Much of the lending done in the U.S. relies on having both collateral and contractual obligations (loan covenants) that together provide the lender with assurance that the funds lent out will be repaid. Rather than putting up physical assets as collateral, governments often instead promise to repay bondholders out of a dedicated stream of income, such as via the tolls collected on a bridge or out of unspecified revenue from future taxes. It is not surprising, then, that a financial crisis involving trillions of dollars of bad loans led to legal conflicts and policy debates about the role of collateral and the sanctity of contracts, according to an analysis in today's New York Times Economix Blog. It seems likely that people owed money by the city of Detroit will get less than promised. One of the many elements in the city's bankruptcy proceedings is the treatment of the holders of general obligation bonds, which constitute $530 million out of the city's $18 billion in total debt. In the past, this type of municipal bond was considered relatively safe in that the borrowing authority was seen as having an implicit commitment to raise taxes as necessary to pay off the obligation. The proposal from Kevyn Orr, Detroit's emergency manager, however, would have these bonds paid back at only 20 cents on the dollar. With Detroit city services already threadbare, and with Orr's bankruptcy proposal foisting losses on retired city workers and current employees through reductions in pensions and other benefits, it seems only fair for bondholders to share in the pain. Bond insurers are likely to file suit, but success by Orr in upending the heretofore accepted view of general obligation bonds could inflict considerable pain on other municipal borrowers, who might well expect to pay higher interest rates to investors nervous that one day other cities might follow Detroit's example. Click here to read the full analysis.
COMMENTARY: NO BANKER LEFT BEHIND
The Detroit bankruptcy case has been cast as a contest between bondholders and pensioners that can be resolved only by shared sacrifice. In principle, there is no problem with that, although in practice, the pensioners' fair share will have to take into account their extreme vulnerability: Public pensions are not federally insured, and many municipal retirees do not receive Social Security. What is problematic is shared sacrifice that does not seem to apply to the big banks that abetted Detroit's descent into bankruptcy, according to a commentary in Friday's New York Times. Just days before its bankruptcy filing last month, Detroit reached its first settlement with creditors. The settlement was with UBS and Bank of America, and although the precise terms will not be nailed down until the bankruptcy judge weighs in, Detroit is set to pay an estimated $250 million to terminate a soured derivatives transaction from 2005 that was supposed to protect Detroit from rising interest payments on a chunk of its variable rate debt. By 2009, both interest rates and the city's credit rating were falling, forcing Detroit to pay the banks some $50 million a year and to pledge roughly $11 million a month in casino-tax revenue as additional collateral. The banks have agreed in a settlement to a discount of as much as 25 percent off what they are owed. But the haircut doesn't mean that the banks will suffer. The banks' 25 percent hit is nothing compared with the city's suggested 90 percent cut to the pensions' unfunded liability — which will result in benefit cuts that would be disastrous in both human and political terms and that the State of Michigan must prevent from happening, according to the commentary. Click here to read the full commentary.
DETROIT SCHOOLS SELL BONDS, FOR A PRICE
Detroit's public-school system sold $92 million in debt today at a substantial yield premium in the largest Michigan municipal-bond sale since Detroit's bankruptcy filing last month, the Wall Street Journal reported today. The Michigan Finance Authority, which sold the debt for Detroit Public Schools, offered the one-year debt at a yield of 4.375%. That compares with 0.18% on a typical triple-A-rated, one-year municipal bond, according to Thomson Reuters Municipal Market Data. The borrowing is backed by a pledge of state aid, a protection cited by some investors who placed orders for the debt. Still, some investors stayed away. Detroit's bankruptcy, filed July 18, has sparked concerns that municipal bonds may not be as safe as many investors once assumed. Kevyn Orr, the city's emergency manager, has proposed imposing cuts on some muni bondholders as the city looks to restructure more than $18 billion in debt. And while Detroit's school district is a separate entity from the city and isn't involved in its bankruptcy, it has still seen its share of financial struggles. It has been under state control, under a separate emergency manager, since 2009, and it has also lost more than 33,000 students, or 40% of its enrollment base, since 2010, according to S&P. Even so, holders of the one-year debt sold today should get paid even if enrollment falls as much as 33%, according to S&P. Click here to read the full article. (Subscription required.)
TRANSUNION: AUTO LOAN DELINQUENCIES REMAIN FLAT DESPITE INCREASE IN LOAN BALANCES
The national auto loan delinquency rate (the percentage of accounts 60 or more days past due) remained relatively flat year-over-year, moving from 0.79% in Q2 2012 to 0.80% in Q2 2013, according to a newswire report today. On a quarter-over-quarter basis, the auto loan delinquency rate experienced an 8-basis-point drop from 0.88% in Q1 2013, according to data provided by TransUnion's Industry Insights Report. Auto loan balances continue to increase, jumping more than 4% between Q2 2012 ($12,875) and Q2 2013 ($13,435). Every state except for Michigan experienced an increase in average auto loan balances during this time frame. While subprime borrower debt increased more than 7% in the last year, delinquency levels for this segment remained about the same, moving from 4.94% in Q2 2012 to 5.02% in Q2 2013. Click here to read the full article.
ABI GOLF TOUR UNDERWAY; NEXT STOP IS THE SOUTHWEST BANKRUPTCY CONFERENCE ON THURSDAY
The 6th stop for the ABI Golf Tour is on Aug. 22 at the Incline Village Champion course, held in conjunction with ABI's Southwest Bankruptcy Conference. Final scoring to win the Great American Cup — sponsored by Great American Group — is based on your top three scores at seven scheduled ABI events, so play as many as you can before the tour wraps up at the Winter Leadership Conference in December. See the Tour page for details and course descriptions. The ABI Golf Tour combines networking with fun competition, as golfers "play their own ball." Including your handicap means everyone has an equal chance to compete for the glory of being crowned ABI's top golfer of 2013! A 22-handicapper won the tour event at July's Southeast Bankruptcy Workshop. There's no charge to register or participate in the Tour.
ABI IN-DEPTH
NEW CASE SUMMARY ON VOLO: AMERICAN BANK, FSB V. IN RE CORNERSTONE COMMUNITY BANK (IN RE AMERICAN BANK, FSB; 6TH CIR.)
Summarized by Bryan Robinson of Law Offices of Bryan Robinson
The Sixth Circuit Court of Appeals affirmed the ruling by the district court that, in regards to the competing secured claims by American Bank and Cornerstone Community Bank, in the funds of the insolvent debtor U.S. Insurance Group (USIG), held in an account at Cornerstone, American Bank's interest was superior to Cornerstone's interest and that Cornerstone had no right to the money. The court's decision was based on the Premium Finance Company Act, Tenn. Code Ann. §§ 56-37-101 et seq. (2008), which gave American a senior perfected security interest in the contested funds good against any competing interest claimed by Cornerstone.
There are nearly 1,000 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI’s Volo website.
NEW ON ABI’S BANKRUPTCY BLOG EXCHANGE: § 502(b)(2) AND THE COLLECTION OF POST-PETITION INTEREST
The Bankruptcy Blog Exchange is a free ABI service that tracks 35 bankruptcy-related blogs. A recent blog post discusses the Ninth Circuit's decision that a creditor can collect post-petition interest from a nondebtor party even though the Code prohibits a creditor from asserting a claim for "unmatured interest."
Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.
ABI Quick Poll
A class of claims should not be considered impaired for purposes of § 1129(a)(10) if the impairment results from the plan proponents' exercise of discretion (i.e., artificial impairment) and not driven by economic need. (In re Village at Camp Bowie I LP).
Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.
INSOL INTERNATIONAL
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