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Mar 20, 2010
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Bankrupt General Growth faces problem of plenty

By
Reuters
Published
Mar 20, 2010

NEW YORK, March 19 (Reuters) - For a company in bankruptcy, General Growth Properties Inc (GGP.N) has a rather unusual problem -- the problem of plenty.



The second-largest U.S. mall owner is working on a plan to exit bankruptcy backed by some of its largest investors while trying to thwart a rival $10 billion takeover bid from Simon Property Group Inc (SPG.N), which may raise its offer.

General Growth's unsecured creditors stand to get paid in full in either case, so the focus has turned to maximizing returns for shareholders who have seen the stock rise to more than $16 from around 60 cents when it filed for bankruptcy in April last year.

As a result, the potential clashes in this takeover battle are shaping up to be over things rarely seen in bankruptcies.

Unusually high fees being given to General Growth's backers through warrants are riling Simon and also may upset some shareholders. And some creditors are looking for compensation for General Growth defaults on loans and early repayment on bonds.

"It is relatively rare especially in a large case in recent years to have a solvent debtor -- often the equity is wiped out, even junior creditors are wiped out," said Doug Bartner, a bankruptcy partner at law firm Shearman & Sterling LLP.

General Growth's more than 200 malls, including such properties as Fashion Show in Las Vegas and Ala Moana Center in Honolulu, make the company valuable.

The issue around warrants -- instruments allowing investors to buy a stock at a fixed price over a period of time -- is playing out as General Growth seeks approval from the bankruptcy judge to make its proposal a court-approved bid. A hearing is expected around mid-April. Other issues will come into play after a formal plan is in place.

General Growth's proposal to emerge independently is to be backed by three investors -- Brookfield Asset Management (BAMa.TO), Fairholme Capital Management and William Ackman's Pershing Square Capital Management.

Brookfield and Fairholme each would get warrants to buy 60 million shares at an exercise price of $15 per share.

For Simon, the largest U.S. mall owner, these warrants would make a bid costlier by several hundred million dollars. Simon has told General Growth that it would walk away if the judge approves these warrants and has urged its rival to not give them out.

General Growth and Simon both declined to comment.

LESS SURPLUS VALUE

Simon has said the Brookfield warrants alone are worth more than $300 million, or over 10 percent, of a $2.625 billion funding commitment.

Break-up fees are usually around 2 percent to 3 percent and will have to be approved by the court, legal experts said.

The larger the transaction, the smaller they tend to be and this is a large transaction, said Steven Hoort, co-head of the bankruptcy practice at Ropes & Gray.

"If someone is asking for a 3 percent break-up fee in a $2 billion transaction, it would be viewed as pushing the edge of the envelope," Hoort said. "You have to have a pretty good explanation why you need that kind of protection."

One bankruptcy expert said it was hard to say if the deal protections were too high without a market test.

"The test is whether other creditors that would be paid off would rather be in Fairholme's position," said Martin Bienenstock, a partner at law firm Dewey & LeBoeuf.

Brookfield is also getting the warrants for seven years, which Simon contends is an unusually long period.

In addition to Simon, some equity holders may be concerned that their interests will be diluted as a result of the warrants. Ackman, whose hedge fund holds a 25 percent interest in General Growth, will get some of Fairholme's warrants if their bid succeeds.

"It leaves less surplus value for all the other equity holders," Bienenstock said. "The deal that (Ackman) is doing should be made available to all of them."

UNSECURED CLAIMS

General Growth's unsecured creditors meanwhile are worrying about other payments that could be owed to them.

Some creditors whose claims General Growth has defaulted on are looking to bump up the interest rate on those claims by around 2 percent, said a source close to the situation, who declined to be named because it is an active case.

General Growth's bondholders may also want money under any "make-whole" provisions in the agreements governing the terms of the securities, the source said. Such provisions entitle bondholders to be compensated for the loss of the interest income they would have received if the bonds had not been repaid early.

Such payments, which could be substantial but not large enough to make a difference to the overall deal, are being raised as an issue because there is money to go around.

"It only comes into play when you are providing some value to old equity, which is absolutely rare," the source said. "It only comes into play when you are paying people in full." (Additional reporting by Ilaina Jonas, editing by Leslie Gevirtz) (For more M&A news and our DealZone blog, go to www.reuters.com/deals)

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