Over night, there was a development at General Growth Properties, a recent very speculative investment by yours truly: GGP declared Chapter 11 bankruptcy. Ordinarily, this would mean "end of story", I rolled the dice and lost. But in this case, not so. In fact, as reported two weeks, ago on April 4, this is really the outcome that was expected (if not exactly hoped for).

Bill Ackman of Pershing Square Capital, stated in an interview posted by Wealth-Ed on April 4, that it was his preference as 25% common stock holder, to file for Chapter 11. Because the biggest investor in GGP is aligned with my small stock position (1200 shares), I am fairly confident this will work out profitably, maybe very profitably. If Pershing instead was a large debt holder, I would instead be worried, or would never have made the investment in the first place. As we have seen with other bankruptcy debt restructurings, where the lead dog has moved his interest to senior debt, it is the common shareholder that is wiped out. The large debt holder has no reason to protect the common stock holder and instead, makes sure the stock interest is erased in bankruptcy court. The senior debt holder then takes back new common (through common equity warranty issuance during restructuring) as part of the court settlement, thereby converting a minority debt position into a majority common position, taking control of the company and erasing much or most long term debt liabilities.

This is exactly what happened when Ron Perelman took over Revlon and Marvel comics. It is also what Lyle Berman did to common shareholders during construction of the Stratosphere Casino in Las Vegas. But, when the lead dog holds 25% of common, and has virtually no debt stake, it is reasonable to expect that entity to try to protect the position of the common stockholder which is his own. Otherwise, why go through the exercise. Legally, all common stock has the same status, so there is no way for Pershing to favor its own stake over that of other common stockholders. Because Ackerberg bought most of his stock around $0.50 per share, about where I own mine, he knew going in that this Chapter 11 was the likely outcome of his acquisition. If there was a decent liklihood that the debt could have been restructured outside bankruptcy, the stock price would have never gotten so low and Ackberg would probably never have invested.

What happens next will be interesting for all observers and stakeholders alike. There is $27.3B in long term debt that could not be restructured previously in out-of-court negotiations, and there is reportedly $29.8B of real estate assets. GGP apparently has positive net equity, which is very encouraging. The GGP COO, Tom Nolan, also reported today on CNBC (see video interview below) that cash flows are positive and have actually increased year over year. This means there is cash to service the debt, even as it stands right now. GGP is in bankruptcy because debtors got cold feet and decided not to wait for the financial climate to improve, not because of any operational issues at the malls, like high vacancy rates.

As the prominent share holder, I expect Bill Ackman to lead the way in bankruptcy proceedings. To guarantee his ability to influence the proceedings, his firm Pershing, secured the "debtor-in-possession" financing status with a $375M loan to GGP to cover operating financing needs during bankruptcy.. The bankruptcy court is likely to approve this arrangement. The interest rate is a very attractive LIBOR plus 12%, or about 14% today (1 yr LIBOR is 1.95%). In addition, Pershing receives a $15M fee for originating the loan. Ackman knows how to play his hand, which is good for me as a common shareholder aligned with his interests. For this financing, Pershing also gets warrants for 4.9% of "fully diluted" ownership of the GGP that re-emerges from bankruptcy. This seems to me a reasonable price to pay to have Bill on my side. I always expected to be diluted by any bankruptcy, but at a cost of much less than $1 per share on average, I don't mind.

Here is the 8K filing with the SEC from last night that explains the provisions of the terms of the bankruptcy:

http://www.sec.gov/Archives/edgar/data/895648/000095015209003795/c50600e8vk.htm

What kind of deal with GGP and Pershing negotiate with the other debt holders? I think they will try to reduce total debt to a reasonable 50% of assets. This will require some sales of very lucrative properties, though there is not much of a market today to raise money by liquidation. More likely, it will require debtholders to cut debt by 40-50% of face value in return for receiving their own stock warrants after reorganization. I expect my own stock to be diluted by 2-3 times, but to have a much more financially healthy GGP on the other side of bankruptcy with significant earning and dividend power. With $10B of debt on $20B of assets (if GGP is able to sell another $10B of assets, for example), GGP will do very well in the future and the stock that was worth $60 at one time, may still have potential to rise to $20 post dilution.

It is all a big speculation, but will be grabbing headlines for months to come. It will be a lot of fun to "be a player", no matter the outcome.

Related posts:

1. Bill Ackman discusses General Growth Properties on CNBC May 11
2. Update on General Growth Bankruptcy
3. Is General Growth Properties an Outstanding Speculation?
4. General Growth Continues Restructuring Efforts
5. Update on General Growth Properties – GGWPQ.PK