--Sarika Gangar
General Growth Properties, which filed for bankruptcy on Thursday (16 April), is attempting to claw back a number of commercial property loans that have been securitized by pulling them into its filing. The move surprised market participants because commercial mortgage-backed securities deals are set up as bankruptcy-remote, special purpose entities. GGP owns over 200 properties, 158 of which were included in the bankruptcy. Of the 158, roughly 90 are held within CMBS and CRE CDOs. These deals have mortgages with outstanding balances of about $9.5 billion.
A bankruptcy-remote entity is supposed to shield a property in the event of a corporate bankruptcy. This protects CMBS bondholders‹who are secured‹from having to share proceeds with other creditors, specifically unsecured creditors, in a bankruptcy. The SPEs are supervised by independent directors and it’s unclear whether GGP obtained these directors’ approval or bypassed them when filing.
It appears the REIT excluded properties that were part of joint ventures in the filing, according to a report from Bank of America. GGP is likely aiming for the court to grant "substantive consolidation," or the permission to pool the SPEs in with unencumbered assets. "The long-term consequences could be very problematic for our business," said Rick Jones, partner at Dechert.