
The collapse of the credit markets has made
refinancing outside of a chapter 11a virtual impossibility for General
Growth Properties.
Mermelstein noted that a more reasonable rate was
the likely reason that the company sought out the short-term loans in
the first place. General Growth cannot pay back their loans because they
do not have the liquidity necessary, but they do have enough cash on
hand to service the loan.
The rules of finance have changed within the last
six months. What we're experiencing now has not been seen for
generations. In order to operate, the banks need liquidity in their
coffers and that's one of reasons the lenders are pressuring General
Growth to repay their debt or have a new lender refinance their loans.
"One of the major issues that's going on in the
banking sector today is that it's frozen 'the banks aren't being paid
back the money that lent out so they can't continue lend to new
clients," said Mermelstein. "That's why we're in a situation where
we're referring to the market being broken. We don't have that money
flowing in and out."
It's not just happening in the commercial market or
with general growth, according to the New York-based attorney. He cited
that there are commercial as well as residential mortgage commercial
backed securities that are going absolutely nowhere.
The nation's second biggest mall operator owns
approximately 200 million square feet of retail space, which equates
into 24,000 retail stores throughout the company.
One day prior to the bankruptcy announcement,
General Growth's shares closed at $1.05 after a steady 97 percent fall
over the past twelve months. The April 15 closing was a far cry from
the mall operator giant's all-time high of $67 set in March of 2007.
In20a statement, General Growth assured that it has
secured a $375 million commitment in bankruptcy financing from Pershing
Square Capital Management. The financing by the hedge fund that owns
more than 25 percent of the company through its holdings of shares and
swap contracts still needs to be approved by a bankruptcy court judge.
Said Mermelstein, "The more likely situation is
that the lenders are going to be forced to extend the loan by the
bankruptcy court for a certain period of time and we anticipate in the
next three to four months that the lending atmosphere is going to
change."  | 
