General Growth, Philadelphia Newspapers: Bankruptcy

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General Growth Properties Inc.’s reorganization plan doesn’t properly compound interest, according to Wilmington Trust Co., the indenture trustee for 6.75 percent senior notes issued by Rouse Co. and the 3.98 percent exchangeable senior notes due 2027.

The indenture trustee contends the formula contained in the plan is incorrect because interest isn’t compounded correctly. The indenture trustee also contends that the plan impermissibly discriminates against the noteholders.

New investors have the option under the plan to receive cash for their existing notes, thus providing some of the cash they need in making new investments in a reorganized General Growth. Other noteholders aren’t offered the same cash-out option, the indenture trustee says.

By not making the cash-out option available to all noteholders, the indenture trustee contends that the plan improperly discriminates against similarly situated creditors.

The issue will be decided by the bankruptcy judge at the Oct. 21 hearing where General Growth banks on walking out with a confirmation order approving the reorganization for the top-tier companies.

The official creditors’ committee goes along with the discrimination argument, to a point. At present, according to the committee, trading prices on the notes indicate the holders will receive payment at least equal to investors who cash out. The committee is reserving its right to object if the price of the notes falls in the market.

Creditors of General Growth’s four top-tier companies are to receive full payment under the Chapter 11 plan. The plan preserves some of the stock for existing shareholders. The plan is financed in part with an $8.55 billion debt and equity commitment from a group led by Brookfield Asset Management Inc. General Growth’s property-owning subsidiaries already confirmed Chapter 11 plans paying their creditors in full.

General Growth, the second-largest mall owner in the U.S. with 180 properties in 43 states, began the largest real-estate reorganization in history by filing under Chapter 11 in April 2009. The books of Chicago-based General Growth had assets of $29.6 billion and total liabilities of $27.3 billion as of Dec. 31, 2008.

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

Prepack Coming

MGM Begins Vote Solicitation for Prepacked Chapter 11

Metro-Goldwyn-Mayer Inc. announced yesterday that it has begun soliciting acceptances of a so-called prepackaged Chapter 11 plan where secured lenders will swap $4 billion in debt for 95.3 percent of the new stock.

Spyglass Entertainment Group will acquire the remainder of the new equity in exchange for contributing assets including Cypress Entertainment Group Inc. and Garoge Inc. When MGM emerges from Chapter 11, Gary Berger and Roger Birnbaum from Burbank, California-based Spyglass will become MGM’s co-chairman and chief executive officer.

The voting deadline for the so-called prepack is Oct. 22. When the votes are in hand, MGM will file the Chapter 11 petition, likely intending to emerge from Chapter 11 within about four to six weeks. In addition to finding compliance with technical aspects of Chapter 11, the bankruptcy judge can approve the plan by signing a confirmation if the courts determines that that the voting solicitation materials were adequate.

MGM, based in Los Angeles, was acquired in April 2005 in a $4.8 billion transaction by a group including Credit Suisse Group AG, Providence Equity Partners Inc., Sony Corp. and TPG Capital.


Meruelo Maddux Committee Wants Executives’ Bonuses Cut Off

The Meruelo Maddux Properties Inc. creditors’ committee said the company should be compelled to terminate employment agreements with the top three officers, to avoid large priority claims if one of the competing reorganization plans is eventually confirmed.

According to a motion filed by the committee on Oct. 6, Chief Executive Officer Richard Meruelo and Chief Operating Officer John Maddux are entitled to so-called golden parachutes if their employment is terminated “without cause.” The payment would equal three times the officers’ base salary and bonus.

If a competing plan is eventually approved by the bankruptcy judge, the services of the three officers won’t be required, thus kicking in claims that would be entitled to priority and require payment in full. The committee wants the judge to require the company to give notices beginning in November that the employments agreements won’t be renewed.

The motion to cut off the employment agreements is scheduled for a Nov. 10 hearing in bankruptcy court in Woodland Hills, California. The third officer with an employment contract is Chief Financial Officer Andrew Murray.

The court is in the process of approving disclosure statements explaining three competing reorganizations plans. One plan is proposed by lenders Legendary Investors Group No. 1 LLC and East West Bank. The company has another, as do shareholders Charlestown Capital Advisors LLC and Hartland Asset Management Corp. The committee again said it isn’t supporting the company’s plan.

The bankruptcy court permitted the filing of other plans in May. The Chapter 11 petition filed in March 2009 listed assets of $682 million against debt totaling $342 million.

The case is In re Meruelo Maddux Properties Inc., 09-13356, U.S. Bankruptcy Court, Central District of California (Woodland Hills).

Bank of America May Sell Cabi Downtown Loan

Cabi Downtown LLC, the owner of the 49-story Everglades on the Bay condominium in Miami, was scheduled to confirm a Chapter 11 plan yesterday where ownership would transfer to Bank of America NA, the construction lender owed $207 million.

The hearing was pushed back to Oct. 27 because the Charlotte, North Carolina-based bank is receiving offers to purchase the loan. The adjournment of the confirmation hearing is intended to give the bank time to complete a sale.

Cabi said in a court filing that it is ready to implement the plan. Cabi agreed not to interfere with a sale of the loan and is committed to allowing buyers to inspect the property.

The plan resulted from a settlement between Cabi and the bank. While the bank would take ownership, the developer would remain manager.

The plan gives unsecured creditors $750,000, for a 25 percent recovery on $3 million in claims. The plan was revised so large, disputed claims wouldn’t dilute the recovery by unsecured creditors.

Cabi filed for Chapter 11 reorganization in August 2009, just after the bank began foreclosure. The company is owned by GICSA, which says it is the largest and most profitable real-estate developer in Mexico.

The case is In re Cabi Downtown LLC, 09-27168, U.S. Bankruptcy Court, Southern District of Florida (Miami).

Tubo Again Reports Progress on Plan Negotiations

Tubo de Pasteje SA and subsidiary Cambridge-Lee Holdings Inc. for a second time are seeking an extension of the exclusive right to propose a Chapter 11 plan.

The company reports “significant progress” in discussions with noteholders on a Chapter 11 plan. The motion for longer exclusivity recites the company’s hope that it will “soon” have agreement allowing the filing of a consensual reorganization plan.

If granted by the bankruptcy court at a Nov. 2 hearing, the new plan deadline would be Jan. 5.

In the first motion in March for longer exclusivity, the company said there had been “significant progress” in talks with noteholders about a plan.

The companies sought Chapter 11 protection after a payment default in November 2009 on $200 million in 11.5 percent senior notes due 2016.

Tubo is a subsidiary of Mexico City-based Industrias Unidas SA, a diversified manufacturer of copper and electrical products. The U.S. subsidiary Cambridge-Lee is based in Reading, Pennsylvania. IUSA is the issuer of the notes which were secured by a pledge of the stock of Cambridge-Lee.

The case is In re Tubo de Pasteje SA de CV, 09-14353, U.S. Bankruptcy Court, District of Delaware (Wilmington).


Defaults by Junk-Rated Companies Continue to Decline

Worldwide defaults for junk-rated companies declined from 6.2 percent in the second quarter to 4 percent at the end of the third quarter, Moody’s Investors Service said in a report.

In the U.S., the junk default rate contracted to 4 percent from 6.4 percent between the second and third quarters.

One year ago, the global junk default rate was 13.2 percent. The default rate now is below the 4.8 percent average for the years 1983 through 2009.

While the default rate is down between quarters, the number of companies with debt trading at so-called distressed levels hasn’t declined as much. Moody’s index for distressed debt was 15 percent at the end of the third quarter, down from 16 percent at the close of the second quarter. One year ago, the distress index was 32.5 percent.

So far this year, there have been 40 defaults by companies that Moody’s rates. In the first nine months of 2009, there were 237 defaults.

Debt is considered distressed if the yield is 10 percentage points more than comparable Treasury securities.

Moody’s predicts that the global default rate will decline to 2.7 percent by the end of 2010 and to 2 percent by the third quarter of 2011.

Exchange Offer News

Madden Converts Betsy Johnson Debt to Mark Ownership

Steven Madden Ltd., a footwear designer and marketer, swapped $27.6 million of secured debt for ownership of the trademarks and intellectual property of 60-store women’s wear retailer Betsey Johnson LLC.

In a regulatory filing this morning, Madden, based in Long Island City, New York, gave a license for the marks back to Johnson in return for royalties. The statement said that Madden purchased $48.8 million of secured debt owed by Johnson for $27.6 million. The debt is secured by all of Johnson’s assets.

As part of the arrangement, Madden also acquired 10 percent of the Class B preferred shares. At the same time, Madden made a $3 million loan to Johnson. The loan will pay interest at 8 percent and mature in December 2015.

Castanea Partners, the majority owner of Johnson, made a new capital investment, the statement said.

New Filing

Five Southern Dairy Farms File to Stop Foreclosure

Dairy Production Systems-Georgia LLC filed for Chapter 11 protection yesterday in Albany, Georgia, along with four affiliates. They operate five dairy farms in Florida, Georgia, Mississippi and Texas.

Together, the farms, based in High Springs, Florida, have about 10,500 head of cattle on farms that collectively encompass about 3,350 acres. The dairies blamed their financial problems on the decline in the price of fluid milk, coupled with increases in feed and operating costs.

The dairies owe $76.2 million to Agricultural Funding Solutions LLC, which purchased the loan from the Federal Deposit Insurance Corp. after the original lender, New Frontier Bank of Greeley, Colorado, was taken over by regulators.

The Chapter 11 filing occurred after Agricultural Funding filed foreclosure proceedings and asked for the appointment of receivers. Agricultural Funding bought the loans from the FDIC for about $22 million, according to a court filing.

Revenue declined to $48 million last year from $57.2 million in 2008 and the farms are operating at no more than 65 percent of capacity, court papers show.

The farms are owned by David P. Sumrall, who guaranteed much of the bank debt.

The case is In re Dairy Production Systems-Georgia LLC, 10-11752, U.S. Bankruptcy Court, Middle District of Georgia (Albany).

Daily Podcast

Bankruptcy Filing Statistics, Truvo, and Vegas Monorail: Audio

Statistics showing that individual bankruptcies have risen while fewer large companies reorganize, and settlements regarding Las Vegas Monorail Co. and Truvo Luxemburg Sarl are subjects for a bankruptcy podcast on the Bloomberg terminal and To listen, click here.

Briefly Noted

Philadelphia Newspapers Sale Due for Closing Today

The sale of Philadelphia Newspapers LLC to the secured lenders is scheduled for completion today. The new owners have signed agreements with the last of 15 labor unions. To read Bloomberg coverage, click here.

To read how the bankruptcy court for a second time approved a sale to the lenders, click here for the Oct. 1 Bloomberg bankruptcy report. The publisher of Philadelphia Inquirer and Philadelphia Daily News began court reorganization in February 2009 in its hometown after defaulting on a term loan and revolving credit totaling $296.6 million and on $98.5 million in subordinated notes.

The case in bankruptcy court is In re Philadelphia Newspapers LLC, 09-11204, U.S. Bankruptcy Court, Eastern District of Pennsylvania (Philadelphia).

Advance Sheets

Walrath Lays Down Rules for Delaware Auction and Bids

The sale of American Safety Razor Co. gave U.S. Bankruptcy Judge Mary F. Walrath an opportunity to expound upon what are and what aren’t permissible restrictions on bidding at a bankruptcy auction.

ASR, the fourth-largest maker of wet-shaving blades, asked Walrath to approve a sale to first-lien lenders. Instead, Walrath required the company to hold another auction in the courtroom today.

At a Sept. 30 hearing, Walrath ruled it was improper for ASR to preclude bidding by Energizer Holdings Inc. on the theory that federal antitrust regulators would disapprove an acquisition by the maker of Schick shavers.

Walrath said the bidding process isn’t covered by the so-called business judgment rule. She said the court has the right to decide what sale procedures are “fair and reasonable” without deference to the company’s business judgment.

The judge in Wilmington, Delaware, decided that several provisions in the bidding qualifications and procedures were improper. Walrath said it was “not reasonable” for the debtor to have power to exclude a bidder based on the company’s opinion about whether there is a “reasonable likelihood” the buyer can complete the acquisition. She said such a loose provision would give a bankrupt company the ability to prevent bidding by any prospective buyer already in the industry.

Walrath said it was “even more remarkable” to prevent a prospective bidder from receiving due diligence material until after being designed as a so-called qualified bidder.

The judge said it wasn’t fair for the bankrupt company to have discretion to require different deposits from different bidders.

She said her “biggest problem” was ASR’s insistence that there must be a nonrefundable deposit or some other form of a “hell-or-high-water provision” accompanying a bid by Energizer. Walrath said there could be several means for dealing with the possibility that antitrust regulators might block a sale to Energizer.

Walrath said it would be acceptable for ASR to have the ability to terminate a sale contract if antitrust clearance wasn’t given within about two months.

To be sure the new auction today would be conducted on a level playing field, Walrath reminded the parties “there are criminal sanctions for anybody who proceeds with a sale process in bankruptcy court for ulterior and improper motives.”

For details on ASR’s debt structure and the bids, click here for the Oct. 1 Bloomberg bankruptcy report.

ASR, based in Cedar Knolls, New Jersey, has U.S. plants in Virginia and Tennessee. Affiliates abroad aren’t in bankruptcy. It was acquired for $625 million in July 2006 by London-based Lion Capital LLP.

ASR has the largest market share for private-label blades, although only 8 percent when branded goods are included, according to Moody’s Investors Service.

The case is In re American Safety Razor Co., 10-12351, U.S. Bankruptcy Court, District of Delaware (Wilmington).

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