General Growth gets $400 mil bankruptcy loan

General Growth Properties Inc., which filed the biggest real-estate bankruptcy in U.S. history, won court approval of a $400 million loan from a group led by Farallon Capital Management LLC and the right to use cash on hand to fund its operations.

The company received approval to use the so-called cash collateral and borrow on the loan over objections from lenders on some properties. The lenders had argued many of General Growth's malls shouldn't be in bankruptcy at all and the parent company shouldn't have access to those properties' cash flow.

U.S. Bankruptcy Judge Allan Gropper overruled the objections yesterday, saying the lenders' rights were protected and General Growth should have access to cash collected at its subsidiaries.

Some lenders "assert their rights to this cash collateral are inviolate. That of course isn't the law," Gropper said in his ruling from the bench.

Many of the objections were resolved when the company amended terms of its bankruptcy loan so that individual properties weren't pledged as collateral for the loan.

General Growth, based in Chicago, filed for bankruptcy- court protection on April 16, after amassing $27 billion in debt during an acquisition spree that turned it into the second- largest shopping mall owner behind Simon Property Group Inc.

Farallon Loan

The Farallon loan replaces a $375 million debtor-in- possession financing offer from William Ackman's Pershing Square Capital Management LP.

Commercial mortgage-backed bond investors have been watching the court's decision as a gauge of how commercial property debt bundled and sold as securities will be treated in future bankruptcy cases.

In a so-called friend of the court brief filed with the U.S. Bankruptcy Court in New York on May 1, trade groups representing the commercial real-estate industry said allowing the mall-operator to include so-called special-purpose entities in its filing could set a dangerous precedent for securitization markets by calling into question the protection of the assets from other creditors.

"I take serious exception to some of the arguments in an amicus brief" claiming the case could represent "systemic risk" to the mortgage-backed securities market, Gropper said. He added he wasn't consolidating all the entities in the bankruptcy in his decision to approve cash collateral.

$15 Billion Debt

General Growth is the largest borrower in the CMBS market, with about $15 billion in debt outstanding that has been bundled and sold as bonds, according to Morgan Stanley data. General Growth surprised bondholders when it sought to include nine special-purpose entity borrowers owning 166 securitized properties in its filing.

The loan offered by Farallon doesn't include any warrants, while Pershing Square's offer would have given the New York- based investment firm warrants to buy 4.9 percent of Chicago- based General Growth's new equity when it emerges from bankruptcy. The Farallon loan has an interest rate of the London Interbank Offered Rate, or Libor, plus 12 percentage points and an exit fee of 3.75 percent after two years.

Pershing Square owns about 25 percent of General Growth.

The case is In re General Growth Properties Inc., 09-11977, U.S. Bankruptcy Court, Southern District of New York.