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General Growth Properties, Inc. has announced:

that it has reached an agreement in principle with Brookfield Asset Management Inc., one of the world’s largest real estate investors and asset managers, to invest in a proposed recapitalization of GGP at a plan value of $15.00 per share and provide par plus accrued interest to unsecured creditors. The $2.625 billion proposed equity commitment from Brookfield is not subject to due diligence or any financing condition and is expected to create a floor value for the purpose of raising additional equity for the company. The plan is subject to definitive documentation, approval of the Bankruptcy Court and higher and better offers pursuant to a bidding process to be approved by the Bankruptcy Court.

The complete term sheet for the proposed plan with Brookfield is available on GGP’s website at www.ggp.com/company/Default.aspx?id=97.

The proposed plan is designed to maximize value for all GGP stakeholders and enable a restructured GGP to emerge from bankruptcy on a standalone basis with a diverse portfolio of high-quality income-producing assets, strong cash flow and a solid balance sheet capitalized principally with long-term non-recourse debt.

Under the terms of the proposed plan:

• GGP’s existing shareholders will receive one share of new GGP common stock with an initial value of $10.00 per share, plus one share of General Growth Opportunities (“GGO”) with an initial value of $5.00 per share, for total consideration of $15.00 per share (see description of GGO below under “Terms of the Brookfield Investment and Proposed Recapitalization”)
• Unsecured creditors will receive par plus accrued interest
• Brookfield will invest $2.5 billion at $10.00 per share for new GGP common stock and up to $125 million at $5.00 per share for GGO common stock

…
Under the terms of the proposal, Brookfield will invest $2.5 billion in cash in GGP in exchange for GGP common stock, thereby providing sufficient liquidity to fund GGP’s bankruptcy emergence needs. Brookfield will own approximately 30 percent of GGP and have the right to nominate three directors. This cornerstone investment will provide the flexibility for GGP to pursue additional capital-raising alternatives up to a total of $5.8 billion, including the issuance of new equity, asset sales and limited new debt issuance. Brookfield has agreed to assist GGP in raising the balance of this capital using its relationships with global institutional capital sources. As part of the restructuring, GGP intends to distribute to GGP shareholders shares in GGO, a new company that will own certain non-core assets, such as all of the company’s master planned communities and landmark developments like South Street Seaport and others. A shareholder must be invested in GGP prior to the recapitalization in order to receive a dividend of GGO. These assets produce little or no current income but have the potential for significant long-term value. GGO plans to raise $250 million through a rights offering at $5.00 per share, with Brookfield backstopping $125 million of such offering.
…
As consideration for acting as “stalking horse” in the company’s process to raise capital, Brookfield will be granted seven-year warrants to purchase 60 million shares of existing GGP common stock at an exercise price of $15.00 per share. The warrants are intended to provide compensation to Brookfield for its financial commitment. Brookfield will not receive any other consideration or bid protection, including any break-up fee, expense reimbursement, commitment fee, underwriting discount or any other fees.

In my view, GGP deserved to go bankrupt, by the way. The website is in the “Techno-weenies go wild!” style, with little evidence of adult supervision. I guess the executives are all “big picture” guys.

The Globe & Mail reports:

Until the warrants are approved by a U.S. bankruptcy court, Brookfield has struck an unusual side deal with General Growth shareholder and noted US shareholder activist Bill Ackman. Until a bankruptcy court judge approves General Growth’s warrant offer with Brookfield, Mr. Ackman’s company Pershing Square Capital Management has agreed to provide interim protection. If Brookfield’s offer fails or is bested by another bidder, Pershing has agreed to pay Brookfield 25 per cent of its profits on any offer that exceeds $12.75 for each General Growth share.

Brookfield released acceptable 4Q09 Results on February 19, while stating that they were seriously looking for acquisitions.

Anyway, this has important implications for BAM’s credit rating. Where’s all this money going to come from? When DBRS confirmed their ratings in December, they stated:

Overall, DBRS remains concerned about Brookfield’s aggressive expansion program in these difficult market conditions, while some of its portfolios have come under pressure. Examples include (i) the $1 billion in capital allocated to a $5 billion Brookfield-managed consortium that will make large, opportunistic purchases of distressed real estate with good long-term prospects and (ii) the $1.1 billion restructuring of Babcock & Brown Infrastructure, in which the Company invested approximately $400 million. With these plans, the consolidated balance sheet (book value) is expected to well exceed the current $60 billion level (with 64% leverage).

Brookfield counters that the diversity of the investments, the use of investing partners, and non-recourse debt mitigates the risks to the Company at the corporate level. In fact, Brookfield’s share of assets on its deconsolidated balance sheet amounts to about $12 billion (with 27% leverage). In DBRS’s view, the Company’s mitigating arguments on how it scales investments are valid up to a point. However, there are limits after which the credit risks of growth exceed the growth of the consolidated balance sheet. Two byproducts of this strategy are the growing interest costs that have first claim on the related cash flow at the operating level and the growing refinancing risk for non-recourse borrowings (subsidiary and property-specific). Going forward, it is reasonable to consider that a large expansion program could very well have credit implications for Brookfield at the corporate level. In short, large transactions have the potential to negatively affect the Company’s credit ratings at the outset.

Stay tuned!

Update: DBRS comments:

Brookfield and the Consortium intend to hold the proposed investment rather than Brookfield Properties, which invests primarily in office properties. As noted in an earlier report, DBRS recognizes Brookfield’s strategy to make opportunistic investments in distressed assets, so long as it does not stress its balance sheet or liquidity. This investment appears to fit with the criteria Brookfield has set out previously.

Hence, DBRS views this plan as neutral to Brookfield’s ratings providing: (i) it enlists other co-investors to support and fund the plan, (ii) the cost of the investment remains at these levels, (iii) the remaining debt and any new debt at GGP is non-recourse to Brookfield and (iv) it maintains sufficient liquidity at the corporate level while completing the plan. At the end of Q3 2009, Brookfield had over $600 million in cash and financial assets on hand, as well as bank lines at the corporate level, plus access to ongoing cash flow and other forms of liquidity within the group.

Update, 2010-4-1: DBRS has concluded that the binding agreement subsequently negotiated is also neutral to credit.

This entry was posted on Wednesday, February 24th, 2010 at 4:26 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.