General Growth Avoids Chapter 11

Unpaid Debts Mount at Mall Owner, but Bondholders Continue Talking in Hopes of Greater RecoveryArticle By KRIS HUDSON General Growth Properties Inc., struggling under a mountain of debt, said Monday that it latest effort to win a reprieve from bondholders had fallen short. But a bankruptcy filing isn't imminent for the mall giant, according to people familiar with the matter, and General Growth's ability to remain out of bankruptcy shows the unusual dynamic between lenders and distressed companies in the recession-ravaged commercial-real-estate market. Sally Ryan for The Wall Street Journal Bondholders have refrained from forcing mall owner General Growth Properties into bankruptcy court, despite lack of a deal on a debt extension. Under normal circumstances a company with as much past-due debt as General Growth would have been forced into Chapter 11 bankruptcy protection by now. Creditors so far have been willing to let deadlines pass because they believe there is little to be gained and much to be lost through a bankruptcy. General Growth's mall operations are stable and many bondholders hope for a greater recovery outside of bankruptcy court. "This is really rare," said Kevin Starke, an analyst at CRT Capital Group LLC, a research company that tracks distressed securities. "It is corporate-bond limbo like I've never seen before." With the credit market for real-estate deals frozen, there is little hope of General Growth selling enough malls or development land to pay off debts expected to reach $3 billion by June, according to the people familiar with the matter. Creditors also recognize that bankruptcy is a long, expensive and unpredictable process that could produce less of a payout then they would get by working out the problems outside of Chapter 11. General Growth declined to comment on the standoff, but a spokesman said, "We continue working with our syndicate of lenders on our current debt situation." Many creditors say that General Growth's management is doing a good job running the company. Its 200 U.S. malls, a portfolio second in size only to Simon Property Group Inc., generate enough cash to cover interest on the debt. But its properties are overleveraged and it lacks the borrowing capacity to retire those debts as their principal comes due. "There's no question that General Growth is a liquidity issue," said Jeff Spector, an analyst with UBS AG. "The properties, for the most part, aren't broken." General Growth, based in Chicago, isn't the only real-estate borrower that is getting a reprieve from its lenders these days. Hundreds of property owners have had loans come due without a repayment made in recent months. But most lenders have agreed to extend loan terms, hoping that the credit market will improve. Often to win extensions, property owners have had to give up equity or agree to higher interest rates. Australian shopping-center owner Centro Properties Group, which owns 650 U.S. open-air shopping centers, last year sought one short-term extension after another. Finally, in December, after nine extensions, it averted a liquidation by agreeing to eventually grant its lenders 90% of its stock in exchange for two- and three-year payment extensions on $7 billion of debt. To be sure, General Growth may still be forced to seek bankruptcy protection soon. Trying to dig out from under $27 billion in debt, the company until this month has had the relative luxury of negotiating primarily with dozens of banks on more than $4 billion of past-due debt and debt that could become due because of other defaults. General Growth became even more vulnerable after a March 16 deadline passed for repaying $395 million in bonds. Now, rather than dealing only with several dozen banks holding past-due debt, General Growth must negotiate with hundreds of bondholders. Some holders bought the bonds at face value and are hoping for a recovery. Others bought the bonds at depressed prices and might want to force a liquidation to receive a quicker payout. On Monday, General Growth said that it concluded efforts to get holders of $2.25 billion of bonds to grant it a nine-month reprieve from paying principal and interest on those bonds. It had three times extended the deadline on its so-called "consent solicitation" because not enough bond holders signed up. In exchange, General Growth offered the bondholders quarterly payments of 62.5 cents for every $1,000 of bonds, with interest accruing. But that offer wasn't accepted because many bondholders were unwilling to forfeit their ability to demand immediate payment for nine months, these people said. General Growth said Monday it continues to negotiate with the holdout bondholders. The result is an unusual situation in which borrowers have allowed the due date for corporate bonds to pass without the issuer either paying them or filing for bankruptcy protection. Often when a company defaults on corporate bonds, bondholders will force an involuntary bankruptcy petition. A person familiar with the bondholder talks said that, while some creditors are angry, none appears ready to insist on an involuntary bankruptcy petition yet. It is possible that bondholders didn't go along with the consent solicitation primarily because they feared that making such a pledge would reduce the value of their bonds. General Growth has told lenders that they'll have more influence over the outcome if it restructures outside of bankruptcy court, according to people familiar with the talks. A bankruptcy filing could force the company to liquidate its assets for less than the whole company would be worth if it remained a single entity for the long term, these people said. Another deterrent to an involuntary petition is that bankruptcy wouldn't bring immediate payment of General Growth's debts. "It's such a large company that the bankruptcy would definitely last at least a couple of years," said Heidi Sorvino, a lawyer leading the bankruptcy practice of law firm Smith, Gambrell & Russell LLP. The timeframe could be shorter if General Growth did a prepackaged bankruptcy in which the creditors agree to terms prior to the company entering bankruptcy, Ms. Sorvino added. But wrangling so many creditors without the threat of a judge making and enforcing decisions is "almost impossible," she said. General Growth's shares on Monday fell 17%, or 11 cents, to 55 cents in 4 p.m. composite trading on the New York Stock Exchange. Write to Kris Hudson at kris.hudson@wsj.com