GGP and SPEs - bankruptcy remote, bankruptcy proof?

Now that I have a few minutes, I want to comment on a great story in Friday's Journal about the General Growth Properties bankruptcy.

When GGP filed its Chapter 11, it also dragged 166 individual malls with it. How so? Each mall is owned by a special purpose entity, demanded by its lenders to try to prevent what actually happened. And this could have major ramifications throughout the real estate world. Why? Because (a) lenders thought the structure of the deals would prevent this from happening; (b) GGP wants to take the cash flow from the deals into general operating funds for the company rather than into paying these otherwise-performing loans -- in short, use the good malls to prop up the dogs; and (c) get some leverage in the bankruptcy.

For those of you saying, "Huh?" here's an explanation:

In past years, to get the malls' mortgages, General Growth had set up 166 "special purpose entities" whose sole purpose was to borrow money. SPEs are attractive to lenders because, according to legal experts, they are "bankruptcy remote," meaning their cash flows are dedicated to paying debt service. The lenders issued securities backed by the SPEs. Holders of securities expect the structure would ensure they'd be paid even if the parent company went bust.

If you have done any of these deals, you know that each entity has independent managers or independent directors or names of similar ilk. They are typically of the springing type, meaning that they come in to vote only in an event such as bankruptcy. And interestingly, the managers were replaced on many of the entities just prior to the filing. What does that mean? You decide for yourself, as there are many interpretations. And, depending on the language in the loan documents, "independent" isn't necessarily what one may think.

Finally, these deals were all backed by legal opinions as to banruptcy remoteness. Will lawyers be impacted? Maybe not. But you never know.

In any event, this is definitely something to monitor as it could have a major impact on the market. And if CMBS ever comes back in a meaningful way, expect even tighter bankruptcy remoteness covenants to try to protect lenders as much as possible.