Special Situation Legal Play on GGP Fixed Income

Buy the General Growth Properties (“GGP”) bank debt default interest claim at 3.25% of par with a price target of 3.66%. Assuming settlement of this case at the end of 2012, this investment would generate a return of 12.5% and an IRR of 35%.

This claim of $89.3M (based on Judge Gropper’s ruling) grows at ~$12,850 daily (5.2% current yield), providing a cushion if settlement and recovery takes longer than estimated. While the absolute return on this investment is not heroic, this investment is uncorrelated with the market and presents a decent risk/reward profile. Judge Gropper has already ruled in favor of creditors in this case over a year ago and a final ruling on the appeal is imminent.

Claim Description:
The GGP default interest stub claim is a litigation claim arising from bank creditors’ (aka the “2006 Lenders”) claims for default interest owed to creditors from defaults around GGP’s 2009 Chapter 11 filing. GGP is the largest mall REIT in the United States and filed for bankruptcy in 2009 due to an inability to refinance debt maturities in the credit crisis. The company successfully emerged from Ch. 11 on July 12, 2010, paying all creditors par plus accrued interest (at the normal, non-default rate).

The 2006 Lenders sued GGP for default interest after GGP emerged from bankruptcy. On July 20, 2011, Judge Gropper has ruled in favor of bank debt holders that GGP owes the creditors default interest but GGP has appealed the ruling.

This claim would probably trade as a participation in the recoveries from the resolution of this litigation. Deutsche Bank has been active in the stubs, making a 5x5 market 2.5% – 3.25% percentage of par.

Valuation & Investment Risks
Assuming the ruling will stand, this investment is an IRR play, with some upside based on the amount of additional interest awarded and the absolute value of the claim. Obviously, given the claim pricing, small movements in purchase price and settlement date have a significant impact on gross returns and IRRs.

Theoretically, the downside risk for this claim investment could be a 100% loss—the initial court ruling could be overturned and no default interest paid at all. However, given Gropper’s existing, lengthy decision in favor of creditors and the substantial precedent behind the 2006 Lenders’ claim, the more likely risk is delayed settlement (it’s already been a year since the initial ruling), or a final decision on the default interest payable. If we receive only GGP’s estimate of the default interest to be paid, and zero accumulated interest, the investment was dead money (we make ~2% above the 3.25% offer price), but nothing much worse.

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