Bankruptcy Remote ≠ Bankruptcy Proof?

"Bankruptcy remoteness" is the bedrock of asset securitization.  Bankruptcy remoteness means both that the assets will not be part of the originator's bankruptcy estate and that the securitization vehicle (SPV) will not itself file for bankruptcy.  The former is achieved by a true sale of the assets from the originator to the SPV; the later by ensuring that the board of the SPV will not authorize a bankruptcy petition and that there will not be outside, creditors who might file an involuntary petition.

The bankruptcy filing of General Growth, the second largest mall operator and the largest CMBS sponsor in the US is putting bankruptcy remoteness into question.

 General Growth owns 166 over 200 mall properties.  It seems that the revenue stream from most has been separately securitized.  This means that the revenue stream has been sold to an independent entity that paid for the revenue stream by issuing securities (CMBS) to be paid from the revenue stream.  The result is that General Growth got cash now for future revenue.  The CMBS investors, of course, assumed that they were taking on the credit risk from a particular mall, not the overall credit risk of General Growth. 

Imagine their shock when 166 SPVs filed for bankruptcy along with General Growth.  How did this happen?  Many of the malls are doing just fine.  The trick was that General Growth replaced enough directors on the SPVs' boards to get a filing authorized.  Most of the directors seem to have been from a rent-a-board operation.  The boards were overlapping, so replacing a few board members was sufficient to ensure a compliant board.  (Can you guess what sort of covenants will be in the next round of CMBS deals?) 

The investors and servicers of these SPVs are objecting, and to be sure there are some legal arguments, like the good faith filing doctrine, that might still save them.  But General Growth stands as a reminder that credit risk can be reduced and difused and hedged, but not ever completely eliminated. 

[As an aside:  check out the terms of the General Growth DIP:  LIBOR+1200!  Ouch.]

Comments

[crabsofsteel]

lots of what is said here is factually in error. For example, GGP owns north of 200 malls.

[Texas Reader (former CMBS lender)]

The way this worked at loan closing was this: All borrowers on CMBS loans must be single purpose and single asset entities, as set forth by the orgizational documents and evidence by a financial statement provided to the lender prior to closing. For loans over around $15MM the borrower was also required to amend its organizational documents in certain ways, and have at least one outside director and the orgl docs would have to state that the outside director would have to vote for bankruptcy for the borrower to file it.

The General Growth loans were probably all over $15MM so they would have had the tougher provisions. By replacing the original outside directors, the parent company was better able to control the board. I would guess that removal and replacement of that outside director was a violation of the loan documents.

[ctk56]

If the SPV is a single asset real estate entity, would not the lender be entitled to stay relief under 362(d)(3) in 90 days unless the debtor files a viable plan of reorganization? Such a plan may be difficult to propose if the lender is under secured. B/R might not be remote, but the exit could be quick.