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 Inyoung Hwang/Medill

General Growth owns more than 200 mall properties including Chicago's Water Tower Place. The company was granted two loan extensions this week, but analysts and investors continue to be grim on its outlook.


Water Tower Place owner wins debt extensions but loses investor confidence

by Inyoung Hwang
Dec 02, 2008


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Inyoung Hwang/Medill 

In addition to $900 million due this past week, General Growth has $3 billion due in 2009, nearly $4 billion in 2010 and $7 billion in 2011.

General Growth Properties Inc., the second-largest U.S. mall owner, received two loan extensions this week. But confidence in the company continued to sink among analysts and investors, as the stock price dropped 17.5 percent to under a dollar Tuesday.

GGP, which owns more than 200 mall properties including Chicago’s Water Tower Place, said late Sunday that its creditors had granted a two-week “interim extension” on $900 million of debt on mortgage loans for two of its shopping malls. It announced Monday an agreement with a lender to extend the maturity date of $58 million in notes to Dec. 11.

Since the announcements however, analysts have affirmed that the Chicago-based company’s troubles are far from over because of significant overleveraging in the last few years.

“Even if GGP effectively addresses the current $900 million in debt obligations that are now due, it will be challenged to effectively meet all of its future obligations,” Todd Lukasik, an analyst with Chicago-based Morningstar Inc., said. “It has more than $3 billion in debt due in 2009, nearly $4 billion due in 2010, and more than $7 billion due in 2011. So, this $900 million is really just the tip of the iceberg.”

Jeffrey Laverty, an analyst with New York-based brokerage firm Oscar Gruss & Son Inc., said the only option for GGP is to sell the two mall properties in Las Vegas, the Fashion Show Mall and Shoppes at Palazzo.

“Even if they do manage to skate by and find buyers for these two properties in Vegas, they’re still looking at $3 billion coming to them next year,” he said. “Frankly, I don’t think there’s any way out of this other than some type of formal restructuring activity that can be in court or out of court. But the end is basically the same.”

The company announced on Nov. 20 that it hired law firm Sidley Austin LLP, as it negotiates for more time to refinance its debts. The debt extensions this week allowed GGP to steer away from immediate bankruptcy, but in the past month, it has seen its stock price plunge, its stock downgraded by three analysts, and its credit ratings slashed.

GGP’s stock has greatly diminished in value. It closed at 94 cents Tuesday, a 74.8 percent drop from the beginning of November and a 97.9 percent from a year earlier.

Louis Taylor, an analyst at Deutsche Bank AG, lowered his rating to a “Hold” on Nov. 5, after the company’s third quarter earnings call when it posted a net loss of $15.4 million, or 6 cents per diluted share, and said it might file for bankruptcy. Taylor released another report to investors Dec. 1, stating he was keeping the Hold rating because of the uncertainty surrounding GGP’s loan terms.

“We’re not sure what will change in the next week that hasn’t been known in the last two weeks,” Taylor wrote in his analyst notes on Dec. 1. “We believe the lenders will ultimately extend the loans far enough to allow GGP to sell sufficient assets or obtain a corporate level financing. Given the financial markets, it’s impossible to determine when this will occur and at what price.”

Along with Deutsche Bank, Merrill Lynch & Co., Inc. downgraded GGP’s stock to “Underperform” and UBS AG to “Neutral” after the Nov. 5 conference call. UBS analyst Jeffrey Spector confirmed his rating on Nov. 25.

Moody’s Investors Service reduced the company’s credit rating to Caa2 on Nov. 14, and Standard & Poor’s lowered it to CCC- on Nov. 25. Fitch Ratings Ltd. gave GGP a credit rating of B on Oct. 27 and has not changed it since.

Lukasik described in his analyst notes on Dec. 1 that GGP had been “punch-drunk on easy credit.” But he estimated that nearly 70 percent of GGP’s properties were acquired in 2004 or later and were purchased at market or higher-than-market values.

Refinancing debt and selling assets have become much more difficult with the credit crunch and slump in values of real estate properties. Laverty said most of the current financial activity in commercial real estate is simply rolling over debt because of the minimal new financing available.

“Unfortunately, buyers that are out there probably don’t want to expand their presence in retail right now, even if they are good malls, and secondly, the buying pool is probably a lot less than it would be in normal times, simply because of the lack of financing people can obtain,” Laverty said.