Commentary: Puerto Rico Oversight Board's Success May Hinge on the Ballot Box
A forthcoming financial turnaround plan for Puerto Rico, which the territory's oversight board wants on its desk in nine days, will probably change after the island's November election, according to a Reuters commentary yesterday. The bipartisan board, created by the Puerto Rico rescue law known as PROMESA, set Oct. 14 as a deadline for the territory's governor Alejandro García Padilla to deliver a draft plan for how to boost island revenues and tackle its $70 billion debt. García Padilla has unsettled Puerto Rico's creditors by insisting on deep debt cuts and defaulting on some payments, but he is not seeking a second term, so it will ultimately fall to his successor to work with the board to finalize the plan. Ricky Rossello, the leading candidate for his job, is seen as more likely to deliver a plan compatible with the philosophy of the board, according to the commentary. The board is largely reviled in Puerto Rico, where locals feel it infringes upon the U.S. territory's self-governance. Rossello and his main opponent, ruling party member David Bernier, have both taken issue with the scope of the board's powers, but said they would cooperate with it.
Ultra Petroleum went into chapter 11 in April listing $3.76 billion in funded debt, none of it secured by the driller’s more than $1 billion in assets, Bloomberg News reported yesterday. Banks led by JPMorgan Chase & Co. didn’t demand collateral when they lent to the company in October 2011. The price of oil was jumping, and lenders were eager to win energy business amid the U.S. shale boom. The senior lenders held an unsecured $1 billion revolving loan. They have sold much of the loan to distressed-debt funds, including Oaktree Capital Group LLC and Anchorage Capital Group. Some of the banks have fully exited their positions, getting out when the company went into chapter 11 amid concerns that, given their uncertain precedence and the driller’s low asset values, they’d be forced to exchange their debt for equity in a reorganized Ultra Petroleum, rather than cash. Their departure has set up what promises to be a contentious fight over which remaining creditors get paid first, and how much.
Analysis: Scrutiny of Commercial Real Estate Loans Chills Small Lenders
Financing commercial property has been local banks’ bread-and-butter business for years, but a post-crisis push for loan growth prompted regulatory warnings about lax lending standards, and small banks are now shying away from the market, according to a New York Times DealBook analysis on Tuesday. A shakeout in commercial real estate is underway as some banks unwind or sell off the loans that are under regulators’ microscopes, and bankers say they are wary of making new loans. Brokers say that they are finding fewer lenders for some commercial property deals. Aaron Appel at Jones Lang LaSalle in New York said that there has been less competition for $5 million to $10 million in commercial property deals, particularly loans that involve construction or redevelopment projects, which are considered riskier because they are not properties that are generating income. Commercial property brokers have been working more with institutional investors, like private-equity and pension funds, partly as a result of some banks taking a step back, Appel and others said. And foreign banks have stepped in on some of the deals.
While commercial real estate values have largely recovered since the 2007 crash and underwriting has loosened, some borrowers are treading water as their property values have not fully recovered, NationalMortgageNews.com reported yesterday. The sheer volume of loans maturing this year and next — $232.4 billion, according to data provider Trepp — leaves some borrowers scrambling for funds to refinance their loans, which repay most of their principal in a final balloon payment. By comparison, $70 billion of CMBS loans matured in 2015 and just $37 billion did in 2014. Analysts at JPMorgan Chase estimate that the net issuance of commercial mortgage bonds was negative $57 billion in the first nine months of the year. Some of the underlying loans that came due were refinanced by other kinds of lenders, such as commercial banks or insurance companies.
Commentary: The Subprime Superhighway
The U.S. and Europe are lowering capital standards for ‘investments’ in public infrastructure — ignoring the lessons from 2007-08, according to a Wall Street Journal commentary. In January, the EU lowered capital standards for infrastructure investments by as much as 40 percent, but cited no major errors in the old risk model or any new empirical evidence to justify the change. Instead, the EU repeatedly emphasized its need for “€2 trillion in [infrastructure] investment” by 2020. The U.S. seems set to follow Europe’s lead, according to the commentary. The Treasury Department’s new Federal Insurance Office released a report last year encouraging “state insurance regulators to assess the current [risk-based capital] approach and explore appropriate ways to increase incentives for infrastructure investments by insurers.”
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City of Detroit Withstands Another Challenge to Its Confirmed Bankruptcy Plan
Several Detroit pensioners had challenged the City of Detroit’s plan confirmation order because the plan reduced their benefits, according to a recent blog post. The U.S. District Court in Detroit had dismissed their challenge, and the pensioners appealed. On October 3, 2016, a three-judge panel of the U.S. Sixth Circuit Court of Appeals issued its decision affirming the District Court’s dismissal.
