Best of the Week
Most Popular
1.Independent Scotland Will Disintegrate as Unionist Regions Demand Referendum's to Rejoin UK - Nadeem_Walayat
2.Bank of England Panic! Scottish Independence Bank Run Already Underway! - Nadeem_Walayat
3.Scottish Independence Referendum Result NO 55%, YES 45% - Vote Forecast - Nadeem_Walayat
4.Scotland Independence Result NO Win 55% to Yes on 45% - Nadeem_Walayat
5.US Dollar Forecast to Go Much Higher - David_Petch
6.Russian Union Of Engineers Accuses Ukraine Airforce In MH17 Crash - Raul_I_Meijer
7.The Emergence of the US Petro-Dollar - Gary_Dorsch
8.Don't Miss This Gold Buying Opportunity - Brien Lundinr
9.Silver Price: A Collapse and a Rally - DeviantInvesto
10.Silver Buyers Keep Stacking And Demand Higher Despite Falling Prices - 18th Sept 14 - GoldCore
Last 5 days
Stocks Rally Following Janet Yellen's Conference and Scotland's Historic Referendum Result - 23rd Sept 14
Why Isn’t U.S. Housing Market A Bubble? - 23rd Sept 14
The Macro View and the Stock Market - 23rd Sept 14
Gold, the Fed and the Looming Stock Market Correction Q&A - 23rd Sept 14
Can Gold Act as a Safe Haven Again? - 23rd Sept 14
Tesco Super Market Giant Fast Disappearing Down a Financial Black Hole - 22nd Sept 14
Where China and Japan Are Investing Billions - 22nd Sept 14
Scotland YES 71% - Global Youth Intifada Moves On - 22nd Sept 14
U.S. Dollar: The Last Hurrah? - 22nd Sept 14
China Moves To Dominate Gold Market With Physical Exchange - 22nd Sept 14
One Giant Cluster Ponzi - 22nd Sept 14
The Millenial Cult Of Global Warming - 22nd Sept 14
Dubai Residential is NOT a Property Bubble But the Party’s Over - 22nd Sept 14
Stock Market Topping Process Update - 22nd Sept 14
Indian Stock Market BSE SENSEX The Encore Rally - 21st Sept 14
ISIS Fear-Mongering Ahead of Another US False Flag? - 21st Sept 14
Ecology Politics And Haeckel's Tree Of Meaning - 21st Sept 14
ASX200 Stock Market Index Set For New Highs - 21st Sept 14
Scottish Referendum Not Avoiding The Future - 21st Sept 14
Five Lessons Learned from the Scottish Referendum - 21st Sept 14
The Problem With UKIP And Other I I P's - 21st Sept 14
Stocks Bull Market Resumes - 20th Sept 14
Gold And Silver - Current Price Is The Story - 20th Sept 14
Can the U.S. Economy Withstand Another Housing Market Breakdown? - 20th Sept 14
Nervous Investors Will Hate the Money You Make With This Strategy - 20th Sept 14
Cheap Gold Stocks Upleg Intact - 20th Sept 14
Monetary Policy Killing The System - 20th Sept 14
Scotland and the Spirit of Our Time - 20th Sept 14
Bitcoin Price Charts In-Depth Analysis - 19th Sept 14
Alibaba is Focused, Will Use Money in Emerging Areas - 19th Sept 14
Bird's Eye View of the Gold Stocks - 19th Sept 14
Scotland Independence Result NO Win 55% to Yes on 45% - 18th Sept 14
Silver Price: A Collapse and a Rally - 18th Sept 14
Here's Why Trendlines are Your New Trading Best Friend - 18th Sept 14
Silver Buyers Keep Stacking And Demand Higher Despite Falling Prices - 18th Sept 14
The "Hidden" Billions in the Alibaba IPO - 18th Sept 14
Russian Union Of Engineers Accuses Ukraine Airforce In MH17 Crash - 18th Sept 14
Monetary Policy Weighs on Gold and Silver - 18th Sept 14
Global Currencies Analysis...The World According to Chartology - 18th Sept 14
Gold Price Hammered by Strong U.S. Dollar - 18th Sept 14
Is Citigroup the Dumbest Bank Ever? - 18th Sept 14
Scotland Must Vote Yes! For All Of Us - 18th Sept 14
Scottish Independence Referendum Result NO 55%, YES 45% - Vote Forecast - 18th Sept 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

You've never seen this before and may never again

Commercial Real Estate Market in Limbo as Lenders Ignore Defaults

Interest-Rates / Corporate Bonds Apr 01, 2009 - 03:21 AM GMT

By: Mike_Shedlock

Interest-Rates Best Financial Markets Analysis ArticleThere is a new twist in commercial real estate action today. Lenders are ignoring defaults of $billions on commercial real estate as if nothing happened, praying that credit conditions will improve.


Please consider General Growth Avoids Chapter 11 .
General Growth Properties Inc., struggling under a mountain of debt, said Monday that its latest effort to win a reprieve from bondholders had fallen short.

Under normal circumstances a company with as much past-due debt as General Growth would have been forced into Chapter 11 bankruptcy protection by now. Creditors so far have been willing to let deadlines pass because they believe there is little to be gained and much to be lost through a bankruptcy.

"This is really rare," said Kevin Starke, an analyst at CRT Capital Group LLC, a research company that tracks distressed securities. "It is corporate-bond limbo like I've never seen before."

Many creditors say that General Growth's management is doing a good job running the company. Its 200 U.S. malls, a portfolio second in size only to Simon Property Group Inc., generate enough cash to cover interest on the debt. But its properties are overleveraged and it lacks the borrowing capacity to retire those debts as their principal comes due.

"There's no question that General Growth is a liquidity issue," said Jeff Spector, an analyst with UBS AG. "The properties, for the most part, aren't broken."

My Comment : Jeff Spector, UBS AG analyst is dead wrong. This is not a liquidity issue. This is solvency issue. The properties are indeed broken. They are broken by debt.

There is more debt on those properties than can possibly be paid back. No one will possibly buy them for the amount owed. And every day that passes the value of those commercial properties sinks. Bondholders are only delaying the inevitable.

General Growth, based in Chicago, isn't the only real-estate borrower that is getting a reprieve from its lenders these days. Hundreds of property owners have had loans come due without a repayment made in recent months. But most lenders have agreed to extend loan terms, hoping that the credit market will improve.

Australian shopping-center owner Centro Properties Group, which owns 650 U.S. open-air shopping centers, last year sought one short-term extension after another.

Finally, in December, after nine extensions, it averted a liquidation by agreeing to eventually grant its lenders 90% of its stock in exchange for two and three-year payment extensions on $7 billion of debt.

My Comment : Boom, just like that, Centro lost 90% just to get a debt extension of 3 years.

To be sure, General Growth may still be forced to seek bankruptcy protection soon. Trying to dig out from under $27 billion in debt, the company until this month has had the relative luxury of negotiating primarily with dozens of banks on more than $4 billion of past-due debt and debt that could become due because of other defaults.

General Growth became even more vulnerable after a March 16 deadline passed for repaying $395 million in bonds. Now, rather than dealing only with several dozen banks holding past-due debt, General Growth must negotiate with hundreds of bondholders. Some holders bought the bonds at face value and are hoping for a recovery. Others bought the bonds at depressed prices and might want to force a liquidation to receive a quicker payout.

My Comment : Any bondholder hoping for recovery is delusional.

On Monday, General Growth said that it concluded efforts to get holders of $2.25 billion of bonds to grant it a nine-month reprieve from paying principal and interest on those bonds. It had three times extended the deadline on its so-called "consent solicitation" because not enough bond holders signed up.

In exchange, General Growth offered the bondholders quarterly payments of 62.5 cents for every $1,000 of bonds, with interest accruing. But that offer wasn't accepted because many bondholders were unwilling to forfeit their ability to demand immediate payment for nine months, these people said.

The result is an unusual situation in which borrowers have allowed the due date for corporate bonds to pass without the issuer either paying them or filing for bankruptcy protection. Often when a company defaults on corporate bonds, bondholders will force an involuntary bankruptcy petition.

A person familiar with the bondholder talks said that, while some creditors are angry, none appears ready to insist on an involuntary bankruptcy petition yet. It is possible that bondholders didn't go along with the consent solicitation primarily because they feared that making such a pledge would reduce the value of their bonds.

Credit Market Hope Is Moot

The lenders are hoping that the credit market will improve. I have news for them: It won't.

Moreover, even if credit does free up, what is the likelihood that General Growth Properties can meet their debt schedule?

The value of that property is sinking every day while debt due and interest on the debt due is rising every day. No lenders will refinance if the debt exceeds the value of the property. Therefore, bondholder hope for improved credit conditions is moot.

A forced bankruptcy is coming either sooner or later.

Time Limit On Limbo

Many regional banks are at risk over ludicrous deals like this. Indeed, huge writeoffs are coming, not just on this property but on countless commercial real estate properties.

What ridiculous mark-to-fantasy values are the creditors placing on this debt anyway? Creditors' reluctance to force bankruptcy suggests far too much.

However, the debt clock is ticking and creditor patience is not unlimited. There is a time limit on limbo. I suspect we are going to find out what that limbo time limit is sooner, rather than later.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014