11 May, 2009:
We have been contending on this site that the myth of special purpose vehicles, as entities with peppercorn capital and isolated from the originators with capital held by charities claiming to do the good of mankind, is all a legal superstition and is a product of good times. The presumption of bankruptcy remoteness is valid only as long as any of the parties is not in bankruptcy. It is not that there have not been challenges to true sale before, but this one taking 166 SPVs for CMBS transactions into bankruptcy may be quite a big jolt. The worst part is that this may be a temptation for more such attempts by transactions facing rough weather.
In the present case, General Growth Properties Inc., a leading CMBS issuer in the US, filed for Chapter 11 protection last month, and also took 166 of SPVs for various CMBS transactions into bankruptcy. Since a bankruptcy filing would have been based on vote of directors, and SPVs typically do not have substantial originator presence on their boards, legal circles have a feeling that the originator strategically changed the composition of board of directors of each of the SPVs to introduce “convenient” who ultimately voted for the bankruptcy filing.
The bankruptcy filing has obviously rattled the securitization investors, not just in this transactions, but the entire market.
General Growth is the single largest CMBS borrower in the U.S. The CMBS market has grown up over the past two decades and was continuing growing, until 2008, when securitization markets in general sank.
[Reported by: Vinod Kothari]