Commercial mortgage bondholders took some comfort after a judge overseeing General Growth Properties' bankruptcy stopped short of a move that they say would have undermined the structures of their securities.

The inclusion of more than 160 subsidiaries in the No. 2 U.S. mall-owner's bankruptcy filing in April set off alarms in the commercial mortgage-backed securities market as investors feared a judge would consolidate the units. A consolidation would set a negative precedent in the market, where investors provide money with knowledge the assets are protected from events like bankruptcy at the parent or other units.

Judge Allan Gropper on Wednesday avoided taking steps toward a substantive consolidation, even as he allowed the company to garner cash flow from its disparate properties.

We dodged this bullet, and I think everyone is breathing a sigh of relief, said Richard Jones, co-head of Dechert LLP's real estate group. But this game is not over yet.

A consolidation of assets under special-purpose entities (SPEs) could still occur as the company looks for leverage to fix the root cause of its bankruptcy: the inability to refinance debt, Jones warned.

Chicago-based General Growth (GGWPQ.PK) filed for bankruptcy after the credit crunch choked off financing for commercial property mortgages, challenging the company as it confronted maturities on billions of dollars in loans. Some three-quarters of its shopping malls joined in the filing, sparking industry concern.

CMBS provided more than $600 billion in financing for commercial real estate lending from 2005-2006, and the thawing of the market is seen as key for preventing a downward spiral of delinquencies and foreclosures.

In general, (the judge) respected the SPEs, said Christopher Hoeffel, president of the Commercial Mortgage Securities Association.

While inclusion of SPEs in bankruptcy is not ideal, the CMSA considered it a victory that Gropper maintained the isolation of the property assets, and put no additional liens on CMBS collateral, Hoeffel said.

Bondholders will continue to get principal and interest under the bankruptcy.

Many of the malls in the filing are top-quality, and their inclusion in the bankruptcy puzzled analysts. General Growth could be angling to use the threat of consolidation as leverage to get lenders and servicers to agree to restructure long term debt, Dechert's Jones said.

A substantive motion can be made at any time during the bankruptcy case, he said.

Next up will be a May 27 hearing during which loan servicer ING Clarion Capital Loan Services LLC will argue that the eight malls it represents should be excluded from the bankruptcy. ING says that not only is each mall owned separately, but that all of them are current on their mortgages, with some having an ample cushion to pay.

Mortgage