General Growth Properties, a mall company, filed for Chapter 11 bankruptcy protection. But they've done something quite startling at the same time: according to lawsuits, they're attempting to reverse an important disaggregation.
General Growth kept 166 malls in distinct corporations — in other words, disaggregated from the parent company and therefore insulated from a general bankruptcy. This gave lenders the confidence to lend money to finance the malls. However, as General Growth went into bankruptcy, it decided to declare that 166 of these malls — none of which appears to have been insolvent or in any danger — into bankruptcy as well. And all 166 theoretically-independent boards that govern the malls agreed to participate in bankruptcy.
This will be a fascinating battle to watch. Lenders relied on — and for many other companies, continue to rely on — the disaggregation of the companies and their cash flows and especially the risks of bankruptcy. Now General Growth has undone this disaggregation, captured the cash flow back into the main company, and placed the properties into bankruptcy. Since many companies use the particular mechanisms of disaggregation that General Growth used, I expect that this will be quite the battle as other companies weigh in. My particular take on reading this newspaper article is that lenders relied in at least some part on General Growth's good faith in honoring the disaggregation, that General Growth may be acting in bad faith, and that the lenders may have no recourse.
Topics: · finance
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