United States Bankruptcy Judge Allan L. Gropper has approved the Joint Plan of Reorganization (the "Plan") filed by General Growth Properties, Inc. and certain affiliated debtors (collectively, "GGP") to restructure approximately $11.6 billion in mortgage loans on 110 retail and office properties.
Gibson, Dunn & Crutcher LLP ("Gibson Dunn") and the lending and structured financing community have been closely monitoring developments in the GGP bankruptcy, the largest real estate bankruptcy in United States history. In past reviews, Gibson Dunn has been at the forefront in analyzing and evaluating the viability of the single purpose entity ("SPE") structure as a bankruptcy remote vehicle in light of the GGP court decisions to deny the motions of property-level lenders seeking to dismiss the Chapter 11 cases filed by various affiliates of GGP, including numerous SPEs. The Plan seems to take into account a number of our suggestions in our earlier Client Alert.
The Plan's Financial Terms
The Plan extends the maturity dates for all loans, with no loans maturing before January 1, 2014. With one exception, the prepetition interest rate on all loans will remain the same, and lenders have agreed to waive claims for default interest and late fees. Under the Plan, GGP will continue to use its centralized cash management system. In exchange, GGP will (i) increase reserves under all loans; (ii) pay all past due amortization (upon emerging from bankruptcy); (iii) pay increased amortization on all loans; (iv) pay a restructuring fee equal to at least one hundred (100) basis points on the outstanding principal balance of the loans; and (v) reimburse lenders for their reasonable costs and expenses incurred as a result of the bankruptcy.
SPE Provisions and Bankruptcy Protections
The Plan seeks to address certain deficiencies in the SPE structure in the event of a subsequent bankruptcy filing.
Under the Plan, each SPE debtor must have at least two (2) independent directors, each of whom must be unaffiliated with the SPE debtor, and approved by the lender (or provided by a recognized corporate services provider). Lenders have the right to consent (which cannot be unreasonably withheld) to any new or replacement independent director (unless provided by a recognized corporate services provider) and must be given notice at least fifteen (15) business days in advance of the replacement of any independent director. In addition, the organizational documents of each SPE debtor will be amended to expressly provide that its directors shall only consider the interests of the SPE debtor (not its shareholders or affiliates) and its lender(s). The Plan also requires each SPE debtor to be organized as a Delaware limited liability company because under Delaware law, the fiduciary duties of a limited liability company's directors can be expressly waived in its organizational documents.
In the event that an SPE debtor subsequently files for bankruptcy, its lenders will have full recourse against the parent entity pursuant to a standard nonrecourse carveout guaranty and automatic relief from the automatic stay. Furthermore, the Plan provides that a subsequent bankruptcy filing will automatically trigger the termination of the loan's extended maturity date.
Reactions to the Plan
The lingering question remains whether the Plan adequately addresses the lending community's concerns regarding bankruptcy remote structures. The jury is still out. Some have argued that the Plan is generally favorable to the property-level lenders because the estates of the SPE debtors were not substantively consolidated and the restructured terms are, for the most part, market in today's environment. Furthermore, the Plan has a waiver of the automatic stay if there ever were a future bankruptcy of GGP. Others, on the other hand, have observed that the structure is deficient because GGP and its affiliates will continue to use its centralized cash management system and such use will be expressly carved out of each loan's SPE covenants. GGP's centralized cash management system was one of the factors that the Court relied on in determining that it was appropriate for the SPE debtors to consider the interests of the corporate group as a whole when deciding whether to file for bankruptcy. Further, because the law regarding the enforceability of automatic stay waivers is unsettled, the validity of the Plan's automatic stay waivers will not be known until they are challenged in court. And, while the consent rights obtained by lenders with respect to the appointment and replacement of independent directors may enhance protection against subsequent bankruptcy filings, it also remains to be seen whether the exercise of such rights could potentially result in lender liability claims.
Although some view the confirmation of the Plan as a victory for property-level lenders, and evidence of the viability of the SPE as a bankruptcy remote vehicle, the fact remains that the property-level lenders were forced to restructure their loans with SPE debtors in the context of bankruptcy despite the fact that the majority of the properties were performing. Thus, it would be premature to conclude that the strength of the SPE has not been weakened because the estates of the various debtors were not substantially consolidated. The Plan's SPE provisions (i.e., lender consent rights and waiver of fiduciary duties) and bankruptcy protections represent a response to the Court's ruling allowing the SPE debtors to remain in bankruptcy. While some suggest that such provisions are likely to be enforced in the event that a SPE debtor files a subsequent bankruptcy petition, whether such provisions become market will depend on whether they are enforced outside the context of the GGP bankruptcy.
 On October 15, 2009, the Court approved the Plan for 194 subsidiary debtors owing $10.25 billion in loans on 103 retail and office properties across the United States. A week later, the Court approved the Plan for an additional seven (7) properties with approximately $1.3 billion in loans. GGP must still restructure the remaining $3.35 billion of its $14.9 billion in property-level debt.
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