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The General Growth Properties Bankruptcy and the Future of Securitizations
Do the recent rulings in the General Growth Properties bankruptcy spell doom for equipment debt securitizations? Not necessarily so, according to the recent rulings of Southern District of New York Bankruptcy Judge Allan Gropper in the $27 billion General Growth Properties Chapter 11 bankruptcy ' at least with respect to the issue of substantive consolidation. Judge Gropper's denial of motions to dismiss certain solvent special purpose entity (“SPE”) subsidiaries from the General Growth Properties bankruptcy confirms, however, that creditors of a solvent “bankruptcy remote” SPE should not assume that the SPE's “independent” director or manager will refrain from putting the SPE into bankruptcy when its parent also files. In denying the motions to dismiss, Judge Gropper ruled that the managers of the SPEs, including the independent managers, were within their rights and breached no law or duty when they decided to cause the SPEs to file for bankruptcy along with their parents, General Growth Properties, Inc. and General Growth Properties LP (“General Growth”), and nearly 400 of their affiliated companies. He made it clear in his published opinion, however, that permitting the solvent SPEs to remain in bankruptcy does not mean that they will be substantively consolidated with their affiliates.
Judge Gropper's ruling on the motions to dismiss and his prior approval of debtor-in-possession (“DIP”) financing allowing General Growth access to cash collateral generated by subsidiary SPE assets and pledged to the SPEs' lenders has sent shock waves through the debt securitization and structured finance markets. While not necessarily killing off those markets, the General Growth Properties rulings will have a direct effect on the way rating agencies, lenders, underwriters, and other creditors view traditional bankruptcy remote structures in equipment, as well as real property financings, particularly with respect to two of the basic tenets of securitizations and structured debt: 1) the owner of the securitized assets or collateral will remain out of reach of the equitable powers of a bankruptcy court, and 2) such assets will not be used to support the bankruptcy estate of such owner's parent.
Bankruptcy Sales: Finding a Diamond In the Rough
There is no efficient market for the sale of bankruptcy assets. Inefficient markets yield a transactional drag, potentially dampening the ability of debtors and trustees to maximize value for creditors. This article identifies ways in which investors may more easily discover bankruptcy asset sales.
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