General Growth wins extension in Bankruptcy Court

General Growth clears a hurdle from Bankruptcy Court this morning that many creditors and lenders are paying attention to (from WSJ):

The judge in General Growth Properties Inc.'s bankruptcy case rejected creditors' motions to dismiss several properties from the case, clearing the way for the mall owner to begin talks with its lenders about long-term debt extensions that would eventually allow it to exit bankruptcy court.

In a decision Tuesday, Judge Allan Gropper of the U.S. Bankruptcy Court in Manhattan ruled against the arguments of loan servicers ING Capital Loan Services LLC and Helios AMC LLC and lender Metropolitan Life Insurance Co. The three had separately argued that the General Growth malls they financed with mortgages are structured as individual "special purpose entities" that shouldn't be included in a broad corporate bankruptcy filing.

The judge ruled Tuesday that the so-called SPE structure doesn't preclude an entity in danger of financial difficulty such as a loan default from being included in such a filing. He added, however, that the ruling has no bearing on the question of substantive consolidation, which entails combining separate entities of the same corporate parent in a bankruptcy case. The case is being closely monitored by real-estate investors and borrowers, since many securitized mortgages are packaged as special purpose entities.

"I think this is a rude awakening for a real-estate finance industry that placed faith in certain structures without any thought to how they could be stressed in a severe economic environment or how they could be tested under the bankruptcy code," said Kevin Starke, an analyst with CRT Capital Group LLC, which tracks distressed securities. "The lenders that wanted these cases dismissed failed to demonstrate why the subsidiaries they loaned money were any different than any other corporate subsidiary."

With the judge's ruling in hand, General Growth will begin negotiating with its creditors for multiyear extensions of its debt maturities that are critical to its effort to exit bankruptcy.

General Growth, the second-largest U.S. mall owner behind Simon Property Group Inc., owns and manages more than 200 U.S. malls. It filed for Chapter 11 bankruptcy protection in April with $27 billion in debt. General Growth included 166 of its malls in the bankruptcy filing.