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Pershing Square Capital and Winthrop Realty Trust, holders of the 100% senior mezzanine debt on New York’s Stuyvesant Town and Peter Cooper Village, plan to file the property into Chapter 11 bankruptcy to stay a planned foreclosure at the property level, persons involved in the matter told Debtwire.

The filing will effectively block a foreclosure action already in motion by CWCapital, the special servicer in control of the USD 3bn senior mortgage’s workout, while placing control of the senior loan modification into a bankruptcy judge’s hands. A filing would be the latest in a string of recent instances – including Innkeeper’s USA – where a special servicer is trumped by a bankruptcy.

The strategy, while brazen, is untested. It’s not entirely clear what actions are permitted under the intercreditor agreement that governs the relationship between the mezzanine debt and the senior mortgage, according to a third person involved.

“As a general industry rule, [bankruptcy] is almost always forbidden,” the third person involved said.

That view appears to be debatable, based on the mezzanine lenders’ action plan. “[The loan] can be restructured in or out of bankruptcy…[but] most likely in bankruptcy,” said one of the sources. “Then we get all the parties in one room and work something out.” Brown Rudnick is advising PSW NYC LLC, the entity created by Pershing and Winthrop, another source added.

Pershing and Winthrop announced their purchase of the USD 300m senior mezzanine position for USD 45m earlier today (see story, 9 August). They plan to foreclose on the equity interest via a UCC foreclosure auction on 25 August, according to a press release. The joint venture is owned 22.5% by Winthrop and 77.5% by Pershing Square,

Pershing Square head Bill Ackman and Winthrop head Michael Ashner have a storied history together, according to one CMBS trader. “Bill and Michael go back way back,” the trader said. In 2009, Ackman attempted to secure Ashner a seat on Target’s board of directors during an attempted takeover of the company.

The mezzanine group believes there is value beyond the USD 3bn mortgage, according to the first source close. This conflicts with the long-standing theory that the property is worth USD 1.8bn-USD 2.2bn – leaving the mezzanine entirely underwater, according to the trader.

The bankruptcy filing will also allow Winthrop and Pershing to sidestep the responsibility of bringing the loan current, one of the sources said. Typically mezzanine lenders are responsible for curing default if they want to exercise their right to step into the equity position. In addition to funding the debt service shortfalls, the pair would otherwise be responsible for USD 666m in accrued interest and other charges racked up on the loan as of mid-April, per court filings. The loan is accruing daily fees totaling USD 536,167 in interest charges and USD 258,263 in default interest charges. A potential modification would also likely include re-funding the property’s reserve accounts, which are currently depleted.

The specter of bankruptcy first appeared in February right after the property was transferred to special servicer CWCapital and foreclosure proceedings were kicked off. Appaloosa Management – which claimed to hold USD 750m in CMBS bonds – pushed for a seat at the table to prevent a foreclosure at the property level, arguing that the USD 200m in double tax liabilities that come with a deed transfer would eat into the debt stack, as reported. The hedge fund’s motion to intervene was eventually denied by the court, with Judge Alvin K. Hellerstein noting that allowing individual bondholders to speak up would create “chaos” and set a precedent for other individual interventions.

Should the modification be handled in bankruptcy, the judge’s approval of terms will be heavily dependent on the perceived value of the property. The mezzanine group will likely use their plan to eventually convert the rentals into a co-op in arguing their case. The duo hopes to recapitalize the property in partnership with the current tenants by pursuing a non-eviction co-op conversion approach, Ackman said in a statement today.

Dan Garodnick, a New York City council member and resident of Stuy Town noted that the one constant in the process will be to partner with an entity that will satisfy the tenant’s goals, though the co-op versus condo issues have not been resolved, he said. “That’s our instinct, that co-op is better,” said one of the persons involved who is close to the mezzanine group. “It would reduce the cost per unit, [but] we’re open minded.”

“No future owner can or will be successful without the support and participation of the tenant community,” Garodnick said. “You can’t avoid us. You can’t go around us. You need to work with us.”

The original holders of the senior mezzanine debt included Hartford Investment (USD 100m), Deutsche Genossenschafts-Hypothekenbank (USD 100m), Allied Irish Bank (USD 50m), and Wachovia (USD 25m). The remaining USD 25m in debt was owned by Winthrop and was mostly housed in a CDO. “A deal of this size is very important for Winthrop,” said the trader. “Having this fail will do damage to their reputation. Hitting a home run makes them a real player.”


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