General Growth Debt Bet Pays Off

By GINA CHON

Going bargain hunting at the mall has rarely been so rewarding.

When the nation's second-biggest mall owner was tumbling toward bankruptcy near the end of 2008, a handful of investors dug to the bottom of the discount bin and snapped up the company's convertible bonds at three cents on the dollar.

Today, these General Growth Properties Inc. bonds are worth 103 cents—one of the great trades of the financial crisis.

The return is "almost nonsensical," says William Welnhofer of investment firm Robert W. Baird & Co., which wasn't a buyer.

Shares of General Growth, which itself is still under bankruptcy protection, also have proved a home run, hitting a low of 32 cents and closing at $14.08 on Monday. After being delisted last year, the shares were relisted on the New York Stock Exchange on Friday.

General Growth on Monday bolstered its case for exiting bankruptcy as a stand-alone company by lining up nearly $4 billion in commitments from creditors Fairholme Capital Management and Pershing Square Capital Management.

The pledges would bring the mall owner closer to eliminating most of its $7 billion in unsecured debt, in its effort to compete with a bid by rival Simon Property Group Inc.

Other winning trades have emerged since the credit crisis took hold in 2007, including against subprime mortgages, against financial firms, and eventually on financial firms' post-bailout recoveries. Many of these trades were plied by hedge-fund managers.

With the General Growth trade, some individual investors ended up benefiting.

Fund firm T. Rowe Price Group Inc. spotted the convertible-bond opportunity early. David Lee, manager of the firm's $2.3 billion real-estate mutual fund, invested about $11 million in the bonds over the last six months of 2008, including at near-bottom prices, according to the fund's 2008 report and a person familiar with the matter.

Last year, General Growth convertible bonds were the fund's best-performing investment, valued at $61.8 million. The fund rose 32% in 2009, compared with a decline of 39% in 2008. The investment "generated excellent results," the fund said in its 2009 annual report.

Today, the Chicago-based mall owner is the subject of a bidding war. And even its shares, which are usually wiped out in bankruptcy, have rebounded.

Convertible bonds give holders the right to convert the bonds into common shares if the stock goes above an agreed-upon price. Long popular among hedge funds, the convertible-bond market collapsed by half in 2008 as credit markets froze and stocks tanked, analysts say.

General Growth's woes were partly tied to the broader market's. But it also had its own problems, as it had loaded up on debt to snatch up properties.

The company, which owns about 200 malls across the U.S., issued $1.5 billion in convertible bonds in April 2007, largely to pay back other debt. The notes paid 3.98%, which represented $88.72 per share, an exchange premium of 35% to the share price at the time.

When the credit markets dried up and General Growth was unable to refinance or extend various debt payments that were due, it began collapsing under its debt, with its shares and bonds diving in value.

The convertible bonds approached bottom in November, when the company said its inability to refinance or extend $1 billion in debt due at the end of that month could cause a default on billions of dollars it owed and its ability to continue operations would be in "substantial doubt."

Still, some investors were confident that given its assets, General Growth could be strong again if it could overcome its credit woes. Investors who bought General Growth stock, like Pershing's Bill Ackman, or its convertible bonds bet that the firm just needed some help to meet its short-term obligations and would re-emerge from bankruptcy in a healthier position.

General Growth has a high occupancy rate and quality assets, such as South Street Seaport in New York, Water Tower Place in Chicago, Ala Moana Center in Honolulu and Tysons Galleria in McLean, Va.

Its assets, almost $30 billion, exceeded its liabilities of $27 billion when it filed for Chapter 11 protection in April 2009. That is unusual for a bankruptcy, notes Ronen Bojmel, managing director at Miller Buckfire, an adviser to General Growth.

"There was a pretty decent chance that if you bought at a very cheap price and GGP went into bankruptcy, you could make a killing because you were likely to eventually get" the face value of the bonds, said one trader who says he bought millions of dollars of General Growth's bonds at about four cents on the dollar.

Immediately after the bankruptcy filing, the convertible bonds began trading higher, breaking 50 cents on the dollar in September. News of interest in the company by Simon Property and others propelled the value of the bonds even higher.

Some investors who had missed the bottom still saw opportunity. Bruce Berkowitz at Fairholme, a New Jersey-based investment advisory firm, bought $2 billion of General Growth's $7 billion of unsecured debt, including a chunk of the convertible bonds, which he says he bought at an average price of around 80 cents on the dollar.

"We thought it was money good," Mr. Berkowitz said.
—Kris Hudson and Jeffrey McCracken contributed to this article.