Chapter 11 Ruling Calls into Question Basic Tenets of Securitization Structures
May 29, 2009
John M. Donovan, David W. Thatch
DOWNLOAD PDF: Chapter 11 Ruling Calls into Question Basic Tenets of Securitization Structures
On May 14, 2009, Judge Allan Gropper of the US Bankruptcy Court, Southern District of New York, approved a US$400 million DIP financing package in the US$27 billion General Growth Properties, Inc. ("GGP") Chapter 11 case. Judge Gropper's ruling also included approval of GGP's proposal to use cash flow generated by shopping centers, structured by GGP as bankruptcy remote, special purpose entities, to fund GGP's ongoing central operations while in bankruptcy.
The bankruptcy filing by the GGP subsidiaries and Judge Gropper's ruling appears to call into question two basic tenets of securitization structures: (1) that the entity holding the securitized assets will remain out of the reach of the equitable powers of a bankruptcy court and (2) that a special purpose entity's assets will not be used to support the bankruptcy estate of the parent sponsor.
While Judge Gropper's ruling may or may not have a significant economic effect on the lenders of the GGP subsidiaries (only time will tell), the true significance of the GGP proceeding in the near term is the uncertainty it likely will introduce with respect to the status of wholly owned special purpose entities that were structured to be bankruptcy remote and the impact this may have on the ratings assigned to asset-backed securities issued in transactions involving such entities.
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