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Bankruptcy Loans Turn Dangerous

One of Wall Street’s favorite ways to make money off corporate defaults is being tested — just as the economic crisis pushes more companies to the brink of bankruptcy, WSJ Pro Bankruptcy reported. Companies seeking bankruptcy protection often need a fresh injection of financing to keep their operations running while they search for buyers or renegotiate debts. Funding a company’s bankruptcy process has long been a safe and lucrative business for banks and asset managers, earning them high fees and interest rates with minimal risk. Known as debtor-in-possession loans (DIPs), these deals normally come with special protections and collateral rights to ensure they are repaid fully in cash ahead of other creditors. But some investors have gotten burned on DIPs since the coronavirus outbreak began wreaking havoc on the U.S. economy, turning what looked like sure bets into problem investments. In recent weeks, an oil driller, restaurant operator and movie-theater supplier have put their DIP lenders at risk of losses. The rash of mishaps has market participants worried DIPs will become both harder to find and more expensive just when American corporations need them most. Finding asset buyers or exit lenders is now a tall order with financial markets in turmoil, oil prices collapsing and unemployment soaring. Some DIP lenders have taken losses after the pandemic upended business projections, slashing enterprise values so severely that not even a company’s top-ranking debts could be paid off. Read more

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Small-Business Aid Bill Faces Delay as Democrats Seek More Funds

A new debate broke out on yesterday over the next infusion of federal dollars needed to bolster an economy battered by the coronavirus pandemic, as Democrats pressed to add money for hospitals and state and local governments to an emergency infusion of $250 billion requested by the Trump administration to help distressed small businesses, the New York Times reported. The counterproposal, put forward by Speaker Nancy Pelosi of California and Senator Chuck Schumer of New York, the minority leader, threatened to slow down the additional round of funds for a new loan program created by the $2 trillion stimulus package for small businesses, which the administration and Republicans had hoped to speed through Congress by the end of the week. “The bill that they put forth will not get unanimous support in the House,” Pelosi said. The debate is over an interim measure that lawmakers in both parties agree is necessary to reinforce the small-business loan program — which had a troubled rollout and has been inundated with requests from desperate companies — before Congress turns to a more sweeping bill it has begun referring to as “Phase Four” of the coronavirus aid efforts. But even the smaller, more immediate measure has created some friction. In a joint statement yesterday, the Democratic leaders said that they supported the administration’s request for an additional $250 billion for the loan program. But they said $125 billion of that should be directed to underserved businesses that might otherwise have trouble securing loans, including those that are owned by women, people of color and veterans, or situated in rural areas.

Missed Rent Payments Cascade Across the Real Estate Industry

The swelling ranks of unemployed Americans and images of shuttered shops and empty streets have presaged a brewing real estate crisis, Bloomberg Businessweek reported. About $81 billion in commercial rent comes due in a typical month in the U.S. The delay of a sizable portion of that will put an enormous strain on the complex systems for financing real estate and highlight how quickly the pain caused by social distancing has spread. Just 69 percent of renters paid their rent by April 5, according to data from 13 million units published by the National Multifamily Housing Council, compared with 81 percent who paid by March 5, providing an early look at how bad things could get if job cuts continue and households blow through savings. In one scenario, renters would need $96 billion in payment assistance over the next six months, according to an analysis from the Urban Institute. It won’t be much better for homeowners. Roughly 15 million households — about 30% of mortgage borrowers — could miss payments if the economy stays shuttered through the summer, according to Mark Zandi, chief economist at Moody’s Analytics. So far the local, state, and federal governments have responded by imposing temporary bans on foreclosures and evictions, dulling the short-term impact of the economic shutdown in the hope that social-distancing efforts ease later this spring and consumers and businesses get back on track. Those measures won’t be enough, though, if the economy doesn’t rebound quickly. “The initial thinking behind it seems like it was that this is going to last a month or two, and things will go back to normal,” says Tomasz Piskorski, a professor at Columbia Business School, who favors forgiving some interest payments for affected mortgage borrowers. “It buys us some time. But it’s going to take months or years to get back to a new normal.”

SBA Official Says Big Banks, Who Took ‘Free Money’ in 2008, Turning Their Backs on Small Businesses

Big banks that received taxpayer bailouts during the global financial crisis a decade ago are now too slow in helping small businesses seeking assistance through a $349 billion emergency lending program, according to a high-level Small Business Administration official, the Washington Post reported. Some banks “that had no problem taking billions of dollars of free money as bailout in 2008 are now the biggest banks that are resistant to helping small businesses,” SBA Nevada district director Joseph Amato said in the Monday teleconference about the Paycheck Protection Program. During the teleconference, Amato acknowledged the SBA struggled to launch the emergency lending program, intended as a lifeline to millions of small-business owners during the economic collapse caused by the coronavirus. But big banks had not done enough to help the program and small businesses, he said. “There is really no risk to the bank,” Amato said of the lending program. “It just comes down to … the same banks that literally took billions of dollars with one page from [then-Treasury Secretary Henry Paulson] are the ones saying the documentation isn’t clear enough for them.”

Airlines Squeezed By Delays in $29 Billion U.S. Rescue Package

U.S. airlines’ desperate bid for $29 billion in government rescue cash is being frustrated by a lengthening process and demands that companies provide more detailed financial information, Bloomberg News reported. Carriers that filed April 3 for the grants intended to help meet payroll costs expected the checks to begin arriving days ago. Instead, U.S. Treasury officials have asked for another round of data that appears to be more related to a separate loan process instead of the cash grants, further delaying the relief. The federal stimulus bill provided for carriers to receive payments within 10 days after the law was signed March 27. That would have been Monday, though the legislation gave Treasury Secretary Steve Mnuchin discretion on the timing. The additional demand for information was so detailed it would take more than a week to review all the submissions. “Treasury’s preliminary guidance did not provide applicants with clear direction on a number of critical items,” two U.S. senators from Illinois, where United Airlines Holdings Inc. is based, wrote to Mnuchin in a letter Wednesday. Senator Tammy Duckworth and Senator Dick Durbin, both Democrats, called on the agency “to make sure the confusing application process doesn’t hamper the ability of applicants to receive the funds intended for them.”

Bankruptcy Judge Won’t Stand in Way of PG&E Settlement Vote

The judge overseeing PG&E Corp.’s bankruptcy has rejected efforts to slow down voting on a proposed $13.5 billion settlement for wildfire victims as negotiations over certain terms continue, WSJ Pro Bankruptcy reported. Bankruptcy Judge Dennis Montali of the U.S. Bankruptcy Court in San Francisco said that he won’t order the dissemination of a supplemental disclosure that urges wildfire victims to withhold votes until at least the end of the month on PG&E’s chapter 11 exit proposal. The ruling marks a setback for an official committee of wildfire victims that has been trying to stop the exit proposal from accumulating support among the roughly 70,000 individuals and businesses who filed claims against PG&E over wildfires linked to its equipment. If fewer than two-thirds of those creditors vote to back the proposal, it would create a serious hurdle for the company in its bid to exit chapter 11 by a state-imposed June 30 deadline. PG&E would have to either reopen negotiations with wildfire victims or ask Judge Montali to approve the proposal without their support, which he has signaled that he is unlikely to do.