Description

Thesis

WPG preferreds are mispriced, with a positively skewed distribution of outcomes and near-term hard catalysts. The opportunity exists because WPG is a bankrupt, left-for-dead, Class B mall REIT and also because CBL REIT preferred shareholders are in the process of having their liquidation preference stomped on in Texas bankruptcy court. The market doesn’t understand the unique position that WPG preferreds currently hold as a result of Judge Isgur’s comments at a July 12th hearing and an official equity committee being appointed on July 15th. 

Under the existing POR, which is supported by over 70% of secured and unsecured creditors, preferreds are entitled to recover $20 million in cash, or approximately $2.50 per share. WPG common shareholders are to receive $20 million in cash as well. I believe there are reasonable scenarios for the preferreds to recover multiples of their current recovery under the Plan. I believe the most likely outcome is for preferred holders to recover $5.00 per share, with case resolution to occur in approximately one month. At recent prices of ~$3.25 per share, risk 75c to make $2.50 in a month, with favorable expected value and positive skew.

Case background

WPG attempted an out-of-court debt exchange in 4Q 2020 that failed (link). Subsequently, WPG topped up its executive compensation program (link), skipped an interest payment on its unsecured bonds due in February 2021 (link) and began the process of negotiating a pre-arranged bankruptcy (link). WPG entered into an RSA with bondholders on June 11th and filed bankruptcy in the Southern District of Texas on June 13th (link). The case is before Judge Marvin Isgur.

Here is a link to the bankruptcy docket for the case: https://cases.primeclerk.com/washingtonprime/Home-Index

The most recent Plan and Disclosure Statement can be found at docket no. 338 and 339.

WPG’s proposed POR calls for a dual-path/toggle restructuring where the company simultaneously runs an auction while marching forward on a standalone reorganization. While there is some evidence that bidders are interested in the company (link), a sale (aka “Toggle Restructuring” as defined in the Plan) is required to provide the same or better outcome for preferreds as the standalone restructuring. The standalone restructuring is underpinned by an equitization of unsecured bondholders and partial pay down of secured debt funded via a rights offering backstopped by certain unsecured bondholders.

Assuming a standalone reorganization, WPG preferreds and common are entitled to an even split of a $40 million pool of cash if they both vote in favor of the Plan. If preferreds vote in favor but common votes against, preferreds will receive all $40 million. If preferreds vote against, both classes will receive nothing.

There are approximately 7.8 million preferred shares outstanding, each with a $25 liquidation preference. In total, the preferred class has a liquidation preference of approximately $200 million. If preferreds and common both vote in favor of the Plan, preferreds as a class will receive $20 million in cash, or ~$2.50 per share.

Ad Hoc Committee of Preferred Shareholders

Shortly after WPG filed bankruptcy, an Ad Hoc Committee of Preferred Shareholders holding 18% of WPG pref formed and lodged several objections (docket no. 62, 195, 227, 237, 238, 246). On July 8th, before the objections were heard, the Ad Hoc Committee of Preferred Shareholders withdrew their objections in exchange for a cut of the backstop fees (which they had objected to) and an allocation of the backstop. I believe this is evidence that preferred holders can extract more value for the entire class without “expanding the pie”. 

July 12 hearing

At the July 12 Disclosure Statement hearing, Judge Isgur took issue with the “unduly coercive” voting structure presented to preferred shareholders that puts the recovery of the preferreds squarely in the control of common shareholders. Recall that if the preferreds vote in favor of the Plan, whether preferreds recover $40 million ($5 per share) or $20 million ($2.50 per share) is subject to how WPG common votes.

The audio for this hearing can be found at docket no. 329. Below are selected quotes from the hearing with approximate timestamps.

23:25 Judge Isgur: Mr. Nicas [Debtors’ counsel], are you using a death trap to unfairly coerce the preferred shareholders? Tell me how this works here.

26:59 Judge Isgur: The Code requires that the split go first to pay the liquidation preference. I don’t care if it’s a gift.

31:45 Judge Isgur: Just make the structure that common doesn’t recover anything. It’s not an outcome I want but the Code may require it.

33:00 Judge Isgur: They [preferred] don’t control their fate. If they vote no then it’s a zero and if they vote yes, they don’t get their fixed liquidation preference. I don’t understand why that isn’t unduly coercive.

35:48 Kirkland (for Debtor): The manner in which your Honor is directing the argument is towards a scenario where preferred equity gets 100% of the value under all scenarios and common is not entitled to any recovery under the Plan.

36:40 Judge Isgur: You need to put that in as another toggle—if the Judge rules that the gifting doesn’t work and therefore preferreds get everything, then that’s what will happen and the Plan will still be confirmed. Without that option there, I don’t know that I have a confirmable Plan.

Official Equity Committee

Following the July 12th hearing where Judge Isgur expressed his deep reservations regarding treatment of preferred shareholders, the US Trustee appointed a five-member official equity committee to represent the interests of common and preferred shareholders on July 15th. Although the holdings of the members of the official equity committee have not been disclosed, I believe that their holdings are significantly weighted towards preferred.

Valuation and scenario analysis

I believe the most likely outcome is that the official equity committee negotiates for an increase to the $40 million total consideration to equity under the current Plan (as the Ad Hoc Committee of Preferred Shareholders did for themselves), and reallocates value between preferred and common. I believe a reasonable scenario would be that WPG preferreds receive $40 million in cash and WPG common shareholders receive the ability to participate in the new money rights offering which is backstopped by bondholders. Under such a scenario, I believe there is a good argument that value received by common is on account of their new money, rather than a violation of the absolute priority rule. This would result in a $5 per share recovery to preferreds.

Below I include my scenario analysis and assign probabilities to arrive at an expected value of $4.30 for the preferreds.

1. 5% probability of recovering $0 due to Plan falling apart

2. 25% probability of recovering $2.50 due to failure of official equity committee to generate additional value

3. 25% probability of recovering $3.75 halfway between existing Plan and my most likely scenario

4. 30% probability of recovering $5.00 – my most likely scenario outlined above

5. 10% probability of recovering $7.50 due to preferreds taking all cash and additional value generated by official equity committee (e.g. warrants, rights offering participation, additional cash, etc.)

6. 5% probability of recovering $10 due to successful auction

I believe it is highly unlikely that preferreds recover less than the $2.50 they are entitled to under the current Plan as a supermajority of bondholders are locked into an RSA and those bondholders along with the Debtor have already demonstrated a willingness to cut junior stakeholders into additional value as they recently did with the Ad Hoc Committee of Preferred Shareholders.

Catalyst

August 4 – Bid deadline

August 6 – Auction

August 12 – Confirmation hearing for standalone restructuring