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General Growth Aim to Keep Top Malls May Thwart Simon

General Growth Properties Inc. (GGP) plans to emerge from bankruptcy without selling its best-performing shopping malls after reaching agreement with lenders, a strategy that may thwart the acquisition ambitions of competitor Simon Property Group Inc. General Growth rose 15 percent.

“I would not be surprised to see the odd sale of an asset, but it won’t be to raise substantial capital,” General Growth President and Chief Operating Officer Thomas Nolan said yesterday in a telephone interview. “We have no current plans to sell any of those assets we consider to be strategically important.”

General Growth, the second-largest U.S. mall owner, this week filed a reorganization plan for about $9.7 billion of mortgages secured by 92 regional shopping centers, community retail centers and office buildings. Under the plan, all claims would be paid in full, and loan-maturity dates would be extended by an average of 5.2 years.

Before filing for Chapter 11 bankruptcy protection in April, Chicago-based General Growth had been trying to sell real estate including Boston’s Faneuil Hall, South Street Seaport in New York City, and the Fashion Show and Shoppes at the Palazzo malls in Las Vegas. Those sales won’t be necessary under the planned reorganization, Nolan said.

General Growth rose $1.03 to $7.98 in over-the-counter trading as of 3:59 p.m. The shares reached their highest level since Oct. 3, 2008.

Simon Property’s Plans

Simon Property, the largest U.S. mall owner, has been working on an approach toward its biggest rival. Simon hired merger adviser Lazard Ltd. and Wachtell Lipton Rosen & Katz, a law firm focusing on acquisitions, for advice on General Growth, Simon said on Nov. 17.

“We’re flattered by the interest in General Growth expressed by a whole host of investors, including Simon,” Nolan said. “We’re very focused on the immediate task at hand, which is to get the company recapitalized, restructured, and emerge from bankruptcy as one of the premier owners of regional shopping centers in the U.S.”

Simon Property spokesman Les Morris declined to comment.

Simon Chief Executive Officer David Simon has said his company is “a logical buyer” for General Growth malls. “There’s a lot we could do with those properties,” he said in a Sept. 15 interview on Bloomberg Television.

Sales Per Foot

General Growth owns four of the five U.S. malls with the highest sales per square foot, with the other owned by Indianapolis-based Simon Property (SPG), according to estimates by real estate research company Green Street Advisors.

General Growth was caught in the credit crunch, unable to refinance debt amassed when it purchased the Rouse Co. for $11.3 billion in 2004. U.S. Bankruptcy Judge Allan Gropper in New York scheduled a Dec. 15 hearing to rule on confirmation of the restructuring plan for the $9.7 billion in secured debt.

General Growth’s best-performing malls are the Grand Canal Shoppes and Fashion Show in Las Vegas, Ala Moana Center in Honolulu, and Whalers Village in Lahaina on the island of Maui in Hawaii, according to Green Street. All four have annual sales per square foot of $1,100 to $1,200. Ala Moana is among the properties in this week’s plan.

General Growth still must reach agreements with lenders on about $5.2 billion of debt secured by properties, and with holders of about $7 billion of unsecured debt, before it can emerge from bankruptcy.

The company has the exclusive right until February to present a reorganization plan to the bankruptcy court.

‘Important Step’

This week’s agreement “doesn’t ensure anything, but it is an important step,” said James Sullivan, an analyst with Newport Beach, California-based Green Street.

The plan pressures other secured-debt holders to reach an agreement with General Growth, he said.

“Then it becomes an issue of what happens to the unsecured debt,” Sullivan said. “There it becomes much more difficult.”

It’s among unsecured debt holders that Simon or another buyer may find support for a potential takeover of General Growth, according to Sullivan. Unsecured creditors may not want to exchange their debt for General Growth equity, the most likely method of extinguishing corporate-level debt, he said. General Growth has few choices for paying them.

“They don’t have the cash to pay off the unsecured debt in full,” Sullivan said. “Someone else might -- Simon or Westfield. That’s what makes a bid for the whole company so intriguing.”

Westfield Group (WDC), a Sydney-based mall owner with 55 U.S. shopping centers, doesn’t comment on “speculation,” spokeswoman Catharine Dickey said.

Mall Portfolio

Greg Cross, the Baltimore-based chairman of the bankruptcy group of law firm Venable LLP, said this week’s agreement may help General Growth keep its mall holdings intact. Cross represents members of the secured-creditors group with more than $4 billion of General Growth debt.

“It’s a significant step toward General Growth emerging completely from bankruptcy,” Cross said in an interview.

This week’s agreement also was positive for holders of commercial mortgage-backed securities, said Sullivan of Green Street and Adam Fox, a senior director with Fitch Ratings in New York. General Growth surprised bondholders when it included nine special-purpose entity borrowers owning 166 securitized properties in its bankruptcy filing.

“The successful resolution substantially alleviates the risk of rating downgrades for the transactions,” with the loans being paid in full, Fox said yesterday in a note to investors.

Standard & Poor’s said it’s reviewing General Growth’s proposed plan to see how it may affect CMBS ratings. “We believe these modifications to the loan documents, in and of themselves, are not likely to prompt negative rating activity,” the credit-rating company said today in a note to investors.

The case is In re General Growth Properties Inc., 09-11977, U.S. Bankruptcy Court, Southern District of New York.

To contact the reporter on this story: Daniel Taub in Los Angeles at dtaub@bloomberg.net.

To contact the editor responsible for this story: Alan Mirabella at amirabella@bloomberg.net.

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