General Growth Properties Inc, the second largest U.S. mall owner, filed for bankruptcy protection on Thursday in one of the biggest real estate failures in U.S. history.
Ending months of speculation, the Chicago-based mall owner, which listed total assets of $29.56 billion 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.
Since November, General Growth has warned that it may have to seek protection from its creditors when it was unable to refinance maturing mortgages. The company said in a statement that it planned to continue exploring strategic alternatives during the bankruptcy protection, from which it 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 nonfinancial companies to succumb to the financial crisis in the U.S. Before 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.
Analysts and other real estate experts have speculated that mall owners Simon Property Group Inc and Westfield Group would be interested in buying some of General Growth's assets from bankruptcy.
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," General Growth Chief Executive Adam Metz said 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 LP, as agent.
The hedge fund run by William Ackman also owns about 25 percent of General Growth shares. Ackman, who has been urging General Growth to file for bankruptcy protection, described it as "a great company" with "phenomenal assets" at a conference on April 2.
At the end of 2008, about $15.17 billion of General Growth's debt was comprised of mortgage loans that had been securitized into commercial mortgage-backed securities, according to research firm Trepp. "This underscores that real estate companies are most vulnerable to refinancing risk rather than market risk," said Nomura's London-based property analyst Mike Prew. "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."
Shares of General Growth have deteriorated as the credit crisis worsened. They closed at $1.05 in the United States on Wednesday, making the company's market capitalization $283.90 million, down from $11.l8 billion when it traded at a 12-month high of $44 in May. S
o far, fallout from the General Growth bankruptcy has not hit European mall owners. Europe's biggest mall owner, Unibail Rodamco, was trading up 2 percent at 118.69 euros, while Anglo-French retail specialist Hammerson edged up 0.2 percent to trade at 307.75 pence.