General Growth filing ups stakes in commercial mortgages

NEW YORK (Reuters) - The bankruptcy of one of the highest-profile U.S. commercial real estate owners is raising the stakes in negotiations over billions of dollars in office, retail, and apartment property debt that must be refinanced in coming months and years.

General Growth Properties Inc's Chapter 11 filing has focused a spotlight on the plight of the commercial mortgage market, where a persistent lack of credit has put a huge chunk of the $3.4 trillion market at risk of default. The move into bankruptcy by such a major borrower may be the impetus for resolutions in debt negotiations, which have been methodical but slow, analysts said.

"Where lenders have some flexibility they are certainly going to be amenable to working with the borrower rather than see a disorderly result, like bankruptcy," said Sam Chandan, president and chief economist at research firm Real Estate Economics LLC in New York.

However, investors in commercial mortgage-backed securities (CMBS) took the GGP bankruptcy in stride. Risk premiums on CMBS indexes fell slightly, reversing moves earlier this week.

There is some $300 billion in commercial mortgage debt maturing this year, and few analysts expect a revival in the supply of credit big enough to spur new lending. Refinancing commercial debt has been complicated further as the U.S. recession is resulting in falling property revenue and real estate prices that may drop more than 40 percent.

NO CREDIT AVAILABLE

The industry got a clarion call for intensified efforts to restart lending as GGP Chief Operating Officer Tom Nolan decried an unprecedented lack of credit in commercial real estate markets, said Jan Sternin, senior vice president of the Mortgage Bankers Association's commercial group in Washington.

Nolan, speaking on Reuters Financial Television, also said frustrations of dealing with mortgage servicers and bondholders over maturing loans in CMBS pushed the Chicago-based company toward bankruptcy, where "the restructuring of that debt was probably going to be more efficient."

Among troubled loans is a $394 million mortgage on Las Vegas's Grand Canal Shoppes at the Venetian hotel, which was shifted to special servicing last week after GGP failed to win an extension of the May 1 maturity, Standard & Poor's said.

"It is going to be an issue that will be high profile" for the industry as the bankruptcy proceeds, Sternin said.

Recognizing the problem, the U.S. government is expanding federal lending plans to include commercial real estate debt which is owned in huge sums by financial institutions that it has been trying to keep afloat for the past year.

Industry groups have been lobbying policymakers to tweak programs to attract commercial bond investors, having already won a victory to allow for the purchase of older assets clogging bank balance sheets.

GGP's bankruptcy can only add weight to the industry's push for measures that would advance their cause, such as extending federal loans for commercial debt beyond three years in the Term Asset-Backed Securities Lending Facility, or TALF.

"There may be more external pressure to work with the borrowers ... potentially within policy circles," Chandan of Real Estate Economics said. "A worsening of the performance of debt in a way that might impinge upon the performance of financial institutions will inevitably get the attention of policy makers."

Volume for fixed-rate CMBS issuance tumbled to $12 billion in 2008, all in the first half of the year, after reaching a record $234 billion in 2007. Refinancings are expected to be extremely difficult for loans made at the peak of the cycle when underwriters had eased up in lending requirements.

But GGP's bankruptcy may also have a dark side for commercial real estate mortgages, said Richard Jones, a partner and co-chair of Dechert LLP's finance and real estate group in New York.

With GGP subsidiaries exposed in the bankruptcy, it is possible a judge would lump together their individual debts, damaging the sanctity of contracts written to isolate the loans, he said. This could severely compromise abilities to write new loans at a time where the CMBS market is struggling to renew itself, he said.

"This is going to have ramifications for the industry," he said. "This is not just a pebble dropped into the pool, it's a boulder dropped into the pool."

Jones, whose firm has been involved with some GGP commercial loan negotiations, expects the filing to have marginal impact on future workouts. Mortgage servicers have already been operating in good faith to extend maturing loans and avoid the more costly alternatives of selling the properties into a rapidly eroding market, he said.

He also underscored the importance of the government's role in providing stability to the market.

"Anything that would goose the government into acting faster is something we would be excited about," he said.