An extra DIP

Despite the handwringing about the dearth of debtor-in-possession financings, bankrupt General Growth Properties Inc. actually found itself in an enviable position last week as the object of a bidding war by prospective lenders.

By all accounts, lenders couldn't wait to shower the second-largest mall operator in the U.S. with money, as an initial DIP proposal from William Ackman's Pershing Square Capital Management LP was met with competing offers from a lending consortium of Goldman Sachs Group Inc., Brookfield Asset Management, Eliot Management Group and P. Schoenfeld Asset Management LLC, and from Farallon Capital Management LLC, Canpartners Investments IV/LLC, Delaware Street Capital Master Fund LP, Luxor Capital Group LP, Perry Principals Investments LLC, Open Air Investors LLC, Pandora Select Partners LP and Whitebox Advisors LLC.

Farallon's proposal won the court-mandated auction, which stretched into­ the wee hours and ended at 1:30 a.m. May 12. That GGP was able to play lenders off each other is evident in the terms, which gave the REIT some optionality in paying off some of the $400 million DIP. There was a lot of back and forth on terms, with three DIPs proposed even before the auction began. By the end, GGP was able to extract a cut in pricing, with the DIP set at LIBOR plus 1,200 basis points with a 1.5% floor on LIBOR. The DIP carries a 3.75% exit fee and a $30,000-per-month agent's fee. The DIP can also be converted into either 8% of the fully diluted common stock or 9.9% of the common stock handed out on the effective date of the reorganization plan. And the terms allow the company to convert the DIP into exit financing.

Compare that with the terms initially proposed. Chicago-based GGP filed for Chapter 11 in April, having arranged a $375 million DIP from Pershing that was priced at LIBOR plus 1,200 basis points, with a base of ­LIBOR at 3%. The Pershing Square DIP gave the lender the option of converting all or a portion of its outstanding DIP into up to 5% of the reorganized equity. The original DIP had a 3% exit fee, a $15 million commitment fee and a $750,000 financial adviser fee.

It's a little surprising that the big mall operator gained even slight concessions on the price and a larger payment-in-equity option, given that credit, especially for troubled companies, is still difficult to come by. But GGP benefited from having relatively solid operations, despite the recession, which has hit the malls hard, and an overburdened balance sheet. The company owns 200 malls in 44 states and filed for bankruptcy on April 16, after it failed to refinance debt in the frozen wastes of the commercial real estate markets. GGP took on much of its debt in 2004, when it acquired Rouse Co. for $12.6 billion.

Fueling the decision to meet GGP's terms was that lenders are still effectively guaranteed a 13.5% interest, not counting fees, with every expectation that LIBOR will only rise from current levels below 1%. "DIPs can be done at great spreads," says a source close to the negotiations, who adds that the secured return offered lenders a rationale for taking on the risk that they would hold equity instead of getting cash after 18 months.

One banker says future DIPs may also include an equity conversion option, but not for borrowers' benefit. Instead, he says hedge funds will start demanding equity payments as part of lending arrangements, as they angle to gain stakes in companies that exit bankruptcy with clean balance sheets. "It's a version of the loan-to-own strategy," the banker says, referring to a hedge fund strategy in which investors buy debt in the hopes that it will convert into equity when the borrower defaults.

Pershing seemed to have designs on GGP with its proposal, which would have provided it with warrants for 4.9% of the equity. "Those were too expensive," says one source, who claims that their inclusion forced other prospective lenders, who also happen to hold an undisclosed amount of pre-bankruptcy debt, to step up with their own proposals.