General Growth bankruptcy faces challenges

By Ilaina Jonas

NEW YORK, June 9 (Reuters) - General Growth Properties Inc (GGWPQ.PK) could emerge from Chapter 11 bankruptcy sooner than most cases its size if a judge next week refuses a request to strip a number of company's malls from the bankruptcy, a lawyer involved in the case said on Tuesday.

"A bankruptcy of this size usually runs a year to 18 months," said Greg Cross, a partner in Venable LLP, a law firm representing several servicers of General Growth's securitized loans.

A group of creditors and loan servicers is scheduled to ask U.S. bankruptcy Judge Allan Gropper on June 17 to dismiss about a dozen malls from the case.

Chicago-based General Growth set up each mall as a special purpose entity -- a separate company -- that protected General Growth from each of the malls' obligations. Each SPE was be governed by independent directors, and each entity's cash was to be managed separately. They were intended to be "bankruptcy remote."

During the hearing next week, the creditors of the SPEs will argue that General Growth put the SPEs into bankruptcy in order to give the company more leverage from which to negotiate loan modifications and extensions.

The commercial real estate and the lending sectors will be watching this hearing and the overall bankruptcy, said experts speaking at the Commercial Mortgage Securities Association conference in New York.

"I think the debtor (General Growth) is inclined to fast track this, and we will have to wait to see what proposals come out short of a dismissal to see if the a negotiated exit is possible," Cross said.

When General Growth filed for bankruptcy protection in April, it swept 166 of its malls along with it, replacing the directors with new ones who voted to put the SPEs into bankruptcy. The entities in bankruptcy were facing $24 billion of debt, about $15 billion of which consisted of commercial mortgage-backed securities.

The remainder of General Growth's other 200 or so malls are joint ventures and are not in bankruptcy nor is the General Growth's management company.

"There haven't been acute tests of these theories and that's what we're seeing now," said Daniel Rubock, Moody's Investor Service senior vice president.

Many of the mortgages on the malls were made during the loose lending period of 2004 through 2005 and some of the terms were either vague or not followed. For instance, in most of the cases, the meaning of independent director was not defined nor was cash for each mall managed separately.

"I think this was largely overlooked when we were running at full speed in 2005," Jonathan Strain, managing director at JPMorgan Chase & Co.

COPY CATS

Some investors, lawyers and others are concerned about copy cats -- borrowers who would try to use bankruptcy as a negotiating tool. This would make lending riskier and could raise borrowing costs.

"If GGP gets what they want this could be very dangerous for the market. A lot of people will kind of 'me too' file as well," Lisa Pendergast managing director of CMBS Research and Strategy for Royal Bank of Scotland.

If Judge Gropper allows the malls to exit bankruptcy, many of its other SPEs will sure to follow, Cross said.

No matter what happens with case, those in the commercial real estate industry have learned several lessons. One is that the expectations and rules of the SPEs should be in the organization of the structure not in the lending agreements, which are subject to change in bankruptcy, Cross said. Also exactly what makes an independent director independent and who should chose them should be defined.

Meanwhile, the longer the company stays in banrkouptcy, the more fees -- from lawyers, from special servicers from administrators -- will accumulate and eat into the cash flow used to repay lenders.

"The longer this is in bankruptcy, I think you might have some assets that will start to deteriorate because if you're a tenant you might not want to be in a GGP mall for very long, if your sponsor continues to be in bankruptcy," Pendergast added. (Reporting by Ilaina Jonas; Editing by Steve Orlofsky)