Tuesday, June 9, 2009

Getting Tilled: How a $6,425 Truck Loan May Decide the Fate of General Growth Properties

General Growth Properties, the bankrupt mall owner, has $27,700,000,000 in debt outstanding. The fate of the company will depend on the restructured terms of that debt. Those terms will probably be set according to a Supreme Court precedent which restructured a subprime truck loan.

Lee Till filed Chapter 13 bankruptcy and attempted to get the interest rate reduced on the loan secured by his 1991 truck. SCS, the lender, thought the rate should be 21%, because that was the going rate for loans to subprime borrowers secured by old trucks. The Supreme Court thought differently, and ruled the rate should be the Prime interest rate + 1.5%. The essence of the Court’s ruling is that in bankruptcy you start with Prime as a base rate and add a risk premium of 1-3%. You can find a summary of the case (Till, Lee, et ux. v. SCS Credit Corp., 2004) here and the syllabus which goes into more detail here.

If you’re a CRE lender, you might think that this doesn’t have anything to do with you. I know I felt that way, the first time I ran into Till a few months after the court ruled. How could the $12M fixed rate Fannie Fannie loan we serviced be repriced at Prime+1%? What about our yield maintenance provision? Why use Prime as a base rate? How could a large loan secured by a nice apartment project end up priced like a $6K loan on a 13 year old truck? When the borrower’s plan was confirmed, it seemed like a bad dream.

What’s even more surreal is this precedent will probably be used as the basis to reprice at least some of GGP’s $27B in debt. That’s what Bill Ackman of Pershing Square Capital Management is betting with his 7.5% stake in GGP’s outstanding common stock. Valueplays has a link to Pershing’s analysis of GGP’s value here. The discussion of the Till precedent starts on page 41. The bottom line is Ackman believes both that GGP’s debt will be extended, and the overall interest rate on their debt will be reduced.

Prime today is 3.25%, so a borrower in bankruptcy has a realistic shot at getting his loan restructured at a rate below 5%. That rate will allow a lot of partially leased income properties limp along. The risk of getting stuck with a low interest rate restructured loan is also keeping a lot of note buyers on the sidelines.