here is a re-study of GGP
- 09/22/2019 – From Tilson
This setup reminds me a lot of the single best investment I’ve made in my career…
I bought more than 1 million shares of mall operator General Growth Properties (“GGP”) shortly before it filed for bankruptcy in April 2009.
My average purchase price was just $0.67 a share. By the end of the year, the stock had soared to $11.56 – and I had made more than 17 times my money.
The shares of most companies that file for bankruptcy generally go to zero because they’re insolvent, meaning the liabilities exceed the assets – leaving nothing for the equity holders.
But GGP was unusual. Its bankruptcy filing wasn’t due to insolvency, but illiquidity. In such cases, the value of the business exceeds the liabilities… But if the company’s assets are so illiquid that it can’t come up with the cash to repay its maturing debt – and panicked debtholders won’t roll the debt forward – a company can go bankrupt.
Just because debtholders force a company to file for bankruptcy, however, doesn’t mean they get the company. They’re only entitled to earn back the debt plus interest, nothing more. Shareholders get any value beyond this.
Throughout the recession and financial crisis of 2008-2009, GGP’s malls continued to generate strong, stable cash flows that far exceeded what it needed to service its debts. Thus, even though the company wouldn’t emerge from bankruptcy until November 2010, investors bid the stock up once the panic passed because they could see the value of the underlying business above and beyond its debt.
The higher GGP’s stock went, the more valuable it became, because the high share price allowed the company to issue fewer shares to pay down expensive debt, resulting in less dilution to shareholders. It was a wonderful, virtuous cycle.
