Mall Shakeout Just Beginning as Complex Debt Drowns Owners

Mall Shakeout Just Beginning as Complex Debt Drowns Owners

ABI Bankruptcy Brief

November 5, 2020

ABI Bankruptcy Brief

Mall Shakeout Just Beginning as Complex Debt Drowns Owners

The two U.S. mall owners that filed for bankruptcy on Sunday could be just the beginning, Bloomberg News reported. As retailers ranging from JCPenney Co. to Brooks Brothers Group Inc. go bust, their landlords are struggling, too. But rescuing malls will be unusually complicated because the properties have intricate webs of financing that have only grown more elaborate with time. Interest groups ranging from lenders to shareholders to tenants to holders of complex mortgage bonds are wrangling over how to fix the situations, and for many large property owners, bankruptcy will be the only option, restructuring professionals said. That’s what CBL & Associates Properties Inc., which controls more than 100 retail properties including malls and shopping centers, found. The real estate investment trust spent months trying to restructure out of court before entering bankruptcy in November. Pennsylvania Real Estate Investment Trust, the owner of about 30 retail properties in mid-Atlantic states, also filed for bankruptcy this week. Both aim to continue operating in bankruptcy. There’s more pain to go around. As of October, 14% of U.S. malls were delinquent on their mortgages, almost double the high after the financial crisis, according to an analysis of mortgage bonds by research firm Trepp. Some malls are just trying to reduce their debt levels, or ease restrictions on their borrowing, when they may need to make more drastic changes that can happen only in bankruptcy, said Jeffrey O’Neale, a partner in the real estate practice of law firm Mayer Brown in Chicago. “Traffic is down and revenues are down. Some of these malls are not gonna make it under the current business model,” he said. “No amount of restructuring can change that.”

NBER Working Paper: Has the Paycheck Protection Program Succeeded?

Enacted as part of the CARES Act on March 27, the Paycheck Protection Program (PPP) was the most ambitious and creative fiscal policy response to the Pandemic Recession in the U.S., according to a recent working paper by the National Bureau of Economic Research (NBER). PPP offers forgivable loans — essentially grants — to businesses with 500 or fewer employees that meet certain requirements. The NBER research presents evidence that PPP has substantially increased the employment, financial health, and survival of small businesses, using data from the Dun & Bradstreet Corporation. Using event studies and standard difference-in-difference models, the research aimed to estimate the effect of a small business applying for larger PPP loans and of a small business being eligible for PPP based on size. The NBER paper concluded that it is too early to issue conclusive judgment on PPP’s success, but did offer a number of suggestions for potential future relief efforts, such as a lending program existing alongside a revenue-replacement program, particularly for a partially reopened economy.

U.S. Weekly Jobless Claims Drop Modestly; Labor Market Recovery Cooling

The number of Americans filing new claims for unemployment benefits fell only slightly last week, adding to signs that the economic recovery was losing steam as the COVID-19 pandemic intensifies and fiscal stimulus ends, Reuters reported. Initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 751,000 for the week ended Oct. 31, the Labor Department said. Data for the prior week was revised to show 7,000 more applications received than previously reported. “It looks like a second wave of layoffs is hitting the economy perhaps due to the rising count of virus cases, but it could also mean that many businesses are unable to reopen fully and facing bankruptcy, so they have to let their workers go,” said Chris Rupkey, chief economist at MUFG in New York. The weekly unemployment claims report, the most timely data on the economy’s health, followed on the heels of reports yesterday showing private payrolls increasing less than expected in October and activity in the services industry cooling.

Fed Says Virus Poses Considerable Risks, Maintains Low-Rate Pledges

The Federal Reserve said the coronavirus pandemic poses considerable risks for the U.S. economy despite recent gains, and officials made no changes today to their commitment to provide sustained stimulus, the Wall Street Journal reported. “The ongoing public health crisis will continue to weigh on economic activity, employment and inflation,” the central bank said in a policy statement after concluding a two-day meeting. In September, Fed officials pledged to support the recovery by setting a higher bar to raise interest rates and by signaling it expected to hold rates near zero for at least three more years. At that meeting, the Fed laid out three thresholds for raising rates, including evidence of a tight labor market, annual inflation of at least 2 percent, and forecasts that inflation would run moderately above 2 percent. Officials didn’t make any changes to that policy today. “Economic activity has continued to recover from its depressed second quarter level,” said Fed Chairman Jerome Powell at a news conference after the meeting. “In recent months, however, the pace of improvement has moderated.” Fed officials likely continued discussions this week over how to provide more support to the economy should the recent rebound fizzle. They have had their eye on two prominent risks since the summer: that growth would falter amid rising virus infections, and that Congress would fail to deliver additional spending to support unemployed workers, hard-hit businesses, and state and local governments. Powell said the recent upswing in virus cases was “particularly concerning” and urged Americans to stay vigilant in the coming months. “All of us have a role to play in our nation’s response to the pandemic,” he said. Wearing masks in public “will help get the economy back to full strength.” (Subscription required.)

Illinois Faces Risk of Junk After Voters Reject Tax on Rich

Illinois voters defeated a measure that would have allowed the state to raise taxes on its wealthiest residents, striking down a pillar of Governor J.B. Pritzker’s plan for shoring up the state’s finances and preventing its debt from being cut to junk, Bloomberg News reported. The failure of the constitutional amendment that would have scrapped the flat income tax by a vote of 55 percent against sent the prices of Illinois’s bonds tumbling, with those due in 2034 down about 7 percent. The costly campaign ended in a win for Citadel founder Ken Griffin, who spent nearly $54 million to fund the opposition, while Pritzker, the billionaire heir to the Hyatt hotel empire, gave $58 million in support. “The citizens of Illinois have delivered a clear message to our political leaders in Springfield,” Griffin, the billionaire head of the Chicago-based hedge fund, said in an emailed statement on Wednesday. “Now is the time to enact long overdue reforms to save our state from fiscal ruin.” The loss adds a new challenge to the Democratic governor’s efforts to steady the finances of Illinois, whose rising pension-fund costs and chronic budget shortfalls left it with the lowest bond rating among U.S. states even before the pandemic struck. Failure of the measure won’t automatically trigger a downgrade to junk. The three major rating companies, which all consider Illinois the lowest level of investment grade, said they’ll be watching for the state’s backup plan. “There will be cuts and they will be painful,” Pritzker said during a press conference yesterday. Without the additional revenue from the graduated income tax, the state will look at various options, including cuts potentially for public safety, education and health services and may have to rely on its “regressive” tax system for more revenue, he said.

ABI’s Consumer Bankruptcy Forum Set to Take Place Next Wednesday; International Insolvency Forum Scheduled for Nov. 18-20

Consumer and business practitioners will not want to miss these two upcoming marquee ABI events:

Consumer Bankruptcy Forum, Nov. 11

Featuring content from the National Association of Bankruptcy Trustees (NABT), National Association of Consumer Bankruptcy Attorneys (NACBA), National Association of Chapter 13 Trustees (NACTT), National Conference of Bankruptcy Judges (NCBJ), and ABI’s Hon. Eugene R. Wedoff Seventh Circuit Consumer Bankruptcy Conference and Hon. Steven W. Rhodes Consumer Bankruptcy Conference, the Forum will provide the perfect way for consumer bankruptcy practitioners to stay on top of the latest industry trends — all from the comfort of your home or office for the low price of $100! This program is eligible for 6.25/7.5 hours of general CLE/CPE credit, including 1.25 hours of mental health/professionalism and 1.25 hours of diversity and inclusion. Click here to view the sessions and register.

International Insolvency Forum, Nov. 18-20

Insolvency experts from around the world will virtually gather to provide their insights on key issues and timely topics pertaining to international practice at ABI’s 2020 International Insolvency Forum. The three-day online conference brings together ABI’s annual International Insolvency & Restructuring Symposium partners — International Insolvency Institute (III), American College of Bankruptcy, TMA Europe, INSOL and IWIRC — and ABI's annual Cross-Border Insolvency Program. Experts will be examining the global restructuring landscape and providing an outlook on the year ahead. The Forum will be a "one-stop shop" for attendees looking for technical sessions covering current international insolvency issues and light-hearted networking opportunities — all from the comfort of your home or office! This program is eligible for up to 10.75/12.5 hours of general CLE/CPE credit. Click here to view the sessions and register.

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Consumer Bankruptcy Forum November 11, 2020 Online Conference
ABI Virtual Happy Hour November 11, 2020 Online Networking
abiLIVE: Collateral Disputes: Experts Weigh In on Recent Transactions November 12, 2020 Online Webinar
abiLIVE: Recent Trends & Issues with DIP Financing, Focusing on Committee, Debtor, and Lender Perspectives November 17, 2020 Online Webinar
International Insolvency Forum November 18-20, 2020 Online Conference
ABI Endowment Virtual Wine Tasting December 2, 2020 Online Benefit and Networking
Winter Leadership Conference December 3-4, 2020 Online Conference
Click here for Full calendar

New on ABI’s Bankruptcy Blog Exchange: In Year of PPP, Big Banks Tap Brakes on SBA Lending 

Wells Fargo, JPMorgan Chase and others cut back on 7(a) lending to focus on originating Paycheck Protection Program loans. Smaller banks such as Live Oak and Byline gained market share by targeting niche industries and originating bigger loans, according to a recent blog post. 

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

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