General Growth Properties Inc. , the second largest U.S. mall owner, on Thursday filed for bankruptcy protection on Thursday, making it one of the biggest real estate bankruptcies in U.S. history.
Ending months of speculation, the Chicago-based mall owner which listed total assets of $29.56-billion (U.S.) and total debts of $27.29-billion, sought Chapter 11 bankruptcy protection from creditors along with 158 of its more than 200 U.S. malls, while it seeks to restructure some of its debt.
The company said in a statement that it plans to continue exploring strategic alternatives during the bankruptcy protection and is seeking to emerge as quickly as possible through a reorganization that preserves its national business.
General Growth's filing in the U.S. bankruptcy court in Manhattan makes it one of the largest non-financial companies to succumb to the financial crisis in the U.S.
Prior to the bankruptcy protection filing, the company had defaulted on several mortgages as well as a series of bonds. It has also put several of its flagship properties up for sale.
General Growth has been generating enough cash flow for the company to pay monthly interest costs and expenses but it has been unable to refinance the principal of loans and mortgages as they come due because banks and other financing sources have been reluctant to issue large mortgages and loans.
"Our core business remains sound and is performing well with stable cash flows," said Adam Metz, General Growth's chief executive, in a statement.
"While we have worked tirelessly in the past several months to address our maturing debts, the collapse of the credit markets has made it impossible for us to refinance maturing debt outside of chapter 11."
General Growth has received a commitment for a debtor-in-possession financing facility of about $375-million from Pershing Square Capital Management L.P., as agent.
The hedge fund, run by William Ackman, also owns about 25 per cent of General Growth shares. He has been urging the company to file for bankruptcy protection and described it as "a great company" with "phenomenal assets" at a conference on April 2.
At the end of the 2008, about $15.17-billion of General Growth's debt was comprised of mortgage loans that had been securitized into commercial mortgage-backed securities (CMBS), according to research firm Trepp.
"This underscores that real estate companies are most vulnerable to refinancing risk rather than market risk. The U.S. insolvency process is, we think, a cure for General Growth's liquidity problems, which stem from external factors, and not a traditional bankruptcy per se," said Nomura's London-based property analyst Mike Prew.
Although shares of General Growth had traded as high as $44 over the past 12 months, the stock deteriorated as the credit crises worsened. Shares closed at $1.05 in the U.S. Wednesday.
The Chicago-based firm started when brothers Martin and Matthew Bucksbaum decided to expand the family grocery business and build a shopping centre in Cedar Rapids, Iowa in 1954.
It grew by new development as well as by acquisition, the largest being the 2004 purchase of Rouse Cos for $14.2-billion which brought the company 37 of the best quality and most valuable malls in the country including Fashion Show in Las Vegas and Faneuil Hall Marketplace in Boston.
General Growth's refinancing troubles in the frozen credit markets led to the firing of its former chief financial officer Bernard Freibaum in October. John Bucksbaum, who succeeded his father Matthew in 1999, stepped down as chief executive the same month, though he remained chairman.
In recent months, the new management team under Mr. Metz has been wrestling with loan after loan coming due, bargaining for extensions. As of the end of 2008, General Growth had $1.18-billion in past due debt and an additional $4.09-billion of debt that could be accelerated by its lenders.
Earlier this month, the company had been seeking to restructure $2.25-billion of Rouse bonds, offering bond holders a percentage on their bonds if they allowed the company to skip interest payments and principal until the end of the year. But the company failed to garner the necessary support it needed.
General Growth said several of its other subsidiaries, in addition to the malls were also placed into bankruptcy protection, while several of its properties that are part of joint ventures were unaffected.
The company has hired law firms Weil Gotshal & Manges and Kirkland & Ellis to represent it, according to court papers.
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