Mall giant General Growth Properties (GGP, news, msgs) is not just the biggest company to file for bankruptcy protection this year, it's one of the biggest companies to go bust in history. (See a list of the top 15 here). But General Growth, which has $30 billion in assets and filed for Chapter 11 today, may not remain at the top of this year's list for long.
The aggressiveness with which many companies took on debt and made risky investments heading into this downturn, coupled with the unwillingness of many banks to refinance loans, is forcing more companies into bankruptcy than ever before. In March, there were 7,843 corporate bankruptcies, according to bankruptcy data management company AACER, Automated Access to Court Electronic Records. That's a whopping 65% increase from the prior year.
"Given all the debt that companies took on in recent years, coupled with the weak economy, I would expect bankruptcy filings to continue at the current pace throughout the remainder of 2009 and probably well into 2010," says George Putnam III, founder of New Generation Research, the firm behind BankruptcyData.com.
Chicago-based General Growth has a stake in more than 200 shopping malls in 44 states, including such upscale landing spots as South Street Seaport in New York and Faneuil Hall Marketplace in Boston. (Click here to find out if General Growth owns or runs your mall.)
Caught between debt and a recession
General Growth was not even the only multibillion dollar company to file bankruptcy this morning. AbitibiBowater (ABH, news, msgs), a company with $9 billion in assets that produces newsprint and paper, also filed for Chapter 11 today.Conditions have grown so bad that investors are even concerned about General Electric (GE, news, msgs), which has a market cap of more than $126 billion. Though shareholders are clearly not abandoning the company, they are concerned that GE's investment arm made too many risky bets. GE reports earnings Friday.
General Growth's stock, which had traded as high as $44.23 last spring, was down to just $1.05 this morning.
The company insists shoppers at its malls will not be affected by this move, and that it will continue to operate all of its shopping centers.
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Each bankruptcy brings with it the threat of taking down even more companies. Companies under Chapter 11 protection can hold off paying suppliers and landlords, such as General Growth, as well as their past-due bills. That puts their creditors in a more precarious position with respect to their own debts and could create a vicious spiral.
General Growth's troubles are emblematic of this problem. It makes money by charging rent to the commercial tenants in its malls and management fees for maintaining the property. As retailers saw fewer sales, they shuttered stores, leading to less revenue for General Growth. The company saw its fourth-quarter revenue decline by $27.8 million. That drop was thanks in part to the performance at some of its biggest malls.
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What will happen to our malls?MSN Money's Elizabeth Strott talks to the chief economist of the International Council of Shopping Centers about how the recession is affecting the future of American malls.
The decreased revenue made it more difficult for the company to refinance its $27 billion in outstanding debt. The declining value of real estate across the board put pressure on the rents General Growth could charge tenants as well as decreased the value of the assets it can borrow against. The combination made refinancing all but impossible.
"While we have worked tirelessly in the past several months to address our maturing debts, the collapse of the credit markets has made it impossible for us to refinance maturing debt outside of Chapter 11," said General Growth CEO Adam Mentz in a statement.
The company was able to secure a $375 million loan from Pershing Square Capital Management to help it restructure while in bankruptcy court.
Other commercial real estate owners are facing similar circumstances. Real estate research firm Foresight Analytics called the commercial real estate market the worst "since the dot.com bust" in a report earlier this year. The reason? As companies go bankrupt or lay off employees, they move out of their offices and put them on the market. That has led to a glut of inventory at a time when demand is low.
Foresight Analytics expects that commercial mortgage delinquencies will jump to 4.3% by the end of 2009. The firm estimates that there are about $594 billion in commercial mortgages maturing between this year and 2011, according to a March 2009 report.
Continued: The top 15 biggest bankruptcies in history
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