Fri 01/14/2022 07:30 AM
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Relevant Items:
Link to Analysis Page
Link to Restructuring Database on Reorg
Second Amended Plan
Disclosure Statement
Disclosure Statement Supplement
2020 10-K

Washington Prime Group, a Columbus, Ohio-based shopping center real estate investment trust, emerged from bankruptcy on Oct. 21, 2021, after equitizing its senior notes, paying down certain debt and reinstating and providing take-back debt to other creditors. WPG raised new money through a rights offering of up to $325 million in its bankruptcy from unsecured noteholders, prepetition common equityholders, and the plan sponsor, Strategic Value Partners. As a result of the bankruptcy plan, Strategic Value Partners, or SVP, is the majority owner of WPG. SVP also appointed the majority of WPG’s reorganized board.

The company projected a slow recovery in financials following emergence from chapter 11. However, net operating income never reaches its pre-pandemic level during the forecast period through 2025. The company anticipates burning marginal free cash flow through the projection period as dividends and distributions exceed leveraged cash flow.

This analysis examines WPG’s bankruptcy plan and equity splits to creditors. We also analyze the company’s historical financial and operational performance to its disclosure statement projections.

WPG filed for bankruptcy on June 13, 2021, due to a resurgence of Covid-19 during fall 2020 and winter 2021 and the shift of consumer behavior from shopping in brick-and-mortar retail stores to online channels. The company completed its restructuring through the equitization of its senior notes and partial paydown of its prepetition credit facilities. The plan also provided for the prepetition credit facilities to receive take-back debt and for certain mortgage debt to be reinstated.

The bankruptcy plan provided for the unsecured notes claims to receive 90.9% of reorganized equity after allocating 6.1% to prepetition preferred equity holders and 3.1% to prepetition common equity holders. These equity splits are before dilution from the rights offering, backstop premium and management incentive plan, or (MIP. The rights offering allowed for new money to be raised up to $325 million and provided prepetition preferred equity and prepetition common equity to be diluted by the rights offering amount only if it was in excess of $260 million.

Unsecured noteholders were allocated 50% of the rights to participate in the rights offering, while SVP, the backstop party, was allocated the remaining 50% subject to dilution from participation of prepetition common equity interests in the rights offering. Prepetition common equity interests were allocated 6.125% of SVP’s 50% rights.

The rights offering was fully backstopped by SVP and in exchange was allocated 50% of the rights offering, subject to participation in the rights offering by prepetition common equity holders, which were allocated 6.125% of the plan sponsor’s portion, and a 9% backstop fee. SVP held credit facility claims, Weberstown facility claims and unsecured notes claims. Their actual holdings, however, were not disclosed. Through the rights offering and related backstop premium alone, SVP received 32% of reorganized equity on a fully diluted basis. SVP also provided part of the debtors’ $100 million DIP, which was repaid with proceeds from the rights offering.

The table below shows two different rights offering scenarios: a $260 million rights offering and a $325 million rights offering. The equity splits shown in the backstop equity premium and MIP columns assume a $325 million rights offering. A summary of the plan treatment and recoveries is shown below:

(Click HERE to enlarge.)

Treatment as laid out in Reorg’s Restructuring Database is below. Please use this link to access the database to find specific aspects of the plan including economic information, legal topics and key documents.

WPG entered bankruptcy having mortgage debt of $1.64 billion, revolving and term loan facilities debt of $1.337 billion and unsecured senior notes of $720.9 million. Although the company’s revolving and term loan facilities debt consisted of secured and unsecured debt, claims were consolidated into a single class, receiving their pro rata share of the exit term loan and the $150 million revolving and term loan facilities cash pool.

The company also had $65 million of Weberstown term loan facility claims, which had the option to receive its recovery in the same amount of exit term loan debt. The mortgage debt was reinstated. In addition to its debt, the company had $198.3 million of preferred equity as of the petition date.

WPG emerged with total debt of $3 billion consisting of $1.606 billion of mortgage debt, $1.262 billion of secured term loans and other secured indebtedness of $109.3 million. Additionally, the fourth amended plan supplement disclosed that the exit term loan credit agreement allows the company to incur debt of $50 million under a revolving credit facility basket.

Reorganized Equity

As part of the bankruptcy plan, the unsecured notes received 90.9% of reorganized equity pre-dilution from the equity rights offering, backstop equity premium and MIP. Also, prepetition preferred equity and prepetition common equity received 6.1% and 3.1%, respectively, of pre-dilution reorganized equity.

The rights offering under the plan allowed unsecured noteholders to participate in the rights offering up to 50% of the rights offering amount with SVP being allocated the other 50%, less any participation by prepetition common equity in the rights offering. Prepetition common equity was allocated rights to participate in the rights offering up to 6.125% of the backstop party’s 50% allocation.

Additionally, SVP received a backstop equity premium in an amount equal to 9% of the total backstop commitment as consideration for the backstop commitments. The backstop equity premium does not dilute the new common equity issued in the equity rights offering. The rights offering allowed the rights offering participants to purchase new common equity at a discount of 32.5% to the equity value based on the “set-up equity value” of $800 million. The backstop equity premium was also allocated to SVP based on the same discounted equity price.

Under the plan, only the amount of the rights offering that is in excess of $260 million dilutes prepetition preferred equity and prepetition common equity. The equity rights offering and backstop equity premium make up 60.2% and 5.4%, respectively, of the reorganized equity assuming a $325 million equity rights offering before dilution from the MIP. The plan allocated 8% of reorganized equity for the MIP.

The table below shows two different rights offering scenarios: a $260 million rights offering and a $325 million rights offering. The equity splits shown in the backstop equity premium and MIP columns assume a $325 million rights offering. The table below illustrates the equity dilution by class and assumes that 50% of the MIP vests at emergence:

Although the exact participation in the equity rights offering from each fund has not been disclosed, Reorg calculates the implied percentage of equity ownership assuming that each fund, based on its holdings disclosed in the September 2021 non-RSA bondholders Rule 2019 statement, August 2021 ad hoc lender group Rule 2019 statement and June 2021 ad hoc preferred shareholder committee Rule 2019 statement, participated in the rights offering to their full extent.

Based on this approach, Reorg estimates that SVP obtained 32% equity ownership solely through the rights offering and backstop equity premium and that Silver Point owns approximately 3% of reorganized equity on a fully diluted basis assuming a $325 million rights offering as shown in the table below:

(Click HERE to enlarge.)

WPG filed a third amended plan supplement before emerging from bankruptcy that revealed four of the company’s new board members. The five-member board consists of:

  • Louis Conforti, former WPG CEO; the company lists two interim co-CEOs on its website, Mark Yale and Joshua Lindimor;

  • Martin Reid, a real estate consultant and former interim CEO and president of Chambers Street Properties;

  • Sujan Patel, SVP’s global head of real estate;

  • Jeff Johnson, a member of SVP funds’ advisory council and the founder and managing partner of Lakeshore Holdings LLC; and

  • The supplement notes one additional director who would be designated by the plan sponsor, SVP.

Financial Projections

Prior to its bankruptcy filing, Washington Prime Group owned and managed a national portfolio of 100 enclosed retail and open-air properties consisting of approximately 53 million square feet throughout the United States, according to its June 2021 cleansing materials. A footnote to the slide discloses that this amount excludes two properties, Charlottesville Fashion Square and Muncie Mall, which were listed as noncore properties in the company’s 2020 10-K. The company’s website currently reports having 96 properties in its portfolio.

WPG’s financial projections in its disclosure statement do not detail the amount of properties owned and managed over the forecast period. WPG states, however, that the “projections reflect planned property transitions of noncore properties and planned asset dispositions.” The company forecasts asset dispositions each year of the projection period, reaching $92 million in 2022 before declining to and remaining at $15 million per year from 2023 through 2025. Even with these asset dispositions, the company forecasts net free cash flow, or levered free cash flow less distributions, being negative from 2023 through 2025.

While the company forecasts reducing its property portfolio from asset dispositions throughout the projection period, its net operating income remains relatively flat at a range of $380 million to $399 million, resulting in average year-over-year growth of 1.2% from 2022 to 2025. The company’s growth assumptions for net operating income, or NOI, are shown below:

Prior to the pandemic, the company’s tier 1 and open-air properties’ comparable NOI was virtually flat to slightly declining from 2015 to 2019, with an average comparable NOI of $451.1 million over the period. Over this same period, WPG reduced its portfolio of tier 2 and noncore properties, thereby also reducing its NOI contribution to the total company.

WPG forecasts a high for NOI of $399 million in 2025 over the projection period. This figure is still 10% lower than its pre-pandemic comparable tier 1 and open-air NOI low of $443.8 million in 2019. Similar to the company’s conservative forecast, it projects general and administrative expenses averaging $55 million over the forecast period.

The average general and administrative expenses from 2017 to 2019 was $41.7 million. The projected general and administrative expenses are higher than the company’s 2019 figure when WPG had 101 core properties and three noncore properties, which is at least five core properties higher than what the company currently reports on its website.

Assuming the company continues to divest properties, general and administrative expenses may be lower than projected. Contrary to the forecast general and administrative expenses, the company’s total projected capex spending is lower than its historical figures from 2017 to 2019. Average capex from 2017 to 2019 was $159.3 million, while average forecast capex is $125.5 million.

While unlevered free cash flow, EBITDA less capex, is positive over the projection period, the company’s $3 billion of debt in its emergence capital structure significantly reduces levered free cash flow. The financial projections forecast levered free cash flow being lower than the amount distributed to shareholders for 2023 through 2025, resulting in net cash flow being negative even while assuming property dispositions occur each year and that there is $2.4 billion of debt at year-end 2022 with a loan-to-value of 61.5%.

--Marc Gardner
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