November 1, 2020 – Pennsylvania Real Estate Investment Trust and 68 affiliated Debtors (NYSE: PEI; “PREIT” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-12737. The Debtors, a leading publicly traded real estate investment trust, or “REIT,” specializing in the ownership and management of differentiated shopping malls (22.0mn sq ft of retail space), are represented by R. Craig Martin of DLA Piper LLP. Further board-authorized engagements include (i) Wachtell, Lipton, Rosen & Katz as general bankruptcy counsel, (ii) PJT Partners LP as financial advisors and (iii) Prime Clerk as claims agent.
The Debtors’ lead petition notes between 1 and 50 creditors; estimated assets of $2,375,550,000 and estimated liabilities of $2,033,381,000 (with funded debt at $935.5mn and both of the asset/liability figures as at June 30, 2020). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Wells Fargo Bank, National Association ($668,454,545 unsecured bank loan), (ii) Wells Fargo Bank, National Association ($244,545,455 unsecured bank loan) and (iii) Service Management Systems, Inc. ($1,122,572 trade claim).
In a press release announcing the filing, the Debtors advised that: “As previously announced on October 14, 2020, PREIT entered into the RSA with its bank lenders. The banks have committed to provide an additional $150 million to recapitalize the business and extend the Company's debt maturity schedule, supporting PREIT's operations and the continued execution of its strategic priorities. Subsequent to executing the RSA, PREIT solicited acceptances of its Prepackaged Plan, which received overwhelming support from 95% of its creditors.”
The current press release follows on the Debtors' October 14th announcement that it was looking to restructure out of court, with a prepackaged chapter 11 the fall back position in the event that they were not able to obtain 100% lender approvals, which is where in fact they ended up. The press release provides: "If the Company is unable to secure the support of the remaining lenders holding less than 20% of the debt, it may need to complete this restructuring through a prepackaged reorganization under Chapter 11 of the United States Bankruptcy Code. The purpose of such a process, if necessary, would be to implement the agreement that already has the support of over 80% of the Company's bank lenders. As such, the Company expects that any prepackaged reorganization process would be expedited, and that it would have no impact on shareholders, suppliers and other trade creditors, business partners, or other stakeholders, all of whom would be unimpaired."
The October 14th press release added the following detail as to the outline of the RSA and expected Plan: "Under the terms of the agreement, PREIT would have access to $150 million in new capital to strengthen the business and provide financial flexibility. Specifically, the banks will convert the Company's existing credit facilities into a $150 million first lien senior secured facility, a $919 million facility consisting of a first lien senior secured term loan facility and a second lien secured term loan facility all of which will have a two-year term with a 1-year extension option. The Company's current pool of unencumbered assets will serve as collateral for the facility and the Company will retain 30% of proceeds from non-income producing asset sales. The agreement remains subject to finalization of definitive documentation and the approval of 100 percent of the bank group."
The RSA and Prepackaged Plan Overview
In an October 14th 8-K, the Debtors filed a copy of their initial restructuring support agreement (the "RSA") which attaches a "Plan Term Sheet" and summarizes the Plan as below (please note that in the intervening two weeks, the Debtors and RSA signatories have been off to a rocky start; with lenders accusing the Debtors of breaching RSA terms and pushing the debtors towards this filing). The 8-K (which also attaches the Prepackaged Plan and Disclosure Statement) provides: "
- The Reorganized Debtors would assume the swap agreements (as amended) related to the allowed claims in respect of the Specified Derivatives, with any obligations of the Reorganized Debtors under the assumed swap agreements secured pari passu with the Secured Facilities; provided, however, that if a holder of an allowed claim in respect of a Specified Derivative is not a Consenting Lender, such holder may elect to exercise its contractual rights to liquidate, terminate or accelerate under the applicable swap agreement in accordance with Section 560 of the Bankruptcy Code, with such holder receiving, on account of any resulting payment amounts or termination values due and owing by the Debtors (as defined in the Plan Term Sheet) (after offset) to such holder, the principal amount of loans under the Second Lien Exit Term Loan Facility in an amount equal to the amount of such allowed claim.
- Each holder of an allowed claim under the Credit Agreements would receive on a dollar-for-dollar basis on account of such holder’s claim the principal amount of loans under the Second Lien Exit Term Loan Facility in a principal amount equal to such claim; provided, however, that any holder of an allowed claim under the Credit Agreements that exercises the Revolving Exit Facility Option (as defined below) would receive: (a) a payment in cash of such holder’s pro rata share (calculated based on such holder’s loan commitment under the Revolving Exit Facility) of the Exit Commitment Fee (as defined in the Plan Term Sheet); plus (b) first, on a dollar-for-dollar basis on account of such holder’s allowed claim under the Credit Agreements, its pro rata share (calculated based on such holder’s commitment of loans under the Revolving Exit Facility) of the principal amount of loans under the Senior Exit Term Loan Facility; and (c) second, on a dollar-for-dollar basis on account of such holder’s remaining allowed claim under the Credit Agreements (if any), the principal amount of loans under the Second Lien Exit Term Loan Facility in a principal amount equal to such remaining allowed claim.
On the Effective Date, each Existing Equity Interest (as defined in the Plan Term Sheet) would be unmodified and would remain as an outstanding equity security in Reorganized PREIT, and the Existing Equity Interests would continue to be subject to the Company’s existing governance documents, as the same may be amended or modified from time to time following the Effective Date in accordance with their terms. Although the Company is currently out of compliance with the continued listing requirements of the New York Stock Exchange (“NYSE”), it intends to request the NYSE make an exception, given the Company’s restructuring, to maintain the listing of the Existing Equity Interests on the NYSE. If the Company commences the Chapter 11 Cases, the NYSE may exercise its discretion to continue the listing of the Existing Equity Interests. If the Company or Reorganized PREIT is unable to remain listed on the NYSE, Reorganized PREIT intends, as soon as reasonably practicable after the Effective Date, to apply to be relisted on the NYSE (or listed on the National Association of Securities Dealers Automated Quotations (“NASDAQ”)), so long as Reorganized PREIT is able to satisfy the initial listing requirements thereof. If unable to relist on either the NYSE or list on NASDAQ within a reasonable period of time, Reorganized PREIT may seek listing on an alternative exchange as Reorganized PREIT may reasonably determine."
The following is summary of classes, claims, voting rights and expected recoveries (defined terms are as in the Plan and/or Disclosure Statement):
- Class 1 ("Secured Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 2 ("Derivatives Claims") is impaired and entitled to vote on the Plan. The estimated amount of claims is $0-$27.0mn and projected recovery is 100%. The Reorganized Debtors shall assume the Swap Agreements, as amended by the Omnibus Swap Amendment, with any obligations of the Reorganized Debtors under the Swap Agreements so assumed secured pari passu with the Postpetition Senior Secured Facilities; provided, however, that if a Holder of an Allowed Specified Derivatives Claim is not a Consenting Lender, such Holder may elect to exercise its contractual rights to liquidate, terminate or accelerate under the applicable Swap Agreement in accordance with section 560 of the Bankruptcy Code by marking an election on its Class 2 Ballot by the Voting Deadline, with such Holder receiving, on account of any resulting payment amounts or termination values due and owing by the Debtors (after offset) to such Holder as of the Petition Date, the principal amount of loans under the New Second Lien Term Loan Facility in an amount equal to the amount of its Allowed Specified Derivatives Claim.
- Class 3 ("Secured Property-Level Debt Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 4 ("Other Priority Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 5 ("Unsecured Credit Facility Claims") is impaired and entitled to vote on the Plan. The estimated amount of claims is $913.0mn (plus accrued, but unpaid interest) and projected recovery is 100%. Each Holder of an Allowed Unsecured Credit Facility Claim shall receive on a dollar-for-dollar basis on account of such Holder’s Allowed Unsecured Credit Facility Claim the principal amount of loans under the New Second Lien Term Loan Facility in a principal amount equal to such Holder’s Allowed Unsecured Credit Facility Claim; provided, however, that any Holder of an Allowed Unsecured Credit Facility Claim that exercises the Exit Facility Option by making such an election on its Class 5 Ballot by the Voting Deadline shall receive: (a) a payment in Cash of such Holder’s pro rata share (calculated based on such Holder’s commitment of loans under the Revolving Exit Facility) of the Exit Commitment Fee; plus (b) first, on a dollar-for-dollar basis on account of such Holder’s Allowed Unsecured Credit Facility Claim its pro rata share (calculated based on such Holder’s commitment of loans under the Revolving Exit Facility) of the principal amount of loans under the New Senior Secured Term Loan Facility; and (c) second, on a dollar-for-dollar basis on account of such Holder’s remaining Allowed Unsecured Credit Facility Claim (if any), the principal amount of loans under the New Second Lien Term Loan Facility in a principal amount equal to such Holder’s remaining Allowed Unsecured Credit Facility Claim.
- Class 6 ("General Unsecured Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 7 ("Intercompany Claims") is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 8 ("Intercompany Interests") is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 9 ("Existing Equity Interests") is unimpaired, deemed to accept and not entitled to vote on the Plan.
Events Leading to the Chapter 11 Filing
The Disclosure Statement provides: "The Debtors are engaged in the ownership, management, leasing, acquisition, redevelopment, and disposition of shopping malls. The retail sector—and shopping malls by extension—has been hit especially hard by the COVID-19 pandemic due to mandatory store closures, travel restrictions, and unprecedented upheaval in the financial markets. The Debtors’ business and operations and those of many of their tenants have been materially and adversely impacted by the government-mandated travel restrictions, business closures and property shutdowns and the implementation of “social distancing” and certain other measures to prevent the further spread of the virus.
In mid-March 2020, as a result of the COVID-19 pandemic, the Debtors began closing their enclosed shopping malls, which remained closed for the majority of the second quarter of 2020. As of the date hereof, all of the Debtors’ malls have re-opened and are adhering to social distancing and sanitation and safety protocols designed to address the risks posed by COVID-19, but many tenants are operating at reduced capacity or have not yet re-opened. Worse yet, some tenants have entirely ceased business operations. Local governments in some jurisdictions where the Debtors’ malls are located are also contemplating or implementing new or renewed travel restrictions and business closures, which could result in closures of the Debtors’ properties.
During March and April of 2020, the Debtors received requests from tenants relating to rent relief or deferral. In the second quarter of 2020, a substantial amount of contractual rent receivables was not collected and the Debtors have continued collection efforts and negotiations with tenants as part of a rent relief initiative. The Debtors believe that future rent collections are probable, but that collections will continue to be below tenants’ rent obligations as long as lingering effects of COVID-19, including new or renewed business closures, affect the return of customers to malls and the financial strength of the tenants.
Prepetition Indebtedness
As of the October 9, 2020 (ie the date of the solicitation Disclosure Statement), the Debtors’ corporate-level funded debt totals approximately $935.5mn. The Debtors’ capital structure consists of approximately:
- Approximately $22.5mn outstanding in principal amount under the Prepetition Bridge Facility;
- Approximately $913.0mn outstanding in aggregate principal amount under the Prepetition Unsecured Credit Facilities, consisting of
- $538.0mn outstanding in principal amount under the Prepetition Revolver/TL Credit Facility; and
- $375.0mn outstanding in principal amount under the Prepetition Seven-Year Term Loan Facility.
Significant Shareholders
- Zhengxu He Inst. of Math: 8.79%
- The Vanguard Group: 7.33%
About the Debtors
According to the Debtors: “PREIT (NYSE:PEI) is a publicly traded real estate investment trust that owns and manages innovative properties at the forefront of shaping consumer experiences through the built environment. PREIT's robust portfolio of carefully curated retail and lifestyle offerings mixed with destination dining and entertainment experiences are located primarily in densely-populated, high barrier-to-entry markets with tremendous opportunity to create vibrant multi-use destinations."
The Disclosure Statement adds: "PREIT is a leading publicly traded real estate investment trust, or 'REIT,' specializing in the ownership and management of differentiated shopping malls. Headquartered in Philadelphia, Pennsylvania, the Company owns and operates over 22 million square feet of retail space in the eastern half of the United States with a concentration in the Mid-Atlantic region.
The Company is primarily engaged in the ownership, management, leasing, acquisition, redevelopment, and disposition of these shopping malls. In general, its malls include tenants that are national or regional department stores, large format retailers or other anchors and a diverse mix of national, regional and local in-line stores offering apparel, shoes, eyewear, cards and gifts, jewelry, sporting goods, home furnishings and personal care items, among other things. PREIT has increased the portion of its mall properties leased to non-traditional mall tenants."
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