Thursday, August 23, 2012


I have a history with GGP :)
When I was a student at the University of Illinois in Urbana Champaign, I tried co-authoring a case study on the bankruptcy of General Growth Properties. I worked with my professor who taught us turnaround and bankruptcy management. I loved and still adore that field - something phoenix-y about it; the rewards to those who are right are stupendous and it is a true test of behavioral and analytic finance.
Because I was caught up with studies and then had to come back to India, (and I was lazy), I could not contribute further to the case.
The gist was that GGP was an REIT and a mall operator (2nd largest in the US and truly gigantic) and under US laws, it was allowed to not pay taxes if it distributed more than 90%, I think, of profits as dividends - what this meant was that the debt on the books had to be long-term and permanent in essence because it could not have afforded principal payback unless substantial moneys were kept aside. And then came the credit crisis of 2007-08. GGP was loaded with debt and had to file for bankruptcy protection.

Chapter 11 in the US is a brilliant mechanism. It allows a company's stakeholders to come together and discuss ways of restructuring debt in an amicable fashion - if not, you go to court or an arbitrator and jazz... The creditors are pooled into secured, unsecured and variants thereof, and legally they are entitled to be compensated fairly. Of course, humans dont want fair treatment, they want superior treatment - so ensues a battle of sorts.

Anyway, if you were to read about GGP on reuters or wiki, you would see that Pershing Square and Brookfield orchestrated a recapitalisation of the company and when it emerged from bankruptcy; it rewarded the bondholders and shareholders in a massive way.

Cut to 2012. August. Pershing Square head Bill Ackman writes to GGP's board a letter that is informative, to the point and asks the board to understand its fiduciary duties and also take note of how Brookfield's interests are not aligned anymore with those of other shareholders.
An excellent letter. Do read it. Some of the mechanisms may be difficult to understand but are super-fun if you are a super-geek like me.

And this is one of the reasons why the US is still an amazing place to do business. The rule of law.

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