Thursday, February 25, 2010

LOVE IT! General Growth bankruptcy "turned on its head" by actually considering equity holders

It's an ugly, complicated fight between different parts of the capital structure, in the battle to "make oneself whole" with the General Growth Properties bankruptcy process.

After Simon Properties (SPG) offered to give common shareholders around $9 per share, General Growth and Brookfield Asset Management announced its own proposal that would give them $15:

GGP’s existing shareholders will receive one share of new GGP common stock with an initial value of $10.00 per share, plus one share of General Growth Opportunities (“GGO”) with an initial value of $5.00 per share, for total consideration of $15.00 per share (see description of GGO below under “Terms of the Brookfield Investment and Proposed Recapitalization”)
Unsecured creditors will receive par plus accrued interest

The key to this is what the unsecured bondholders receive.  People who think the common stock is worth much higher levels use an analysis that assumes the unsecured bondholders will accept much less than par (full) value, in exchange for diluted new equity shares going forward.  Whitney Tilson of T2 Partners emphatically argued against a Hovde Capital presentation (before any deal from Simon was announced) that a bankruptcy judge would NOT give the unsecured creditors full par value, meaning they'd accept equity:

Hovde doesn’t appear to understand bankruptcy law and what will likely happen to the unsecured debt. There is almost no chance that it will remain outstanding: it will either be refinanced or, more likely, be converted into equity (this is what Pershing assumes – there is no inconsistency). But here’s the key: it will NOT BE DILUTIVE because it will convert AT FAIR VALUE, as determined by the bankruptcy judge. Of course, if the judge determines that fair value is $1/share, then it would be massively dilutive, but that’s not going to happen. The judge has a great deal of discretion in determining fair value, but will certainly take into consideration the current stock price, comps and the price of any equity offering(s) GGP might do.

Turns out that the judge didn't need to give the unsecured creditors $1 per share - Simon has offered it - making Tilson wrong on that count.  Now a portion of the unsecured creditors are arguing that they would prefer to take Simon Property Group's full value for their bonds, rather than rick converting into equity and letting it ride...

Objection by General Growth's Unsecured Creditors to Exclusivity

More details from Simon's most recent offering points out that this is a company in bankruptcy, and the value for the common stock is less important than achieving breathing room, by way of more cash:

$9 billion of cash upfront vs. the General Growth plan which offers only $2 billion in cash and the hope of additional cash down the road, subject to highly uncertain market conditions.

100% immediate and certain cash recovery to unsecured creditors vs. the General Growth plan which would likely result in unsecured creditors receiving most of any recovery at some point down the road in the form of equity in a highly leveraged, capital constrained entity. In addition, the inevitable sale of shares by creditors who receive stock would put downward pressure on the value of General Growth shares.

Cash value to equity holders with no dilution vs. the General Growth plan which would result in significant dilution of General Growth shareholders -- who would be left with two speculative equity securities that are likely to underperform.

Fully addresses claims of unsecured creditors vs. General Growth's proposal which turns the bankruptcy process on its head by favoring equity holders at the expense of creditors.

No financing condition vs. the combination of the massive required capital raising and asset sales in the General Growth plan which amount to a financing condition for the majority of potential cash recovery for creditors.

Potential for equity holders and certain creditors to elect SPG stock in lieu of cash, providing certainty and upside potential in an established equity security of an S&P 500 company that has historically outperformed.  Stakeholders who elect SPG stock will be investors in an entity that has enhanced growth prospects through superior management, synergies and access to capital to realize value creation.

Copyright 2010 AlphaNinja

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