Debtors vs. non-debtors General Growth Properties has been releasing a monthly operating report; an 8K filing required by US Bankruptcy Laws, indicating the debtors’ operating performance, working capital and assets/liabilities levels. It’s a very useful report and it shows how much profit the Company has generated post-petition. The report excludes operating performance, assets and liabilities of non-debtors; as such entities are operating outside of the provision of Chapter 11. However, the debtors’ ownership in such entities is disclosed and it’s reported as “investment in controlled non-debtors” on the balance sheet and earnings/losses from such entities are reported under “income/loss of unconsolidated real estate affiliates” on the income statement.

Valuation With the information provided on the post-petition monthly operating report along with the cash flow forecast released on May 22, I was able to come up with a model that estimates General Growth Properties’ price upon emergence in June 2010. From the filing date up to October 31^st, the debtors generated 960 mm in NOI, which is calculated as total revenue minus real estate taxes minus repairs and maintenance minus property operating costs. At emergence, the Company will have produced 1,700 mm in NOI in the worst case scenario and 2,040 mm or 20% more, in the best case scenario. I used a 10% capitalization rate to arrive at the EV, which is conservative considering that Simon Property Group (SPG) is currently trading with a 9.00% cap rate and that’s expected to drop to 8.50% in 2010 and 8.00% in 2011 based on projected NOI and EV. Remember that just a couple of years ago, REITs used to be valued with a 7.50%-8.00% cap rate. The total EV, including non-debtors, will be 17,900 mm in the worst case scenario and 21,480 mm on the best case scenario. I estimated that non-debtors will contribute from 90 mm to108 mm in NOI.

Post-petition cash flow The 8K released on May 22, 2009 provides a nice cash flow forecast on a consolidated basis, which includes debtors and non-debtors. The Company will generate 2,172 mm in cash from operations which includes revenue from mall/offices, Master Planned Communities and property management fees. Financing related expenses will amount to 1,097 mm, which include a cash inflow from the DIP loan of 400 mm and DIP related expenses like a commitment fee of 15 mm, a 3.00% exit fee and interest charges. Inclusive is a charge of 213 mm related to the repayment of the Goldman Loan and various interest charges and principal amortizations. Other expenses are working capital and restructuring fees that will amount to 661 mm and 156 mm. The net cash flow balance from petition date up to emergence on June 2010 will be 426 mm.

Equity Value The total EV available to secured creditors is the sum of the debtors’ residual value and investments in non-debtors, which are assets that operate outside of the provision of Chapter 11. Secured creditors are mortgages secured by properties and unsecured creditors represent outstanding notes like the 2,245 mm of Rouse Bonds, 1,550 mm of GGP LP Notes, 206 mm TRUPS and 2,577.5 mm in revolver and term loan. The Junior Sub notes were repurchased with the proceeds from the sale of TRUPS. The residual equity value ranges from 9,040 mm to 12,620 mm, which is enormous given the fact that the Company is in financial distress. But this is a unique case of bankruptcy, where non-debtors’ assets account for a large part of the company, which is why the equity is trading at almost 10 dollars a share. But I believe there is more upside from the current level, and in the worst case scenario, the Company will be trading at 29 dollars per share, an annualized IRR of 43% from today’s closing price of 9.50 dollars a share.

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Path to Bankruptcy In the 4Q of 2008, Chemtura experienced an unprecedented reduction in orders as the global recession deepened. Liquidity also deteriorated as the availability of financing under the European Receivable Facility decreased significantly due to the Company’s weak financial performance and it was eventually terminated in the 2Q of 2009. On January 2009, the US Facility was formed for the purpose of selling receivables and restoring most of the liquidity that was available in the previous quarter. However, sales and the overall financial performance deteriorated further in the first part of 2009, resulting in the company’s inability to be in compliance with two maintenance covenants under its Amended and Restated 2007 Credit Facility. On December 2008, the Company obtained a 90-day waiver of compliance with the covenants from the lenders under the 2007 Credit Facility. When Chemtura realized that it wasn’t able to refinance its 370 mm notes due in July 15, it filed for bankruptcy on March 18 2009. Foreign subsidiaries and certain US subsidiaries were not included in the filings. The Company is expected to file a plan of reorganization by February 15 2010, after the court already granted two extensions.

Capital Structure As of petition date, there are 1,020 mm of unsecured debt and 199 mm of secured debt, for a total of 1,229 mm.

Advances under the 2007 Credit Facility were originally set to 300 mm, but after it was amended on December 30 2008, the maximum allowed was reduced to 190 mm. The 2009 Notes (GLK.GA) are obligations of Great Lakes Chemical Corp, a wholly owned subsidiary of Chemtura Corp. The 2016 Notes (HTRA.GA) are obligations of certain domestic subsidiaries of Chemtura Corp, but may be released from their subsidiary guarantees under certain circumstances (exhibit 10.1 10Q filing on May 10 2006). The 2026 Debentures (CK.GE) are obligations of Chemtura Corp, the parent company, and therefore junior compared to the other notes.  The 2009 US Facility was terminated on March 23 as a condition of the debtor entering into 400 mm DIP Lending Agreement.  All receivables were sold back to the Company by purchasers for the amount of 117 mm. The CFO for 2009 already contains that charge.

Valuation For the nine months ending in September 30, the Company accumulated 169 mm in EBITDA and it will earn approximately 210 mm for the entire year. During Chemtura’s peak cycle 2005-2007, EBITDA ranged from 350 mm to 400 mm, which is not possible in this environment as demand remains weak, therefore I expect EBITDA for 2010 to be 210 mm on the conservative side, and 20% higher to 250 mm on the aggressive side. EV is calculated with a 4.5 multiple, which is conservative considering that the company never traded around these levels, but rivals like DOW and DD, traded around 5.2 and 6.2 during their peak cycles in 2005-2007. For the nine months ending in September 2009, CFO was 26 mm and it will be approximately 50 mm for the year with 60 mm in capex. For 2010, I expect the company to generate 60 mm in CFO with 90 mm in capex. Historically, capex has been around 110 mm a year with a CFO of 150 mm in 2007 and 250 mm in 2006. Keep in mind that results before 2005 are not directly comparable to more recent results due to the inclusion of operating results of Great Lakes, subsequent to the merger on July 2005.

Recovery Analysis Unsecured debt holders, excluding the 2026 Debentures, are getting 100 cents on the dollar if EV is higher then 1,035 mm in 2010. In fact, the 2009 and 2016 Notes are now trading around 107 cents on the dollar and 2026 Debentures are trading around 78 cents on the dollar, which implies that investors are expecting an EV on the high end of my valuation, around 245-250 mm. There seems to be no equity value left after restructuring at this moment, but if the company earns more then 210 mm in EBITDA for 2009 and expects to earn mote then 270 mm in EBITDA for 2010, I would be a buyer of the 2026 Debentures and the equity as well, which is now trading at 70 cents under CEMJQ.