Ackman bets General Growth is fundamentally healthy

NEW YORK (Reuters) - Hedge fund manager Bill Ackman has doubled down on his investment in General Growth Properties by providing bankruptcy financing to the shopping mall operator, a bold move in a weakening commercial property market.

Ackman's Pershing Square already owns or has exposure to about 24 percent of the company's shares, and owns senior unsecured bonds with a face value of $177 million, which it bought for around 30 cents on the dollar, Ackman told Reuters.

But $4.5 billion hedge fund Pershing Square has also provided $375 million of debtor-in-possession financing to General Growth. That financing has an unusual feature: it allows General Growth to convert the loan into equity upon exit from bankruptcy.

"No other DIP lender has done that, but I'm betting on General Growth reorganizing with the company intact," Ackman told Reuters.

Lenders to bankrupt companies typically want to take as little risk as possible, and want to be first in line to be repaid when the company emerges from Chapter 11.

But Ackman's financing is designed instead to allow Pershing Square to lend to the company as it restructures, and end up with a larger stake in the company afterward.

Activist investor Ackman is joining General Growth's board, which is also unusual. DIP lenders typically do not get involved with managing a company during restructuring.

"We're going to be very actively working with the company to reorganize it," Ackman said.

Ackman -- who won big on a short position on bond insurers last year but did not do as well with investments like retailer Target Corp -- is making a bold bet. Equity investors typically get nothing in bankruptcy, while lenders take over the company.

But Ackman thinks the market value of General Growth's assets is well above their roughly $29.6 billion value on the company's books. The cash flow from the company's properties is more than enough to pay interest on its $27.3 billion of debt, which should mean the company can make lenders whole without wiping out its equity holders.

General Growth went into bankruptcy after failing to refinance maturing debt linked to its 2004 purchase of mall operator Rouse Cos, meaning it is suffering from the breakdown of the commercial mortgage market, which is preventing it from refinancing debt.

"This company is doing fine. Its problem is that it can't get mortgages, but nobody can get a mortgage now," Ackman said.

A RISKY MOVE

The move is risky. Equity holders typically get wiped out in bankruptcy, although in some rare cases, most notably U-Haul truck rental parent Amerco Inc, equity investors retain their ownership.

Adding to Ackman's risk, a series of retailers have filed for bankruptcy since the start of 2008, ranging from Circuit City to Linens 'n Things, which should hurt shopping mall operators.

But General Growth typically owns the best shopping malls in any given metro area, Ackman said. When a retailer goes out of business, a new tenant comes in fairly quickly, he added.

The retail sector may be hurting, but so far mainly weaker regional companies are going out of business, Ackman said. The best shopping malls are faring well, he added.

The data seem to bear that out.

According to Elizabeth Schoen, a real estate analyst at SNL Financial, General Growth's occupancy rate fell by a little more than 1 percentage point between the end of 2006 and the end of 2008. Rental revenue rose nearly 19 percent over that period, including about 7 percent of gains in 2008 alone.

Pershing Square's main fund fell 12 percent last year, outperforming the U.S. stock market's nearly 40 percent decline. The fund is up about 10 percent year to date.

(Editing by Steve Orlofsky)