C.M.O. 5.14.2009

Credit Market Overview
May 14, 2009

Away from the much publicized bankruptcy of Chrysler and, shall we say, imminent entering of Chapter 11 by GM there is an interesting story going on in the REIT world with General Growth Properties.

What used to trade under the symbol GGP has now added that moniker reserved only for those that have gone to “11” instead of heaven the dreaded “Q” and trades as GGWPQ. This is the least of it however. It seems that on its way to bankruptcy General Growth or GG for short took 166 of its malls along with it.

This was an unprecedented move as the structure of these REITs separates the parent company from the operating properties through a “special purpose entity” which makes them in legal terms “bankruptcy remote”. As GG said in court recently, it doesn’t make them “bankruptcy proof”.

As the single largest CMBS borrower in a market that is itself $700BN this is not doing good things for CMBS’s or REIT’s. “The company is doing something that would damage the entire CMBS industry. The filing for so many of these well-capitalized performing malls is an outrage,” said Richard Jones, a lawyer at Dechert LLP, which represents some secured creditors in the bankruptcy case.

As it turns out the boards of these properties are small and their memberships are drawn from the same pool of candidates creating a lot of overlap amongst the 166 properties. Not unlike the stories we hear where the Chairman fill boards seats with cronies, just replicated 166 times from a group of what has turned out to be very sympathetic ears.

Adding to the intrigue is that Farallon Capital Management LLC just won a three way bidding war to provide DIP financing to GG yesterday over Bill Ackman’s Pershing Square and the usually victorious in all situations Goldman Sachs.

The interesting bit is not that GS lost but that Farallon, as well as some of the partners in the firm are already GG creditors holding an undisclosed amount of the debt.

J.P. Morgan once said that the way to make a lot of money was to “put all your eggs in one basket and then watch that basket very closely”. It would appear that Farallon is doing just that.

Since they are in bankruptcy proceedings the CDS levels for GG have been static since the filing. The news, however, has not been good for the REIT industry as a whole. The RWR an ETF constructed to track the Wilshire REIT index closed last night at $32.40 down from a recent high of $36.58.

In CDS land the spreads for the 17 REIT’s the CEC Strategy follows are all widening or begun to do so. Although there is no guaranty that things will happen in the future the way they have happened in the past, if the negative correlation usually seen between CDS levels and stock prices holds this would lead to lower prices for REITs.

Enjoy the day.

Jim Delaney