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McKinsey Investments Weren’t Disclosed in Bankruptcy Cases

A McKinsey & Co. retirement fund held investments that gave it a financial interest in the outcome of six bankruptcy cases in which the company also was serving as an adviser, court and regulatory filings show, the Wall Street Journal. McKinsey’s restructuring unit, known as McKinsey RTS, didn’t disclose those investments publicly. Rules governing the chapter 11 bankruptcy process require advisers to disclose all relationships that might give rise to a conflict of interest, to ensure that advisers will be disinterested advocates for their clients and that other participants in the cases are aware of them. The McKinsey retirement fund’s investments with two hedge-fund companies, Whitebox Advisors LLC and Strategic Value Partners LLC, gave it a stake in the debt or other obligations of six companies that sought bankruptcy protection: United Airlines parent UAL Corp. in 2002; American Airlines parent AMR Corp. in 2011; Edison Mission Energy in 2012; NII Holdings Inc. in 2014; Alpha Natural Resources Inc. in 2015; and SunEdison Inc. in 2016. McKinsey was a bankruptcy adviser to all six companies. In each bankruptcy case McKinsey advised on, its officials signed a sworn statement that the firm was a disinterested party.

U.S. Utilities Cut to Negative in First as Moody's Warns of Debt

For the first time ever, Moody’s Investors Service cut its outlook for U.S. utilities to negative, warning that the sector’s debt levels have reached their highest since the financial crisis and may remain there for months, Bloomberg News reported. The sector’s consolidated debt-to-equity ratio has hit the highest level since 2008 as companies finance mergers, acquisitions and other investments in renewable energy and pipelines, Moody’s analysts led by Ryan Wobbrock said in a note Monday. The federal tax overhaul signed by President Donald Trump stands to make matters worse, since utilities that depend on regulated returns are collecting less cash from customers to cover their tax expenses, the ratings firm said. The downgrade underscores how a massive buying spree and rising dividends have affected the industry’s debt levels. Power companies have been turning to M&A to fuel growth as demand for electricity weakens and the costs of maintaining their infrastructure rise. The industry racked up a combined $68.2 billion of acquisitions in 2017, the most in a decade, according to data compiled by Bloomberg. Meanwhile, companies including Duke Energy Corp. and Southern Co. have sought to raise billions in equity to make up for revenue losses at their utilities due to the tax changes.

Lehman Brothers Claimants Mull Cashing Out

Deutsche Bank AG wants to buy out Lehman Brothers Inc. claimants as the defunct brokerage’s liquidation draws to a close, WSJ Pro Bankruptcy reported. Deutsche Bank’s London branch beat out five other bidders competing to make a cash offer to holders of unsecured claims against the Lehman Brothers bankruptcy estate, according to court papers filed Monday by liquidating trustee James Giddens. Giddens is nearing the conclusion of a decade-long wind-down of Lehman Brothers, the brokerage unit of Lehman Brothers Holdings Inc. He is planning to distribute $170 million distribution, his sixth payout to creditors, which would bring recoveries on unsecured claims to 39.75 cents on the dollar from 39 cents. Priority creditors have already been paid in full.

Actors Defend Contracts in Weinstein Co. Bankruptcy

Meryl Streep, George Clooney, Julia Roberts and Brad Pitt are among a group of actors who have sought to defend their financial and artistic interests in films distributed or produced by Harvey Weinstein’s former studio as the business is sold in bankruptcy to a private-equity firm, WSJ Pro Bankruptcy reported. More than a dozen objections were filed Monday in the studio’s chapter 11 case in Wilmington, Del., on behalf of actors, writers and producers who are challenging the terms under which Weinstein Co. seeks to transfer film participation agreements to the purchaser, Lantern Capital Partners. Weinstein Co. has classified these agreements as so-called non-executory contracts. The studio has said that it can make this classification because “the failure to perform any remaining obligations under any such contract would not constitute a material breach” of the agreements. Lawyers for the actors say the distinction is important because it could give the studio or Lantern the ability to forgo outstanding participation payments or exploit these films in the future without their clients’ input.

U.S. Banks Could Boost Payouts by $30 Billion After Stress Tests

Harsher Federal Reserve stress tests this year won’t stop U.S. banks from increasing their payouts to shareholders, Bloomberg News reported. As the annual review gets under way this week, the 25 largest lenders are gearing up to announce dividends and buybacks totaling roughly $30 billion more than last year, representing a 25 percent increase, according to analysts’ estimates compiled by Bloomberg. JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. are likely to distribute more than 100 percent of their profits in the next four quarters, according to the estimates. Goldman Sachs Group Inc. and Morgan Stanley might not be so lucky. Their earnings are more closely linked to capital markets, which suffer more under the tougher macroeconomic scenario in this year’s test. Periods cover the four quarters following the release of stress test results in June of each year. The 2018 figures are the averages of five analysts' estimates compiled by Bloomberg, except for Morgan Stanley and Goldman Sachs, which were forecast by three of the analysts.

New Head of FDIC Plans to Review Financial Health Rating System

The newly appointed head of the Federal Deposit Insurance Corp. (FDIC) said yesterday that said she plans to review the decades-old system for measuring lenders’ financial health, which banks say is outdated, Reuters reported. Jelena McWilliams, who became FDIC chair this month, said she wants the regulator to be more transparent about how it rates banks’ financial health using the so-called CAMELS rating system. CAMELS has not been modernized in more than 20 years, said McWilliams, a former banker who was appointed by President Donald Trump. The FDIC guarantees customer deposits in case a bank fails and has the power to seize banks that are judged to be on the verge of collapse. Like other bank regulators, the FDIC uses the CAMELS system to measure a bank’s overall financial condition. The system assesses capital adequacy, asset quality, management capability, earnings, liquidity and risk sensitivity. The Clearing House and other groups have complained that the system, as applied by the FDIC, is opaque because banks are not able to contest their rating. McWilliams said she soon intends to open the CAMELS system and other regulations to public comment so lenders and academics can advise whether the rules have shortcomings.

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