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Commentary: Quest for Yield Still Trumping Safety in Debt Markets

ABI Bankruptcy Brief


ABI Bankruptcy Brief
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September 17, 2015

ABI Bankruptcy Brief


Commentary: Quest for Yield Still Trumping Safety in Debt Markets

It seems that the quest for a reasonable yield is still trumping all else in the debt markets, according to a commentary by Prof. Stephen Lubben in Tuesday's New York Times DealBook blog. Moody's Investors Service issued a report recently that found that the covenant quality of North American high-yield bonds reached a record low in August. Between blanket liens and asset-based loans that ensure senior creditors at the point of default, and even before, the addition of another layer of indebtedness will not help matters. The end result is that the next wave of chapter 11 cases will probably feature lots of quick sales, where the company is handed over to its senior lenders.

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Analysis: Pitfalls for the Unwary Borrower Out on the Frontiers of Banking

More than 1 million Americans have tried what many believe is the future of finance, in which big banks are being replaced by lenders that operate mostly online and match borrowers with investors who buy up large chunks of the loans, the New York Times reported on Monday. The companies say that they are providing affordable credit to families and small businesses and that losses on the loans are low. Marketed as a way to improve people's credit scores, the loans are instead worsening some people's financial troubles. And when these people run into trouble, borrowers and their lawyers say, some of the new lenders are unwilling to modify their loan terms.

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Commentary: Puerto Rico Needs a Bankruptcy Framework

Many years of weak economic growth and poor financial management have highly compromised Puerto Rico's public finances, putting it in a position where it cannot fully honor its loan obligations, according to an AEI commentary today. A recent report found that even if Puerto Rico were to adopt strict budget measures and to somehow revive its economy from a 10-year downward spiral, it would still only be able to repay around 65 percent of its debt obligations over the next 10 years. Bondholders might want to consider whether they might stand to gain more by having an orderly bankruptcy procedure in place for the island rather than having a disorderly asset grab in which both the island and bondholders as a group stand to lose, according to the commentary.

For more news and analysis of Puerto Rico's ongoing debt crisis, be sure to visit ABI’s Puerto Rico in Distress webpage.

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Sens. Warren and Vitter Sound Alarm About Fed's Rescue Authority

Sens. Elizabeth Warren (D-Mass.) and Richard Vitter (R-La.), sponsors of S. 1320, the "Bailout Prevention Act of 2015," are concerned that the Fed's emergency lending powers even under Dodd-Frank encourage risk, leverage and cavalier management in the banking industry, while simultaneously undermining any incentive that lenders and investors have to supervise the financial firms into which they put their money. Warren and Vitter pointed out at a Cato Institute event yesterday that this dynamic distorts the market over time, tilting the playing field in favor of the biggest banks -- for whom implicit government guarantees mean a lower cost of capital -- and eroding the competitiveness of smaller financial institutions. "If you advertise to the market that the Fed is here, and no need for any large financial institution ever to have to go to the bankruptcy court house or declare itself insolvent, but instead there will be trillions of dollars available to back up these giant institutions, I think that changes fundamentally the behavior of the big banks themselves," Warren said.

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U.S. Foreclosure Activity Decreases 6 Percent in August

RealtyTrac released a report today showing a total of 109,561 U.S. properties with foreclosure filings -- default notices, scheduled auctions and bank repossessions -- in August, down 12 percent from the previous month and down 6 percent from a year ago, according to a company press release. The 6 percent year-over-year decrease in August followed five consecutive months with year-over-year increases. A total of 45,072 U.S. properties started the foreclosure process for the first time in August, down 1 percent from the previous month and down 19 percent from year ago to the lowest level since November 2005. So far in 2015, foreclosure starts have averaged 49,362 per month, below the pre-crisis average of 52,279 per month in 2005 and 2006.

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ABI Funds Study to Test Effectiveness of Financial Education on Distressed Consumers

The American Bankruptcy Institute (ABI) Anthony H.N. Schnelling Endowment Fund has commissioned a study to test whether original, re-conceived consumer education materials have a positive effect upon the financial health of struggling individuals. Profs. Lois R. Lupica of the University of Maine School of Law, D. James Greiner of Harvard Law School and Dalie Jimenez of the University of Connecticut School of Law will be conducting the research. The empirical study “allows us to link the dollars spent on various legal interventions and the incidence of bankruptcy filings,” according to the researchers.

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ABI Podcast: Covering the Basics of General Assignments for the Benefit of Creditors

The latest ABI podcast features ABI Deputy Executive Director Amy Quackenboss talking with Geoffrey L. Berman, Senior Vice President at Development Specialists, Inc. (Los Angeles), former ABI President and author of ABI's third edition of General Assignments for the Benefit of Creditors: The ABCs of ABCs. Berman discusses the book and issues surrounding general assignments as a vehicle used for the sale or liquidation of a business.

To purchase ABI's third edition of General Assignments for the Benefit of Creditors: The ABCs of ABCs, please click here.

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New on ABI's Bankruptcy Blog Exchange: Regulators Should Let Banks Get Back to Small-Dollar Loans

A recent post on ABI's Bankruptcy Blog Exchange says that small installment loans with monthly payments limited to 5 percent of a borrower's income offer a way for banks to serve low-income customers' credit needs while turning a profit.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

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