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Risky Deals Return to Leveraged-Buyout Market

ABI Bankruptcy Brief

October 25, 2018

ABI Bankruptcy Brief

Risky Deals Return to Leveraged-Buyout Market

Four years after a government crackdown on the leveraged-buyout market, risky loans are making a comeback, the Wall Street Journal reported yesterday. Nearly 13 percent of LBOs in the first nine months of 2018 were financed with debt equating to at least seven times the target company’s earnings before interest, taxes, depreciation and amortization, or EBITDA, according to S&P Global Market Intelligence’s LCD. That is more than double the level in all of last year and is on track to be the highest since 2014, when 13.5 percent of deals crossed that threshold and regulators began to crack down on leverage exceeding six times EBITDA. In another sign of growing risk, the amount of cash private-equity firms are putting into buyouts is falling. Their average equity contribution was 39.6 percent in the first nine months, also the lowest since 2014.

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33 State AGs Call Out CFPB over Predatory Lending to Servicemembers

Tennessee's Attorney General Herbert Slatery III has joined 32 other Attorneys General in a call to protect military servicemembers from financial exploitation, reported yesterday. In a letter sent to Consumer Financial Protection Bureau (CFPB) Acting Director Mick Mulvaney, the coalition urges Mulvaney to reconsider reports his agency will no longer provide oversight to ensure lenders are not taking advantage of those in the military. Under the Military Lending Act (MLA) passed under the George W. Bush administration in 2006, servicemembers and their immediate family members are protected against loans that would charge more than 36 percent interest or include predatory features. The act was amended even further in 2013 by the Barack Obama administration to specify that the CFPB was to enforce the act and make sure lenders are in compliance. The letter states the Attorneys General are "perplexed" by reports that Mulvaney and the CFPB have determined that the agency needs more authority to make sure lenders are in compliance, given the steps taken by both the Bush and Obama administrations. The letter goes on to state disappointment with the CFPB not consulting the Defense Department on their decision, given that the Defense Department is the primary agency responsible for interpreting the MLA. Read more.

Click here to read the letter.

The November ABI Journal cover feature outlines the efforts of ABI’s newly created Veterans' Affairs Task Force, which is examining how the bankruptcy system treats veterans.

Analysis: Slow Death of Sears Is a Crisis for Struggling Malls — and an Opportunity

Once upon a time, shoppers at the great American malls bounced from Sears to Bon-Ton to Borders Books and Circuit City, stopping along the way at the smaller stores in between. Now the anchor model, which relied on big-box retailers to drive traffic, is fading, Bloomberg reported yesterday. Sears Holding Corp. filed for chapter 11 protection on Oct. 15, saying it will close 77 of its namesake stores in the next few months. Already, 24 percent of those shopping centers have at least one vacant anchor of at least 25,000 square feet, according to CoStar Group Inc. Even before Sears disclosed its plans, those shopping centers were struggling to attract major tenants. Between 2007 and 2012, a cumulative 130 anchor tenants moved in while just seven moved out. Since 2016, they have lost a total of 62 anchors and only found 25 replacements. As Sears shutters stores, landlords will have to overcome the perception that the entire property is failing or risk losing other tenants, said Burt Flickinger, managing director of Strategic Resource Group LLC, a retail-advisory firm. The loss of traditional anchors doesn’t have to be a disaster, said Greg Maloney, chief executive officer of JLL Retail. Mall owners say that shuttered department stores offer the chance to release space to hipper tenants that pay higher rents, a process that takes time and money under the best of circumstances. “It could be a double whammy or it could be a double opportunity; it could go either way depending on the property,” Maloney said. “A lot of these developers, I don’t want to say they’re excited, but it’s a finality. Now we’re going to move on.”

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Occupancy issues are at the heart of many significant retail cases, as detailed in the ABI publication Retail and Office Bankruptcy: Landlord/Tenant Rights, available at the ABI Store. 

At CFPB, a Critic Is Now the One Pulling the Levers

Brian Johnson spent years as a congressional aide organizing Republican attacks on the Consumer Financial Protection Bureau. Now, he is its No. 2 official, playing a central role in the Trump administration’s reshaping of the consumer-finance regulator, the Wall Street Journal reported on Monday. Johnson, the CFPB’s acting deputy director, has served as acting Director Mick Mulvaney’s top aide. He is expected to stay on after Mulvaney leaves and support Kathy Kraninger, President Trump’s pick to be the bureau’s permanent director, who has little consumer finance experience. Kraninger’s nomination is awaiting a final Senate vote. The timing of that vote is uncertain, especially given the potential for disruption in Washington following November’s midterm elections. Meanwhile, that makes Johnson even more important; Mulvaney is also the White House’s budget chief, holding two jobs at once. Johnson serves as the final check on enforcement actions and rule-making decisions before they are sent for Mulvaney’s approval, bureau officials said. Officials added that Johnson is closely involved in developing the bureau’s communications strategy and new initiatives.

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U.S. Landlords Copy Hotel Model to Cut Risk as Coworking Surges

Leading owners of prime U.S. office space are taking a page from the hotel industry to boost profits from coworking’s rapid growth and to mitigate some of the risk they assume when signing long-term leases with these flexible workspace providers, Reuters reported. Blackstone Group’s EQ Office, private-equity firm Rubenstein Partners LP and others have turned to “management agreements,” a new format in the office market that avoids fixed-lease payments that critics say can be disastrous for coworking in a downturn. Landlords stand to make more money in these profit-sharing partnerships with coworking firms, which industry goliath WeWork well understands as it rapidly gobbles up office space with leases in Manhattan, San Francisco, Boston and elsewhere. The partnerships unite interests, unlike with leasing, and they cut exposure to the same liability critics say pushed serviced office giant IWG’s Regus into bankruptcy in 2003. Regus couldn’t make lease payments when some customers declined to renew short-term rental contracts during the dot-com recession.

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Notice to All ABI Members

UNITE HERE Local 11 is a labor union based in southern California. They represent more than 20,000 workers in the hotel and restaurant industry. The union has been attempting to organize employees at the Terranea Resort, site of ABI’s 2019 Winter Leadership Conference (WLC). The union has repeatedly contacted ABI leadership, including members of the board and committee leaders, to urge ABI to cancel or move the WLC. ABI has no plans to move or cancel the event, which would result in substantial legal exposure. If you are contacted by phone or email by representatives of the union, ABI encourages you to ignore rather than engage or respond. ABI regrets this development and will continue to closely follow events at the property. This has no effect on the ABI’s 2018 WLC, set for Scottsdale, Ariz., this December.

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New on ABI’s Bankruptcy Blog Exchange: Fed Board to Consider Proposed Revamp of Big-Bank Supervision

The central bank will hold an open meeting Oct. 31 to discuss changes to the enhanced supervisory regime as required by the regulatory relief bill passed in May, 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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