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Commentary: The Role of Chapter 11 Bankruptcy in Addressing the Consequences of COVID19

ABI Bankruptcy Brief

April 30, 2020

 
ABI Bankruptcy Brief
 
 
 
NEWS AND ANALYSIS

Commentary: The Role of Chapter 11 Bankruptcy in Addressing the Consequences of COVID19*

Many businesses may require bankruptcy proceedings to assist in recovery from the COVID-19-induced recession, according to a commentary by Prof. Jay Westbrook in the CreditSlips Blog. In his view, the best legal approach to any chapter 11 reforms necessitated by the emerging economic crisis lies in building up from the Small Business Reorganization Act (SBRA) to cover more small and medium enterprises (SMEs), rather than trying to adjust the general provisions of chapter 11, the home of larger bankruptcies like General Motors and American Airlines. The database at the Business Bankruptcy Project shows that in 2018, more than half of the businesses that filed under chapter 11 in the Southern District of New York would have fallen under the temporary SBRA cap of $7.5 million. Most immediately, the recently voted funds for small businesses must be available in bankruptcy reorganization cases, according to Prof. Westbrook, and we must remove any barrier to using them in that way. Bankruptcy cannot help unless it can be used in connection with rescue funding, according to the commentary.



*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.
 

Weekly Jobless Claims Hit 3.84 Million, Topping 30 Million over the Last 6 Weeks

The Labor Department reported today that first-time filings for unemployment insurance hit 3.84 million last week as the wave of economic pain continues, CNBC.com reported. Jobless claims for the week ended April 25 came in at the lowest level since March 21, but bring the rolling six-week total to 30.3 million as part of the worst employment crisis in U.S. history. Claims hit a record 6.87 million for the week of March 28 and have declined each week since then. Last week’s initially reported figure was revised up by 15,000 to 4.4 million, meaning that the most recent total is a decrease of 603,000. Continuing claims rose to just shy of 18 million, a rise of 2.2 million from the previous week. The four-week moving average, which smooths volatility, jumped to 13.3 million, an increase of 3.7 million from the previous week’s average.



 

Federal Reserve to Offer ‘Main Street Loans’ for Businesses with Up to 15,000 Employees

The Federal Reserve is planning to launch its emergency lending program for small and medium-size businesses soon, and even more businesses will be able to qualify than originally planned, the Washington Post reported. The Fed said today that businesses with up to 15,000 employees and $5 billion in annual revenue can apply, a much higher threshold than the initially announced caps of 10,000 employees and $2.5 billion in revenue. Lobbyists and some lawmakers had urged the Fed to open the loans up to more companies, especially distressed oil and gas firms. Companies should soon be able to go to their banks to obtain one of these loans, but the program is not up and running yet. Fed Chair Jerome H. Powell said yesterday that he expected the “Main Street Lending Program” to be operational “fairly quickly.” “These are not grants. These are loans,” Powell emphasized yesterday. Most small businesses with less than 500 employees have been encouraged to seek a Small Business Administration loan, known as the Paycheck Protection Program, because that can be forgiven if the small business uses most of the money to rehire and pay employees. The Fed’s program is designed to target midsize companies and businesses that need money for more than just payroll expenses. The minimum loan size is $500,000, and companies will have up to four years to pay the money back. Most of the loans are capped at $25 million, but the Fed created an additional option to obtain a loan of up to $200 million. The interest rate on the loans will be about 3.4 percent, as it is set three percentage points above the LIBOR, a global benchmark interest rate. By contrast, the Small Business Administration’s PPP loans were set at a much lower interest rate of 1 percent.

Commentary: Is This a Liquidity Crisis or a Solvency Crisis? It Matters to the Fed*

Whether the economy is facing a liquidity crisis or a solvency crisis is a distinction that will determine how important the Federal Reserve is to returning the economy to health, according to a Wall Street Journal commentary. In a liquidity crisis, otherwise-healthy firms collapse because they can’t access credit. The Fed can resolve such a crisis because it can print and lend unlimited amounts of money. In a solvency crisis, companies can’t survive no matter how much they can borrow; they need more revenue. The Fed can’t solve that. Fed Chairman Jerome Powell underlined the distinction yesterday. The central bank had directed aid to sectors “where we have never been before and … quite aggressively,” he said at a news conference after the central bank’s policy meeting. “Nonetheless, these are lending powers. We can’t lend to insolvent companies. We can’t make grants.” By preventing illiquid companies from going bankrupt, the market seems to believe that the Fed has set the stage for a brisk economic recovery once the coronavirus pandemic eases. Investors may have conferred more power on the Fed than the Fed believes it has. Mr. Powell urged Congress to appropriate more money to aid potentially insolvent firms and the unemployed. “This is the time to use the great fiscal power of the United States to do what we can to support the economy,” he said. A much bigger challenge looms: the many companies that were profitable before the pandemic and should be again when the pandemic has passed, but that may not survive that long. Providing them with cash should pay economic dividends in terms of protecting jobs and incomes, but such a move is complicated by the question of whether the firms are illiquid or insolvent. (Subscription required.)



*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.
 

Analysis: The Devil's in the Details for Junk Debt Investors Facing Coronavirus Defaults

Before the coronavirus, investors hungry for returns piled into risky corporate loans and bonds with precious little protection for creditors. Now they’re frantically scouring the terms to see just what firms can get away with to survive the fallout, according to a Reuters analysis. At the same time, firms starved of cash and funds thinking about lending to them are also poring over the fine print to see what room they have to shift assets away from other creditors, pay dividends or borrow more while staving off default. With the coronavirus pandemic threatening to trigger a surge in corporate loan defaults, borrowers and investors in so-called covenant-lite loans and high-yield bonds with weak protections for creditors are taking stock fast. Over the past decade, the leveraged-loan market has trebled to about $1.4 trillion. Whereas only 15 percent of loans in 2010 were deemed covenant-lite, now more than 80 percent lack clauses that might trigger warnings about a company’s finances or stop it from stripping out assets, according to S&P Global Market Intelligence.

Commentary: Borrower Beware: CARES Loans Carry a Steep Cost*

Questions are already arising about whether the federal dollars flooding the U.S. economy during the COVID-19 crisis are reaching the intended recipients, and rightly so, when trillions in taxpayer dollars are at stake. But it should make businesses think twice before they take federal money, according to a Wall Street Journal commentary. Clearly, there should be a financial lifeline for America’s hundreds of thousands of small businesses and 30 million unemployed. When the government orders “nonessential” business to close, it’s only reasonable that it should compensate them. But borrower beware! Businesses with flexibility should seriously consider to what extent accepting the terms of federal loans or other support may be a Faustian bargain. The ultimate cost may dramatically outweigh the temporary gain. Through the congressional oversight commission established under the CARES Act, the new Special Inspector General for Pandemic Recovery, and numerous other freshly funded inspectors general, the groundwork has already been laid for aggressive investigation and review of which businesses received — and how they spent — federal emergency funds. Read more. (Subscription required.)



*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

The abiLIVE panel discussion held on April 6, featuring former House Speaker John A. Boehner, discussed oversight of funds appropriated by the CARES Act and provided a warning to firms about being transparent and acting in good faith in accepting the funds. Access a replay here.

Coronavirus Oversight Panel Staffs Up

The committee of inspectors general investigating the coronavirus pandemic response — which lost its chair earlier this month — named its top staffer and launched a website to help the public track its investigations, CNN.com reported. The Pandemic Response Accountability Committee, which was created by Congress in the CARES Act, selected former inspector general Robert Westbrooks to be executive director of the committee, which will examine the coronavirus outbreak response and the trillions being spent to prop up small businesses and help corporations. The PRAC, composed of 21 members from offices of inspectors general across the federal government, is intended to help coordinate their investigations into various elements of the outbreak response. But the committee has gotten off to a rocky start after naming then-acting Pentagon Inspector General Glenn Fine as chairman of the committee. A week later, Trump replaced Fine as head of the Defense Department inspector general office — which in turn made him ineligible to serve on the coronavirus panel, let alone lead it. In addition to the inspectors general committee, the CARES Act created a new special inspector general for pandemic recovery and a five-member Congressional Oversight Commission, and provided an influx of funding to nonpartisan congressional watchdog the Government Accountability Office. House Speaker Nancy Pelosi has also created her own new select subcommittee in the House to investigate the coronavirus response.



In related news, Speaker Nancy Pelosi (D-Calif.) yesterday filled out the Democratic roster on a special committee overseeing coronavirus relief spending, naming six new members to the newly created panel, including some of President Trump’s harshest congressional critics, The Hill reported. The panel, created by a party-line vote last week, will be led by Rep. Jim Clyburn (D-S.C.), the Democratic whip. In a letter to Democrats Wednesday, Pelosi named six additional members: Reps. Maxine Waters (Calif.), Carolyn Maloney (N.Y.), Nydia Velázquez (N.Y.), Bill Foster (Ill.), Jamie Raskin (Md.) and Andy Kim (N.J.). Democrats are billing the panel as a commonsense safeguard to ensure that the historic levels of emergency funding — money designed to prop up businesses, workers, families and medical providers most affected by the coronavirus fallout — aren’t frittered away by fraud and abuse. Republican leaders in Congress and the White House have said that the Clyburn committee is both redundant and politically motivated. They’re accusing Democrats of establishing the panel merely to embarrass Trump in the months leading up to November’s elections.

New ABI Website Supplies Bankruptcy Professionals with Key Resources to Help Navigate the Financial Crisis Resulting from the COVID-19 Pandemic

ABI this week launched its new COVID-19 Resources website for bankruptcy professionals and the public to access essential information and analysis regarding the financial distress being inflicted by the COVID-19 pandemic. The site features exclusive ABI content on the crisis, recommended member analysis, industry sector news, charts and more. Click here to access the site, and be sure to bookmark the page so you can easily check back for regular updates!

Upcoming abiLIVE Webinars to Examine Litigation Finance, Nuts and Bolts of Subchapter V for Small Businesses and Chapter 12 Update

ABI will host a number of abiLIVE webinars over the next two weeks looking at key issues for practitioners amid the economic downturn due to the COVID-19 pandemic. Expert panels include:

• The "Litigation Finance: Lessons from the Last Financial Crisis for the COVID-19 Downturn" webinar on May 6 will feature Eric Fisher of Binder & Schwartz (New York), Marc Kirschner of Goldin Associates, LLC (New York), Cathy Reece of Fennemore Craig PC (Phoenix, Ariz.) and Emily Slater of Burford Capital (New York). Click here to register for free.

• Sponsored by ABI's Consumer Bankruptcy Committee, the "Understanding the Nuts and Bolts of ‘New’ Subchapter V Small Business Chapter 11" webinar on May 7 will feature Committee co-chair Jon Lieberman of Sottile & Barile (Loveland, Ohio) moderating a panel including James B. Bailey of Bradley Arant Boult Cummings LLP (Birmingham, Ala.), Bankruptcy Judge Paul W. Bonapfel (N.D. Ga.; Atlanta) and Judith Greenstone Miller of Jaffe Raitt Heuer & Weiss, P.C. (Southfield, MI). Click here to register for free.

• The "Update Your Chapter 12 Skills" webinar on May 20 will be hosted by ABI's Legislation Committee and feature Bankruptcy Judge Robert L. Jones (N.D. Tex.; Lubbock), Joseph A. Peiffer of AG & Business Legal Strategies (Cedar Rapids, Iowa) and Ronda J. Winnecour, Office of the Chapter 13 Trustee (Pittsburgh). Click here to register for free.

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New on ABI’s Bankruptcy Blog Exchange: SBA and U.S. Treasury Announce Full “Review” of Businesses Receiving PPP Loans Greater than $2 Million

Treasury Secretary Steven T. Mnuchin and U.S. Small Business Administration administrator Jovita Carranza issued a joint statement on April 28 stating that a review will be conducted for businesses seeking loan forgiveness for loans in excess of $2 million under the Paycheck Protection Program (PPP), as enacted under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), according to a recent blog post.

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

 
© 2020 American Bankruptcy Institute
All Rights Reserved.
66 Canal Center Plaza, Suite 600
Alexandria, VA 22314
 

U.S. Jobless Claims Top 5.2 Million, Erasing Decade of Job Gains

ABI Bankruptcy Brief

April 16, 2020

 
ABI Bankruptcy Brief
 
 
 
NEWS AND ANALYSIS

U.S. Jobless Claims Top 5.2 Million, Erasing Decade of Job Gains

More than 5 million Americans filed for unemployment benefits last week, bringing the total in the month since the coronavirus pandemic throttled the U.S. economy to 22 million and effectively erasing a decade of job creation, Bloomberg News reported. Initial jobless claims of 5.25 million in the week ended April 11 followed 6.62 million the prior week, according to Labor Department figures today. The four-week sum compares with roughly 21.5 million jobs added during the expansion that began in mid-2009. The latest figures suggest an unemployment rate currently around at least 17% -- far above the 10% reached in the wake of the recession that ended in 2009 -- in a sign that the effects of shutdowns have spread well beyond an initial wave of restaurants, hotels and other businesses. Another reason for elevated claims is that Americans are getting through on outdated or overwhelmed systems after previously being stymied. Continuing claims, or the total number of Americans receiving unemployment benefits, jumped by 4.53 million to a record 12 million in the week ended April 4. Those figures are reported with a one-week lag.

Some Banks Keep Customers’ Stimulus Checks if Accounts Are Overdrawn

For some struggling Americans, the arrival of a deposit from the Treasury Department to help with basic expenses like rent and groceries during the coronavirus crisis was something to count on — until their financial institutions got in the way, the New York Times reported. The phenomenon is swiftly becoming a political issue, with Treasury Secretary Steven Mnuchin fielding calls from senators urging him to ensure that CARES Act relief money isn’t garnished. Banks are legally allowed to withhold funds that go into accounts that have negative balances, and no specific provision in the CARES Act, the $2 trillion relief package that authorized the stimulus payments, prevents banks from taking customers’ stimulus money to cover debts. The government checks are meant to cushion the pandemic’s financial blow to some of the hardest-hit Americans. Anyone who earns up to $75,000 in adjusted gross annual income and has a Social Security number will receive $1,200. Married couples who file joint tax returns will receive $2,400 if their adjusted gross income is under $150,000. The amount declines for those who make more. Several politicians are calling for banks to stop garnishing stimulus payments. On Wednesday, Sens. Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio) implored the head of a bank trade group to tell its members to halt the practice. “For weeks, we have pressed the Treasury Department to exercise its authority and ensure that Americans receive the full amount of their stimulus payments,” the senators wrote in a letter to Rob Nichols, the chief executive of the American Bankers Association. “While Treasury has refused to follow congressional intent, that does not give banks license to steal the stimulus payments from their customers.” By contrast, the CARES Act specifically prohibits garnishing stimulus money for state or federal debts, except for court-mandated child support.



 

Despite Federal Ban, Landlords Are Still Moving to Evict People During the Pandemic

Landlords in at least four states have violated the eviction ban passed by Congress last month, a review of records shows, moving to throw more than 100 people out of their homes, ProPublica.org reported. In an effort to help renters amid the coronavirus pandemic and skyrocketing unemployment, the March 27 CARES Act banned eviction filings for all federally backed rental units nationwide, more than a quarter of the total. But ProPublica found building owners who are simply not following the law, with no apparent consequence, filing to evict tenants from properties in Georgia, Oklahoma, Texas and Florida. The scores of cases ProPublica found represent only a small slice of the true total because there’s no nationwide — or, in many cases, even statewide — database of eviction filings. Four landlords said they were reversing eviction filings after being contacted by ProPublica and informed the filings were illegal. National real estate trade groups, however, are already lobbying to limit the scope of the ban. The recent eviction filings underscore Congress’s failure to include an enforcement mechanism in the law, as well as the complexity of the ban, which only applies to certain categories of properties. “There’s nothing in the bill that seems to create a clear penalty for violating the new law,” said Dan Immergluck, an urban studies professor at Georgia State University in Atlanta. He added it’s not clear that landlords even know about the ban.


 

‘Pretty Catastrophic’ Month for Retailers, Now in a Race to Survive

Retail sales plunged in March, offering a grim snapshot of the coronavirus outbreak’s effect on consumer spending, as businesses shuttered from coast to coast and wary shoppers restricted their spending, the New York Times reported. Total sales, which include retail purchases in stores and online as well as money spent at bars and restaurants, fell 8.7 percent from the previous month, the Commerce Department said Wednesday. The decline was by far the largest in the nearly three decades the government has tracked the data. Even that bleak figure doesn’t capture the full impact of the sudden economic freeze on the retail industry. Most states didn’t shut down nonessential businesses until late March or early April, meaning data for the current month could be worse still. When demand does rebound, it might come too late for some retailers, many of which were struggling even before the pandemic because of changes in mall traffic and a long-term shift to online sales. “Pent-up demand is what drives recoveries, and the good news there is we will come out of this with some degree of pent-up demand,” said Ellen Zentner, chief U.S. economist for Morgan Stanley. She added, however, that there are “a lot of caveats.” Apparel retailers, in particular, seem to be preparing for a substantial amount of destroyed demand. Deborah Weinswig, founder of Coresight Research, an advisory and research firm that specializes in retail and technology, said she had spoken with retailers who were preparing for holiday sales to be 40 percent lower than last year.

Measures to Control Coronavirus Weigh on U.S. Homebuilding

U.S. homebuilding fell by the most in 36 years in March amid a broad decline in activity, offering further evidence that the economy is buckling under the weight of drastic measures to control the spread of the novel coronavirus, Reuters reported. Housing starts plunged 22.3% to a seasonally adjusted annual rate of 1.216 million units last month, the Commerce Department said on Thursday. That was the largest monthly decline in starts since March 1984. Data for February was revised downward to show homebuilding decreasing to a pace of 1.564 million units rather than the 1.599 million units previously reported. Homebuilding declined in all four regions last month.

Commentary: Rethinking the World Economy as We Know It

As the world economy is an infinitely complicated web of interconnections, it shows what is unnerving about the economic calamity accompanying the spread of the novel coronavirus. In the years ahead, we will learn what happens when that web is torn apart, when millions of those links are destroyed all at once, according to a commentary in the New York Times. And it opens the possibility of a global economy completely different from the one that has prevailed in recent decades. It would be foolish, amid such uncertainty, to make overly confident predictions about how the world economic order will look in five years, or even in five months, according to the commentary. But one lesson of these episodes of economic tumult is that those surprising ripple effects tend to result from longstanding unaddressed frailties. One obvious candidate is globalization, in which companies can move production wherever it’s most efficient, people can hop on a plane and go nearly anywhere, and money can flow to wherever it will be put to its highest use. The idea of a world economy with the United States at its center was already falling apart, between the rise of China and America’s own turn toward nationalism. “There will be a rethink of how much any country wants to be reliant on any other country,” said Elizabeth Economy, a senior fellow at the Council on Foreign Relations. “I don’t think fundamentally this is the end of globalization. But this does accelerate the type of thinking that has been going on in the Trump administration, that there are critical technologies, critical resources, reserve manufacturing capacity that we want here in the U.S. in case of crisis.” Even before the coronavirus hit, the limits of globalization were becoming clearer. Trade as a share of global GDP peaked in 2008 and has trended lower ever since. The election of President Trump and the onset of a trade war with China had already made multinational companies start to rethink their operations. “I think companies are actively talking about resilience,” said Susan Lund, a partner at McKinsey who studies global interconnectedness. “To what extent would companies be willing to sacrifice quarter-to-quarter efficiency for resilience over the long term, whether that’s natural disasters, the climate crisis, pandemics or other shocks?”

ABI's GlobalInsolvency Webpage Features Global Responses to Limit the Economic Impact of COVID-19 Pandemic

Learn about the ongoing measures being taken around the world to limit the economic impact of the COVID-19 pandemic. GlobalInsolvency members have compiled insights into fiscal, monetary & macro financial, health policy and global cooperation/international assistance measures undertaken to date. Click here to view the COVID-19 Global Response page.

abiLIVE Webinar on April 29 to Examine Trading in the Secondary Markets in the Current Environment

Amid the financial crisis due to the COVID-19 coronavirus, when is a trade (whether it is bank debt, bond debt or bankruptcy trade claim) a trade? When are they considered broken, despite industry standards and practices? Listen to a panel of experts explore the answers to these questions and more on an abiLIVE webinar hosted by ABI's Claim's Trading Committee on April 29. Register for FREE!
 

Replays Available for Recent abiLIVE Webinars on the CARES Act, SBRA, Consumer Relief and Preferences

ABI hosted a series of webinars last week looking at the "Coronavirus Aid, Relief, and Economic Security Act" (CARES Act) and the Small Business Reorganization Act of 2019, which went into effect on Feb. 19. The programs featured expert speakers looking at how the laws created greater access to financial relief for consumers and small businesses seeking bankruptcy. Former House Speaker John A. Boehner joined a panel to examine tools to navigate the financial crisis related to COVID-19. Be sure to use your ABI member login on the http://cle.abi.org site to access the replay and materials.
 
"The Small Business Reorganization Act: How It Helps in Today’s Health & Economic Crisis"
Panelists: Bankruptcy Judge Madeleine C. Wanslee (D. Ariz., Phoenix), Robert J. Keach of Bernstein Shur (Portland, Maine) and Attorney Allan D. NewDelman (Phoenix), moderated by ABI Editor-at-Large Bill Rochelle.
Click here for the video and materials.
 
"Tools to Navigate the Financial Crisis Related to COVID-19"
Panelists: Former U.S. House Speaker John A. Boehner of  Squire Patton Boggs (Washington, D.C.), Karol Denniston of Squire Patton Boggs (San Francisco), Michael C. Eisenband of FTI Consulting (New York), Brian Kennedy of FTI Consulting (Washington, D.C.) and Ed J. Newberry of Squire Patton Boggs (Washington, D.C.), moderated by Stephen Lerner of Squire Patton Boggs (Cincinnati, Ohio).
Click here for the video and materials.
 
"The Consumer Provisions of the CARES ACT, and Local Court Responses to the Pandemic"
Speakers: Bankruptcy Judge Tracey N. Wise (E.D. Ky.; Lexington), Attorney Eric Goering (Cincinnati), Prof. Robert M. Lawless of the University of Illinois (Champaign, Ill.) and Reporter for the ABI Commission on Consumer Bankruptcy, and Michael J. McCormick of McCalla Raymer (Atlanta), moderated by David P. Leibowitz of Lakelaw (Chicago).
Click here for the video and materials.
 
"Preference Update: SBRA’s Due Diligence Requirement" 
Speakers: Timothy J. McKeon of Mintz Levin (Boston), Bankruptcy Judge Jerrold N. Poslusny (D. N.J.; Camden), Shane G. Ramsey of Nelson Mullins (Nashville, Tenn.) and Bethany J. Rubis of ASK LLP (Saint Paul, Minn.).
Click here for the video and materials.
 

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New on ABI’s Bankruptcy Blog Exchange: CFPB Finalizes HMDA Rule that Gives Reg Relief to Banks

The move is part of an effort by CFPB Director Kathy Kraninger to help smaller lenders by significantly raising loan thresholds for collecting and reporting mortgage data, according to a recent blog post.

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

 
© 2020 American Bankruptcy Institute
All Rights Reserved.
66 Canal Center Plaza, Suite 600
Alexandria, VA 22314
 

4.4 Million Sought Unemployment Benefits Last Week

ABI Bankruptcy Brief

April 23, 2020

 
ABI Bankruptcy Brief
 
 
 
NEWS AND ANALYSIS

4.4 Million Sought Unemployment Benefits Last Week

More than 4.4 million Americans filed for unemployment benefits last week, according to the Labor Department, a signal the tidal wave of job losses continues to grow during the coronavirus pandemic, the Washington Post reported. It’s the fifth straight week that job losses were measured in the millions. From March 15 to April 18, 26.5 million people have probably been laid off or furloughed. The number of jobs lost in that brief span effectively erased all jobs created after the 2008 financial crisis. Jobless figures on this scale haven’t been seen since the Great Depression. The new weekly total comes on top of 22 million Americans who had sought benefits in previous weeks, a volume that has overwhelmed state systems for processing unemployment claims. Economists estimate the national unemployment rate sits between 15 and 20 percent, much higher than it was during the Great Recession in 2008 and 2009. The unemployment rate at the peak of the Great Depression was about 25 percent.

In related news, as millions file claims, many are poised to receive more money than they would have typically earned in their jobs, thanks to the additional $600 a week set aside in the federal stimulus package for the unemployed, the New York Times reported. That calculation is based on an analysis of the so-called replacement rate, which is the share of a worker’s wages that is replaced by unemployment benefits. Replacement rates for each state are determined by dividing the average unemployment payment by the average 40-hour-a-week salary of those who receive unemployment benefits. Ernie Tedeschi, a former Treasury Department official and an economist at Evercore ISI Research, combined the new stimulus relief with each state’s average unemployment payment at the end of 2019 to estimate how much their replacement rates would increase. The Massachusetts replacement rate will increase the smallest amount, he found, though it still doubles. Mississippi will have an 88 percentage point jump, meaning workers there earning an average wage will make roughly $130 more in benefits. These estimates, which reflect what tens of thousands of people around the country may now receive, come with caveats. As large portions of the economy remain closed because of the outbreak, rendering more than 26 million people without jobs in a matter of weeks, no one knows for sure how wages and benefits for those receiving unemployment might change as more people enter the ranks. A provision of the stimulus package, for example, allows part-time and self-employed workers who would normally not qualify for unemployment to receive benefits. That will alter the makeup of the typical pool of people filing claims, not to mention the average benefit paid out.

Commentary: Congress Will Need More than the CARES Act to Help Consumers Weather the COVID-19 Financial Crisis

The financial support for Americans within the CARES Act will unfortunately prove to be shockingly minimal, according to a recent essay by Profs. Pamela Foohey, Dalié Jiménez and Christopher K. Odinet. The direct payments represent a fraction of the average American households’ monthly budget. It also quickly became apparent that the payments were unlikely to reach most people within any sort of useful time frame, and that once they did, they could be garnished immediately by debt collectors and even banks themselves. The unemployment benefits, while providing people with more money over several months, required that people be laid off and similarly were unlikely to reach people quickly enough to be effective. People’s wages decreased at the exact time they were spending more money to stock up on supplies. The CARES Act promised to send people small checks and augment unemployment benefits. Americans very soon began to discover that these promises would do little to help them survive the coming months of financial and social upheaval. It has also become quickly apparent to lawmakers that Congress will need to pass at least one additional stimulus package. And with projections that the pandemic could last for 12 to 18 months, it seems that Congress may have several more opportunities to craft legislation that actually will help American families survive the pandemic. This legislation must provide people with true funding to stay current with their minimum necessary expenses as these expenses are incurred. If done right, helping individuals will cost the government more than $2 trillion next time, and the time after that, and possibly the time after that. And, if done right, it will be worth every penny, according to the essay.



 

Getting a Mortgage-Payment Break Isn’t the Boon Many Expected

A government effort to give Americans a break on their mortgage payments during the coronavirus pandemic hasn’t provided the relief many homeowners were hoping for, the Wall Street Journal reported. The stimulus package that Congress passed in March allows homeowners with federally backed loans to suspend monthly payments for up to a year without penalty if they face financial hardship. But the law doesn’t specify what happens after the so-called forbearance period ends. Many borrowers say they are being told they will have to make lump-sum “balloon” payments. The situation is causing extra anxiety for U.S. households dealing with job losses and the struggles of life under lockdown. If mortgage servicers follow through with demands for lump-sum payments, borrowers could be pushed into default, damaging their creditworthiness and compounding the financial pain inflicted by the downturn. The coronavirus relief package passed by Congress created no mechanism to test whether homeowners face financial hardship and left servicers on the hook for payments skipped by borrowers during the forbearance period.


 

U.S. Treasury Says It Will Be Hard for Public Companies to Qualify for Coronavirus Relief Loans

A highly valued public company will have a hard time getting a coronavirus relief loan, the U.S. Treasury said today, just as Congress was poised to approve a new round of funding for the loans known as the Paycheck Protection Program, Reuters reported. “It is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith,” the Treasury said in an updated list of Frequently Asked Questions on the program. Public outcry has erupted over major chain restaurants being able to take out the forgivable loans in the first round of lending this month. Treasury Secretary Steven Mnuchin warned yesterday that companies that received the rescue money intended for small businesses could be investigated. He told Fox Business Network it was “questionable” whether larger firms had qualified for loans based on a self-certification step in the application process. The FAQ made it clear that the Treasury is looking hard at the step in which a small business “must certify in good faith that their PPP loan request is necessary.” “Specifically, before submitting a PPP application, all borrowers should review carefully the required certification that ‘current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant,’” it said. The U.S. Senate has approved another $310 billion in funding for the loans, with the House of Representatives set to pass it later today.

Global Economy Hit by Record Collapse of Business Activity

Business activity in the U.S., Europe and Japan collapsed in April as governments tightened restrictions on movement and social interaction aimed at limiting the spread of the coronavirus, according to surveys of purchasing managers, the Wall Street Journal reported. The surveys, released today, suggest that governments have effectively closed parts of the economy where face-to-face interaction is unavoidable—such as restaurants and barbers—and activity has tumbled in parts of the economy less directly affected. The drop in services-sector activity is unprecedented in the history of the surveys, even in the wake of the global financial crisis. Manufacturing activity is also contracting, though not quite as severely. According to data firm IHS Markit, the composite Purchasing Managers Index for the U.S. — a measure of activity in the private sector — fell to 27.4 in April from 40.9 in March. A reading below 50.0 indicates that activity has fallen, and the lower the figure, the larger the fall. The April reading was the lowest in data dating back to October 2009.

The Death of the Department Store: ‘Very Few Are Likely to Survive’

American department stores, once all-powerful shopping meccas that anchored malls and Main Streets across the country, have been dealt blow after blow in the past decade. J.C. Penney and Sears were upended by hedge funds. Macy’s has been closing stores and cutting corporate staff. Barneys New York filed for bankruptcy last year. But nothing compares to the shock the weakened industry has taken from the coronavirus pandemic. Sales of clothing and accessories fell by more than half in March, a trend that is expected to only get worse in April. The entire executive team at Lord & Taylor was let go this month. Nordstrom has canceled orders and put off paying its vendors. The Neiman Marcus Group, the most glittering of the American department store chains, is expected to declare bankruptcy in the coming days, the first major retailer to be felled during the current crisis. “The department stores, which have been failing slowly for a very long time, really don’t get over this,” said Mark A. Cohen, the director of retail studies at Columbia University’s Business School. At a time when retailers should be putting in orders for the all-important holiday shopping season, stores are furloughing tens of thousands of corporate and store employees, hoarding cash and desperately planning how to survive this crisis. The specter of mass default is being discussed not just behind closed doors but in analysts’ future models. Whether or not that happens, no one doubts that the upheaval caused by the pandemic will permanently alter both the retail landscape and the relationships of brands with the stores that sell them.

Hard-Hit Restaurants, Gyms and Other Businesses Are Battling Insurers over COVID-19 Shutdown

A multibillion-dollar standoff between the nation’s leading insurers and the restaurants, hotels, gyms and theaters that purchase their policies has spilled into some of the most powerful corridors of Congress, as both sides clash over who should foot the sky-high costs of the coronavirus outbreak, the Washington Post reported. The battle hinges on whether insurance providers should have to pay claims to companies that have shuttered unexpectedly as a result of the deadly pandemic. The dispute has attracted the attention of President Trump, triggered lawsuits in courtrooms nationwide and touched off a massive lobbying blitz on Capitol Hill, where some insurers say the federal government instead should be the one providing financial help to those that need it most. The industry’s powerful lobbyists, led by the American Property Casualty Insurance Association (APCIA), say “business interruption” policies never were intended to cover contagions. Even if they had been, the estimated claims just from small businesses during the coronavirus pandemic could total more than $430 billion a month, threatening to create a “solvency event” for the industry, said David A. Sampson, the group’s chief executive. But business executives who have paid their premiums for years say they have been misled — and now face dire financial straits without the aid they believe they were promised. Some have sought federal aid in response: Prominent restaurateurs including Wolfgang Puck, for example, have raised the issue directly with Trump in recent days. The problem has taken on even greater urgency because of growing confusion about who qualifies for federal coronavirus aid, given changing government guidelines — and fast-dwindling funds.

Businesses Strive to Reopen from Coronavirus Shutdown

As America’s attention turns to reopening its economy, many businesses are deploying a range of tactics to attempt to shield their workforces from the coronavirus. For the most part, they are making it up as they go, the Wall Street Journal reported. With no single standard or clear-cut road map, safety procedures and implementation vary widely, particularly on how to handle confirmed COVID-19 cases in the workplace. Pepsi-Cola bottling plants in New York are giving factory workers surgical masks and checking their temperatures at the door. A rival Coca-Cola bottler has given employees thermometers to monitor themselves and red bandannas as face covers at work. Testing employees for the virus before they come to work has also emerged as a potential solution for businesses looking to better track the outbreak. But executives say that there are still many hurdles to widespread deployment, including whether enough tests can be secured and workers will agree to take them. Businesses that never closed their facilities because they were deemed essential are on the forefront of these ad hoc efforts — with vastly mixed results and constant changes. Others, such as many major car makers, plan to reopen factories in coming weeks. The patchwork approach to safety is creating tensions with unions and debate over whether some companies are doing enough to protect workers. Some employees in recent weeks have walked off the job, saying their workplaces were putting them at risk. (Subscription required.)

ABI's GlobalInsolvency Webpage Features Global Responses to Limit the Economic Impact of COVID-19 Pandemic

Learn about the ongoing measures being taken around the world to limit the economic impact of the COVID-19 pandemic. GlobalInsolvency members have compiled insights into fiscal, monetary & macro financial, health policy and global cooperation/international assistance measures undertaken to date. Click here to view the COVID-19 Global Response page.

Upcoming abiLIVE Webinars Examine Trading in the Secondary Markets, Litigation Finance and the Nuts and Bolts of Subchapter V for Small Businesses

ABI will host a number of abiLIVE webinars over the next two weeks looking at key issues for practitioners amid the economic downturn due to the COVID-19 pandemic. Expert panels include:

• Hosted by the ABI Claims Trading Committee, "Trading in the Secondary Credit Markets: When Am I Bound?" on April 29 features attorney Richard Corbi (New York) moderating a panel including David Daniels of Richards Kibbe Orbe (Washington, D.C.), Jennifer Pastarnack of Sullivan and Worcester (New York) and Amanda Segal of Katten (New York). Click here to register for free.

• The "Litigation Finance: Lessons from the Last Financial Crisis for the COVID-19 Downturn" webinar on May 6 will feature Eric Fisher of Binder & Schwartz (New York), Marc Kirschner of Goldin Associates, LLC (New York), Cathy Reece of Fennemore Craig PC (Phoenix, Ariz.) and Emily Slater of Burford Capital (New York). Click here to register for free.

• Sponsored by ABI's Consumer Bankruptcy Committee, the "Understanding the Nuts and Bolts of ‘New’ Subchapter V Small Business Chapter 11" webinar on May 7 will feature Committee co-chair Jon Lieberman of Sottile & Barile (Loveland, Ohio) moderating a panel including James B. Bailey of Bradley Arant Boult Cummings LLP (Birmingham, Ala.), Bankruptcy Judge Paul W. Bonapfel (N.D. Ga.; Atlanta) and Judith Greenstone Miller of Jaffe Raitt Heuer & Weiss, P.C. (Southfield, MI). Click here to register for free.

• The "Update Your Chapter 12 Skills" webinar on May 20 will be hosted by ABI's Legislation Committee and feature Bankruptcy Judge Robert L. Jones (N.D. Tex.; Lubbock), Joseph A. Peiffer of AG & Business Legal Strategies (Cedar Rapids, Iowa) and Ronda J. Winnecour, Office of the Chapter 13 Trustee (Pittsburgh). Click here to register for free.

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New on ABI’s Bankruptcy Blog Exchange: State Attorneys General Urge FHFA, HUD to Expand Mortgage Payment Help

A bipartisan coalition of AGs said homeowners should be allowed to wait until the end of a loan term to make payments they skipped because of the coronavirus, 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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Stores that Stocked Up on Debt Face a Harsh Holiday Reckoning

ABI Bankruptcy Brief

December 26, 2019

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

Stores that Stocked Up on Debt Face a Harsh Holiday Reckoning

Retailers are strapping in for the final days of their traditional do-or-die holiday shopping period. For some, that could be meant literally, as creditors and vendors decide which ones are still worth supporting in a field plagued by fewer shoppers, more online competition and too much debt, Bloomberg News reported. Some of the most familiar names — Forever 21 Inc., Barneys New York Inc. and Payless Inc. — have already collapsed into bankruptcy or liquidated this year. Among the survivors, fates have diverged, according to the restructuring experts at FTI Consulting Inc. “The retail sector is becoming more segmented between winners and losers,” Christa Hart, a senior managing director in FTI’s retail and consumer practice, said in an interview. “The ‘average’ has disappeared.” Merchants could use a strong finish after last year’s holiday season, when retailers wound up with their worst sales drop for December since 2008, according to U.S. Census Bureau data analyzed by FTI. This holiday season “will be disproportionately great for the strong players and disproportionately weak for the other ones,” Hart said. Some of the most vulnerable are the traditional department store chains. Moody’s Investors Service predicted in a November report that by the end of 2019, those retailers will have seen their operating income fall by more than 15 percent, despite heavy investing to improve inventory efficiency and to build their online capabilities. “It’s not 1985 anymore,” said Perry Mandarino, head of restructuring and co-head of investment banking at B. Riley FBR Inc. “People don’t need a one-stop shop where they can get everything from vacuum cleaners to jewelry.” 

Commentary: Trump’s New Plan to Make Student Loans Great Again

Student loan debt is the second-highest category of consumer debt after mortgages, averaging about $30,000 per borrower, according to a Forbes commentary. As first reported by the Wall Street Journal, President Trump has been meeting with advisers from the White House and U.S. Department of Education, led by Betsy DeVos, to create a plan to address student loans. During the 2016 presidential campaign, Trump proposed combining the existing student loan repayment plans into a single simpler repayment plan to help borrowers pay off student loans faster. Trump also proposed an income-based repayment plan that would cap monthly student loan payments at 12.5 percent of discretionary income and forgive remaining balances after 15 years. While Trump’s proposal raises the monthly payment cap from 10 percent to 12.5 percent of income, his proposal would forgive the remaining student loan balance five to 10 years sooner than the current income-driven repayment plans. Read the full commentary.



Student loan debt and bankruptcy was the first issue addressed by ABI’s Commission on Consumer Bankruptcy. To view the Commission’s recommendations on student loan debt and bankruptcy, please click here.

Be sure to also read “Game of Loans: Is Student Debt Forgiveness Coming?” in the December edition of the ABI Journal.

Also, the cost of rising tuition was a focus of an ABI Talk at the 2019 Winter Leadership Conference. Click here to watch the presentation by Inez Stepman of the Independent Women’s Forum (Washington, D.C.).

Survey: Private Capital Aimed at Distressed Businesses in 2020

With a majority of venture capital and private-equity firms expecting a recession to hit within two years, a massive volume of “dry powder” may be targeted at distressed businesses in 2020, CFO.com reported. In a survey of 100 VC fund managers and 100 PE fund managers by BDO, 40 percent and 39 percent of them, respectively, said they expected such businesses to be a “key driver” of deals next year. That represented an enormous departure from BDO’s previous survey of such investors a year ago, when only 1 percent of PE respondents anticipated distressed businesses being a key investment driver in 2019. BDO acknowledged that the current availability of distressed opportunities is “quite low.” However, the professional services firm noted, during the Great Recession private capital flocked to distressed-debt funds, which typically outperform other private investment strategies during an economic downturn. In the survey, 72 percent of private-equity respondents and 56 percent of venture capital respondents said they expected an economic downturn to arrive within two years. And 92 percent and 87 percent of them, respectively, anticipated a downturn within four years, which BDO characterized as “less than the length of most investment holding periods.”

Analysis: Congress Saves Coal Miner Pensions, but What About Others?

The $1.4 trillion spending bill passed by Congress last week quietly achieves what a parade of select committees and coordinating councils could not: the rescue of a dying pension fund that is the lifeblood of nearly 100,000 retired coal miners, the New York Times reported. For the first time in 45 years of federal pension law, taxpayer dollars will be used to bail out a fund for workers in the private sector. And now that there’s a precedent, it might not be the last. One coal company after another has gone bankrupt and stopped paying into the miners’ pension plan, but the retirees are still there. Its assets are dwindling, but the liabilities have stayed about the same. When the mine workers’ retiree health plan ran out of money in 1989, Congress arranged for new funding sources, including the Abandoned Mine Lands Reclamation Fund and, later, the Treasury. That precedent is now being followed for the miners’ pensions. Starting next year, the Treasury’s transfers to the Abandoned Mine Lands fund will rise to a maximum $750 million a year, and will help pay for pensions as well as retiree health care. This may prompt other unions to seek federal assistance for their plans, too.

Fed’s U-Turn on Assets Faces a Year-End Test

The Federal Reserve over the last three months has flooded money markets with hundreds of billions of dollars in cash to avoid a repeat of the volatility that roiled cash markets in September, the Wall Street Journal reported. The success of the moves — which reversed roughly half of the Fed’s shrinkage of its asset portfolio over the prior two years — will encounter a test around Dec. 31. That is when some financial institutions could face incentives from regulations to limit their lending, which could cause supply and demand imbalances for cash. Fed officials have said they believe reserves held at the Fed grew scarce enough in mid-September to put pressure on an obscure but important lending rate in the market for repos. “You can flood the markets with reserves, but are the reserves going to be redistributed to the corners of the markets that need it? That’s the big question,” said Ward McCarthy, chief financial economist at financial-services company Jefferies LLC. To prevent a squeeze from happening again, Fed officials have been buying short-term Treasury bills from financial institutions to put more reserves back into the financial system. They also have conducted daily injections of liquidity into markets. Altogether, those operations could add nearly $500 billion in net liquidity to markets around Dec. 31. (Subscription required.)

The Financial Lesson of 2008-09 that Most Investors Have Forgotten

If 2000-2009 was the Lost Decade for investors, 2010-2019 was the Decade of Forgetting, according to the Wall Street Journal. At year-end 2009, most investors — individuals and professionals alike — expected interest rates to rise, inflation to return, the dollar to weaken, commodities to boom and U.S. stocks to struggle. The giant investment firm Pacific Investment Management Co. and its then-influential co-founder Bill Gross were actively promoting their scenario of “the new normal,” which they described as “likely to be a significantly lower-returning world” for stocks and bonds alike for years to come. (Gross left Pimco in 2014 and retired from money management earlier this year.) Instead, over the ensuing 10 years, interest rates fell to historic lows, inflation all but vanished, the dollar strengthened, commodities languished, and U.S. stocks earned among the highest returns they have produced in any decade. Investors en masse pulled money out of active funds run by people trying to pick the best stocks or bonds, and poured cash into passive funds run by computers holding everything in a market index. Over the decade, according to Morningstar, investors withdrew more than $160 billion from all active funds combined, while adding more than $3.76 trillion to index funds. (Subscription required.)

Crisis Looms in Antibiotics as Drug Makers Go Bankrupt

At a time when germs are growing more resistant to common antibiotics, many companies that are developing new versions of the drugs are hemorrhaging money and going out of business, gravely undermining efforts to contain the spread of deadly, drug-resistant bacteria, the New York Times reported. Antibiotic start-ups like Achaogen and Aradigm have gone belly up in recent months, pharmaceutical behemoths like Novartis and Allergan have abandoned the sector, and many of the remaining American antibiotic companies are teetering toward insolvency. One of the biggest developers of antibiotics, Melinta Therapeutics, recently warned regulators it was running out of cash. Experts say the grim financial outlook for the few companies still committed to antibiotic research is driving away investors and threatening to strangle the development of new lifesaving drugs at a time when they are urgently needed. The problem is straightforward: The companies that have invested billions to develop the drugs have not found a way to make money selling them. Most antibiotics are prescribed for just days or weeks — unlike medicines for chronic conditions like diabetes or rheumatoid arthritis that have been blockbusters — and many hospitals have been unwilling to pay high prices for the new therapies. Political gridlock in Congress has thwarted legislative efforts to address the problem. The challenges facing antibiotic makers come at a time when many of the drugs designed to vanquish infections are becoming ineffective against bacteria and fungi, as overuse of the decades-old drugs has spurred them to develop defenses against the medicines.

U.S. Consumer Comfort Hits Nine-Week High on Economic Optimism

Confidence among U.S. consumers advanced to a nine-week high on greater optimism about the economy and brighter views of personal finances and the buying climate, Bloomberg News reported. Bloomberg’s index of consumer comfort increased to 62.3 in the week ended Dec. 22 from 61.1, according to data released today. A measure of confidence in the economy climbed to the highest since the end of July, while the personal finances gauge also was the strongest in nine weeks. Record stock prices, unemployment at a five-decade low and steady wage gains continue to lift spirits, putting the 2019 average sentiment level on track for the best since the 1999-2000 dot-com boom. Combined with elevated sentiment, this backdrop helps explain the economy’s resilience in the face of business-investment cutbacks and global demand concerns.

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New on ABI’s Bankruptcy Blog Exchange: 600,000 Student Loan Borrowers Getting Nowhere
Student loan borrowers who plan to apply for Public Service Loan Forgiveness (PSLF)  after 10 years of income-based payments are simply not getting their payments counted, according to a recent blog post.

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

 
© 2019 American Bankruptcy Institute
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Alexandria, VA 22314
 

Job Cuts from Bankruptcies Hit Highest Level Since 2005

ABI Bankruptcy Brief

January 2, 2020

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

Job Cuts from Bankruptcies Hit Highest Level Since 2005

Data by global outplacement firm Challenger, Gray & Christmas Inc. found that the number of job cuts announced in 2019 due to companies filing for bankruptcy protection hit the highest level in more than a decade, the Wall Street Journal reported. More than 62,100 job losses have been announced by U.S.-based employers in the past 12 months due to bankruptcy, according to the report. That number is higher than the annual totals for bankruptcy-related job cuts any year since 2005, when 74,200 were announced. Bankruptcy was one of the leading causes of job cuts, along with restructuring, trade difficulties and tariffs, in the past year, Challenger found. Employers said they were going to slash more than 592,500 jobs for various reasons, with the retail industry leading the way with nearly 77,500 cuts. About 10.5 percent of all job cuts announced through year-end 2019 were attributed to bankruptcies. In December alone, there were more than 5,500 job cuts due to bankruptcy, Challenger’s data show. There were more job cuts related to bankruptcy in 2019 than during the recession years. More than 62,100 jobs were affected due to bankruptcy in 2008, while about 50,900 were cut in 2009. (Subscription required.)

Financial Tug-of-War Emerges over Fire Victims' Settlement

A financial tug-of-war is emerging over the $13.5 billion that the nation's largest utility has agreed to pay to victims of recent California wildfires, as government agencies jockey for more than half the money to cover the costs of their response to the catastrophes, the Associated Press reported. Pacific Gas & Electric declared bankruptcy nearly a year ago as it faced about $36 billion in claims from people who lost family members, homes and businesses in devastating wildfires in 2017 and 2018. The utility acknowledged that its power lines ignited some of the fires. Those claims were settled as part of the $13.5 billion deal that PG&E reached last month with lawyers representing uninsured and underinsured victims. Meanwhile, insurers had been threatening to try to recover roughly $20 billion in policyholder claims that they believe they will end up paying for losses from those fires. PG&E settled with the insurers for $11 billion. PG&E must keep working on its broader bankruptcy exit plan to meet the approval of state regulators and a bankruptcy judge by June, as planned. In the meantime, the $13.5 billion settlement leaves open just how much would be used to compensate victims, their lawyers, and federal and state agencies for the money they spent on rescue and recovery operations.

Sales-Tax Ruling Strains Small Online Sellers

Eighteen months after the Supreme Court gave states the green light to tax online transactions, small companies that sell things as diverse as recycled yarn and gold bullion are struggling to adjust, the Wall Street Journal reported. In its June 2018 ruling, the Supreme Court held that states had the authority to make online retailers collect sales taxes even if they didn’t maintain a store, warehouse or other physical presence. Before the decision, consumers were supposed to pay what is known as use tax on out-of-state purchases, but most didn’t. The decision came in a lawsuit filed by South Dakota against home-furnishings retailer Wayfair Inc. and other online sellers. What is taxed and how often those taxes are paid varies from state to state. Some states, such as Colorado, allow localities to administer their own taxes. Some states share definitions and procedures to make it easier for companies to comply, but some of the biggest jurisdictions have their own rules. “Small businesses are definitely the ones that are really adversely affected,” said Clark Calhoun, a state and local tax attorney in Atlanta. “A bigger business is typically going to have more robust sales-tax software,” he said, as well as “a better sense of where their products are going and will be well over the sales thresholds every single year.” Verenda Smith, deputy director of the Federation of Tax Administrators, which represents state taxing authorities, said the state laws were never intended to affect small businesses. But “the fairness issue is equally on the table, and it can be at odds with the burden issue,” she said. Most states have tried to limit the impact on the smallest companies, with many following the lead of South Dakota, which exempted out-of-state sellers with $100,000 or less in sales or fewer than 200 transactions in the state a year. But limits vary, with a threshold of $500,000 in California and none in Kansas. (Subscription required.)

Corporate Debt Issuers to Kick Off Sales with Up to $35 Billion

Sales of U.S. high-grade bonds will total between $30 billion and $35 billion next week, according to an informal survey of dealers at some of Wall Street’s biggest banks, Bloomberg News reported. The market remains inviting for potentially supercharged debt-issuance, with funding costs at the best levels ever for the start of a year and incentive to get ahead of potential U.S. election-induced volatility beginning in March. About $120 billion is forecast for January, an increase of 9 percent from last year. The high-grade bond spread, the added premium over U.S. Treasuries that investors get paid to hold riskier debt, fell to 93 basis points on Tuesday, the tightest level since February 2018. Meanwhile, there is about $78 billion in U.S. high-grade corporate bonds coming due or that may be called in January, according to data compiled by Bloomberg.

Americans Are Taking Cash out of Their Homes — And It Is Costing Them

Many U.S. homeowners who need cash are taking it out of their properties, but the trade-off is higher interest rates, according to a Wall Street Journal analysis. Over the past two years, a big chunk of homeowners took on higher interest rates when they refinanced to tap into their home equity. These cash-out refinancings, as they are known, free up money that homeowners can use to pay down credit card debt, renovate or invest in a new property. Nearly 60 percent of cash-out refinancings in 2018 came with higher interest rates, the biggest share since before the financial crisis, according to Black Knight Inc., a mortgage-data and technology firm. This year, that number fell to around 44 percent of cash-out deals, but it remains at more than three times its average between 2009 and 2017. This corner of the mortgage market illuminates the crosscurrents in the U.S. economy: After roughly a decade of rising home prices, homeowners are flush with record amounts of home equity they can tap. But many Americans remain short on cash and are increasingly relying on debt to fund their lives. “There’s something in their life that is causing them to need money,” said Sam Polland, a mortgage-loan officer at Sandy Spring Bank in Rockville, Md. “They are willing to go up in rate to get the equity out of their house.” (Subscription required.)

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New on ABI’s Bankruptcy Blog Exchange: Supreme Court Set to Hear Passive Stay Violation Case

Seeking to resolve a 5-3 split among the courts of appeals, the Supreme Court will consider whether a creditor that passively retains property of the estate violates the automatic stay. Case No. 19-357, City of Chicago v. Fulton. The Second, Seventh, Eighth, Ninth and Eleventh Circuits have ruled that retaining possession or control of property of the debtor violates the stay. The Third, Tenth and D.C. Circuits have held that passive retention of property is not an "act" to exercise control over property of the estate.

For further analysis of this case, be sure to read Rochelle's Daily Wire.

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

 
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Catholic Church Shields $2 Billion in Assets to Limit Abuse Payouts

ABI Bankruptcy Brief

January 9, 2020

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

Catholic Church Shields $2 Billion in Assets to Limit Abuse Payouts
A Bloomberg Businessweek review of court filings by lawyers for churches and victims in the past 15 years shows that the U.S. Catholic Church has shielded more than $2 billion in assets from abuse victims in diocesan bankruptcies. “The survivors should have gotten that money, and they didn’t,” says Terry McKiernan, president of BishopAccountability.org. The unfolding of one diocese’s bankruptcy provides a road map for what may come as more go this route. The chapter 11 filing of the Archdiocese in Santa Fe shows how easy and routine it is to reconfigure a balance sheet. The archdiocese was facing a few dozen clergy abuse suits when it filed in December 2018, saying that it was too poor to defend itself. The number rose to about 375 by the June 2019 deadline that the bankruptcy court had set for victims to file claims. In court papers, the archdiocese reported owning $49 million in real estate, cash, and investments. By contrast, the church’s 1951 incorporation papers put its estimated value at $40 million, or $396 million in today’s dollars. To arrive at that $49 million figure, church leaders said at least $178 million in cash and property associated with the archdiocese was owned by parishes or held in a trust or foundation and thus wasn’t eligible for inclusion in the estate. James Stang, lead lawyer for the alleged clergy abuse victims in the bankruptcy, wrote in a June court filing that the incorporations and transfers were made with the intent to “hinder, delay, or defraud” the claimants. J. Ford Elsaesser, an archdiocese lawyer, disputes accusations that the archdiocese shuffled assets to keep money from claimants. The relationship between the church and its parishes is like that between an adult child and an elderly parent who can no longer handle his affairs, he says: “The property is yours in name, but it’s not your money.” He says that bankruptcy is the best venue for settling large numbers of abuse claims in part because it makes for a fairer distribution of finite church assets, with all victims sharing the money in an orderly way instead of it being quickly scooped up by victims who file claims first.

Analysis: A Borrower Will Be 114 When Bonds Backed by Her Student Loans Mature

Julie Chinnock is 50 years old and owes about $250,000 in student loans. She was happy to get a new payment plan that lowered her monthly bill, but the holders of two bonds backed by her loans were probably less cheerful, according to a Wall Street Journal analysis. The two bonds were due in 2043 and 2054, but Chinnock and other borrowers were paying less each month under a new government plan that tied debt payments to income. Because borrowers were taking longer to pay off their loans, there was a risk the bonds backed by the loans wouldn’t be paid off in time. Bond-rating firms were watching and getting ready to downgrade the highly rated bonds, potentially causing losses for investors. The issuer of the bonds and the investors who owned them hatched a plan to avoid the downgrades. Their solution: Make sure the bonds were paid off in time by extending their maturity dates by decades. The bonds that include a big chunk of Chinnock’s loans now mature in 2083, when she will turn 114. Today, the bonds are rated triple-A. Altogether, issuers have extended maturities on about $11.5 billion of outstanding bonds backed by mostly older-vintage student loans, extending maturity dates by as much as 54 years. (Subscription required.)

Commentary: Public Pensions Throw Their Weight Around in Private Debt

The hedge-fund industry swelled over the past two decades in no small part because of eager pension managers, according to a Bloomberg commentary. In the U.S. alone, state and local retirement funds have $4.57 trillion in assets. Local officials banked on star investors delivering outsized gains to help the retirement funds meet their lofty annual return benchmarks, which in some cases exceeded 7 percent. According to data from Pew Charitable Trusts, U.S. state pension funds had a 26 percent allocation to alternative investments in 2016, up from just 11 percent in 2006. Of course, with more hedge funds came fewer ways for them to profit — and pensions took notice. In September 2014, the California Public Employees’ Retirement System rocked Wall Street by announcing that it would divest the entire $4 billion it had across 24 hedge funds and six hedge funds of funds. In 2016, New Jersey’s pension fund cut its $9 billion hedge-fund allocation in half and New York City’s retirement fund for civil employees exited its $1.5 billion portfolio. More than 4,000 hedge funds have been liquidated in the past five years. With even some of the most well-known managers calling it quits, hedge funds are clearly in retreat. The market for private debt and direct lending is trending in precisely the opposite direction. Managers are raising money hand over fist, as they have in each of the past few years. Assets in private-credit strategies now total more than $800 billion — doubling from 2012 and up from less than $100 billion in 2005.

Tense Time for Buyers of Riskier Corporate Loans

The market for low-rated corporate loans has suffered sharp declines in recent months, a sign of growing aversion to earnings shortfalls or other strains at indebted companies, the Wall Street Journal reported. In the U.S. at the start of December, some 2.5 percent of leveraged loans were trading at less than 70 percent of face value, the most since September 2016, according to S&P Global Market Intelligence’s LCD, the loan market research service. Analysts and investors blame the loose credit standards that characterized the market in recent years, encouraged by strong demand from yield-hungry investors. The hunt for yield also fed a boom in new issuances of structured loan funds known as collateralized loan obligations (CLOs), which have been the biggest group of lenders in recent years. But investors are shying away from such loans at any sign of trouble, including those deemed “covenant lite” for their scant investor protections, which is sparking steep falls in the prices of loans to firms — particularly when they fail to hit earnings targets. In the U.S., some of the companies whose loans fell below 70 cents on the dollar in recent months included Deluxe Entertainment, a media group whose loans fell to around 40 cents on the dollar in August, according to S&P’s LCD, before the company’s credit rating was downgraded. It later negotiated a debt restructuring, announced in October. Murray Energy Corp., a coal company, and 4L Technologies, a technology recycling group, are two others whose loan values tumbled. Both have since entered restructuring programs. (Subscription required.)

American Consumers, Not China, Are Paying for Trump’s Tariffs

American businesses and consumers, not China, are bearing the financial brunt of President Trump’s trade war, new data shows, undermining the president’s assertion that the U.S. is “taxing the hell out of China,” the New York Times reported. “U.S. tariffs continue to be almost entirely borne by U.S. firms and consumers,” Mary Amiti, an economist at the Federal Reserve Bank of New York, wrote in a National Bureau of Economic Research working paper. The other authors of the paper were David E. Weinstein of Columbia University and Stephen J. Redding of Princeton. Examining the fallout of tariffs in data through October, the authors found that Americans had continued paying for the levies — which increased substantially over the course of the year. Their paper, which is an update on previous research, found that “approximately 100 percent” of import taxes fell on American buyers.

Few Bank Failures Could Be a Warning Sign for U.S. Financial System

Unusually, not a single bank failed in 2018, and just four small lenders have gone under since the end of May 2019. Yet some bank analysts and former regulators say the very paucity of failures may be a sign that hidden risks are building, according to a Wall Street Journal analysis. “It’s in the good times, when things seem very calm and when there are no bank failures, that the bad loans are made,” former FDIC Vice Chairman Thomas Hoenig said. The financial crisis saw a spike in bank failures, as measured by the number of failed lenders and the assets at those firms. Apart from 2018, the only years on record with no failures were 2005 and 2006, when home prices soared and banks feasted on subprime mortgage debt in the run-up to the financial crisis. Regulators say that the current calm is a sign of strength in the economy, which is in its 11th year of expansion. Even banks that do run into trouble can easily raise fresh capital or find a merger partner. All four banks that failed in 2019 were small, and one of them, the Enloe State Bank, with a single branch near Dallas, collapsed as a result of what Texas banking authorities said was “insider abuse and fraud by former officers.” Failures “have been small in number and nothing that gives us concern that there is a systemic problem,” said FDIC Chairman Jelena McWilliams in November. Some of the failures would have occurred sooner in a weaker economy, she said. (Subscription required.)

World Bank Sees Growth Slowing Amid Nagging Risks

Investors set aside their jitters over the recent Middle East tinderbox to send stocks to new highs, but economists taking a long view see graver threats to growth both at home and abroad looming on the horizon, the Washington Post reported. The World Bank in its latest forecast cut expectations for global growth this year by .2 percent — to 2.5 percent — citing “fragile” conditions brought on by ongoing trade uncertainty and a slowdown in investment. That would amount to a tiny improvement over 2019, which saw the worldwide economy expand by 2.4 percent, the slowest pace since the 2008 financial crisis. The development bank left room for rosier outcomes but warned that “downside risks predominate, including the possibility of a re-escalation of global trade tensions, sharp downturns in major economies” and disruptions in the developing world. The outlook closer to home is gloomier. The World Bank sees U.S. growth stumbling from the unspectacular 2.3 percent growth it notched in 2019 to 1.8 percent this year — on its way down to 1.7 percent in both 2021 and 2022. And the World Bank’s forecasters aren’t alone: Economists gathered at the American Economic Association’s annual meeting last week shared a “dark” mood, according to a New York Times article. “Underlying their sense of foreboding was a widespread sentiment that the current expansion is built on a potentially shaky combination of high deficits and low interest rates — and when it ends, as it is bound to do eventually, it could do so painfully,” according to the article. (Subscription required.)

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New on ABI’s Bankruptcy Blog Exchange: Lenders Have Reason to Encourage Faster Debt Payoffs

Research shows most consumers would prefer more options to pay down their debt early. A recent blog post examines why it would also help banks.

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IRS Provides Tax Relief for Those with Discharged Student Loans

ABI Bankruptcy Brief

January 16, 2020

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

IRS Provides Tax Relief for Those with Discharged Student Loans

The IRS and Treasury Department released guidance yesterday that will allow more people with discharged student loans to receive tax relief, The Hill reported. Under the guidance, certain taxpayers with discharged student loans will not have to report the amount of the loan as gross income on their federal tax returns. The guidance applies to taxpayers whose federal loans were discharged by the Department of Education because they were attending a school that closed or because they established that "a school’s actions would give rise to a cause of action against the school under applicable state law," the IRS said. The guidance also applies to taxpayers whose private loans were discharged as a result of legal settlements against colleges and certain private lenders. The new guidance comes after Treasury and the IRS in recent years have provided similar tax relief to taxpayers who took out loans in order to attend schools owned by Corinthian Colleges Inc. or American Career Institutes Inc. — now-defunct for-profit institutions. Treasury and the IRS said in the new guidance that they determined that it's appropriate to extend that tax relief to people who had taken out loans to finance attendance at other schools as well.

New Jersey Could Soon Become First State to Mandate Severance for Employees in Mass Layoffs

New Jersey state lawmakers approved a bill Monday that would compel employers to give more notice and pay severance to laid-off workers, after a public backlash against the treatment of workers who lost their jobs in the retail apocalypse, the Washington Post reported. The bill, which has been called the “Toys ‘R’ Us bill,” after workers of the retail chain that filed for bankruptcy in 2017, requires larger employers to pay workers one week of severance for each year of service. It also gives employees 90 days’ notice, rather than just 60 days, in the event of a mass layoff. It was approved 55-21. “When businesses go bankrupt or close, far too often, workers are given little notice or severance pay. We saw this happen right here in New Jersey last year when Toys “R” Us filed for bankruptcy," lawmaker Annette Quijano (D), a primary sponsor of the bill, said in a statement. "Employees deserve to be treated fairly, especially when they are forced to leave a job due to circumstances beyond their control.” The bill, which only applies to employers with 100 or more full- or part-time workers laying off 50 or more people, was approved by the state’s Senate in December. It now goes to the desk of Gov. Phil Murphy (D).

Consumer Spending Solid at End of Holiday Shopping Season

Consumers headed into 2020 on a solid footing, driving up retail sales in the final month of the holiday season, the Wall Street Journal reported. December retail sales, a measure of purchases at stores, restaurants and online, increased a seasonally adjusted 0.3 percent from a month earlier, the Commerce Department said today. Solid gains in nearly every category offset a drop in motor-vehicle sales, the data showed. Consumer spending has been supported by a strong jobs market and wage gains, as well as diminished tariff uncertainty over the U.S.-China trade dispute. Excluding the volatile categories of autos and gas, retail sales rose 0.5 percent in December, the strongest pace of growth in five months. Still, updated numbers from Commerce showed retail sales outside of motor vehicles and gasoline declined in the prior three months. December department-store sales slipped 0.8 percent from November and declined 5.5 percent from a year earlier. Meanwhile, sales at nonstore retailers, a category that includes internet merchants such as Amazon.com Inc., were up 0.2 percent from November and increased 19.2 percent compared with a year earlier. (Subscription required.)

Banks Reported 2019 Large Profits with the Help of Consumers’ Credit Card Debt

A growing tide of consumer debt helped propel some of the country’s largest banks to major profits last year, the Washington Post reported. JPMorgan Chase, the country’s largest bank, said this week that it earned a record $36 billion profit last year with credit card loans increasing 8 percent. U.S. Bancorp said yesterday that it brought in $7 billion last year with the help of a 7.6 percent increase in its credit card business. Citigroup, which reported a profit of $19 billion last year, said that its branded cards business increased 8 percent in North America last year. Even Wells Fargo, which has been struggling to rebound from scandals, found a bright spot with consumers, reporting that credit card loans were up $2 billion during the fourth quarter. “Even though consumers are confident, people are still carrying significant debt,” said Ted Rossman, an analyst for CreditCards.com. Consumers’ appetite for credit cards has not been dampened by relatively high interest rates. The average rate is 17.3 percent, near a record high, for consumers with a good credit score, according to CreditCards.com, which surveys the country’s 100 most popular cards. The cost is steeper for consumers with lower credit scores, 25.30 percent, according to the site.

Lawmakers Press Rulemaker on Economic Impact of Credit-Loss Standard

The chairman of the Financial Accounting Standards Board on Wednesday faced a barrage of questions from lawmakers seeking to better understand the economic effects of a controversial new rule on credit-loss accounting, the Wall Street Journal reported. During an oversight hearing, members of the House Committee on Financial Services’ Subcommittee on Investor Protection, Entrepreneurship and Capital Markets questioned FASB Chairman Russell Golden, expressing concern that the new accounting rule would negatively affect banks, consumers and the economy at large. Lawmakers cited fears from the banking industry that the rule would curtail credit availability, make credit losses worse in a recession and heighten volatility of bank earnings. “We are setting ourselves up for an even larger problem going forward, caused by accounting,” said Rep. Trey Hollingsworth (R-Ind.). The Current Expected Credit Losses rule (CECL) requires lenders to record expected future losses as soon as loans are issued. The rule was adopted in 2016 and started to go into effect for large public banks on Dec. 15. FASB in October delayed the rule’s effective start date for private and nonprofit lenders until after Dec. 15, 2022. Before CECL, lenders didn’t have to recognize losses until they had evidence the losses had been incurred. FASB, which sets U.S. accounting standards, changed the rule to provide investors with more transparency about the loan-issuing process. (Subscription required.)

2020 Edition of the Mini-Code Now Available for Purchase

Now available for purchase and immediate delivery: The 2020 edition of the Mini-Code (incorporating the Small Business Reorganization Act, the Family Farmer Relief Act, and the HAVEN Act), plus the 2020 edition of the Mini-Rules (including all rules adopted as of Dec. 1, 2019). Order your copies today at store.abi.org!

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New on ABI’s Bankruptcy Blog Exchange: In Rebuke of CFPB, States Look to Get Tough on Debt Collectors

In another sign of state officials trying to outdo the Consumer Financial Protection Bureau, governors in California and New York want greater authority to license and oversee the debt collection industry, according to a recent blog post.

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Report: U.S., Canadian Oil Company Bankruptcies Surge 50 Percent in 2019

ABI Bankruptcy Brief

January 23, 2020

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

Report: U.S., Canadian Oil Company Bankruptcies Surge 50 Percent in 2019

A report released yesterday by Dallas law firm Haynes and Boone said that the number of oil and gas company bankruptcies in the U.S. and Canada increased 50 percent in 2019 over the previous year, and is likely to increase as a slide in energy prices continues to shake producers, Reuters reported. U.S. and Canadian oil and natural gas exploration and production company bankruptcies totaled 42 in 2019, up from 28 in 2018, the law firm said. A total of 208 oil and gas production companies filed for bankruptcy between 2015 and 2019, according to the report. "This increase in year-over-year filings indicates that the reverberations of the 2015 oil price crash will continue to be felt in the industry through at least the first half of 2020," Haynes and Boone said in the report. Oilfield service companies were again hit hard with the number of bankruptcies nearly doubling from 12 in 2018 to 21 in 2019, the largest being the $7.4 billion filing by Weatherford International in July. Midstream companies that provide storage and pipelines to producers fared better, with only two bankruptcies in 2019 out of a total of 28 since the beginning of 2015.

U.S. Regulator to Move on Low-Income Lending Overhaul Without Fed

A top U.S. banking regulator said yesterday that he plans to push ahead with a proposal to overhaul rules governing billions of dollars of lending in low-income neighborhoods despite objections from the Federal Reserve, the Wall Street Journal reported. Comptroller of the Currency Joseph Otting said that he doesn’t see that there is time to compromise with the Fed regarding a December proposal that would update federal regulations under the Community Reinvestment Act. The proposal was crafted jointly by his office and the Federal Deposit Insurance Corp. Otting said that the Office of the Comptroller of the Currency will receive comments on its proposal until March 9 and issue a final rule about 60 days later. The growing rift among federal banking regulators makes it likelier that banks will have to navigate different sets of rules under the community reinvestment law, which was enacted in 1977 to end “redlining” — the practice of avoiding lending in certain areas, often lower-income communities, which served to deepen racial disparities in housing and education. The OCC oversees roughly 70 percent of activity under the rules, and its proposal would apply to some 1,200 banks — including some of the biggest, such as JPMorgan Chase & Co. and Wells Fargo & Co. The Fed oversees about 15 percent of CRA activity. Earlier this month, Fed governor Lael Brainard, who is leading the central bank’s efforts to update the act, criticized the joint proposal by the OCC and FDIC. She said that it could encourage some banks to meet their CRA requirements through a small number of large loans or investments, potentially reducing many poor and middle-class Americans’ access to financing. (Subscription required.)

110 Million Consumers Could See Their Credit Scores Change Under New FICO Scoring

Americans who are struggling to pay off their debt could see lower FICO credit scores in their future, especially if they miss payments, CNBC.com reported. Fair Isaac Corp., the company behind the popular FICO credit score, announced the launch of its latest FICO 10 model today, Jan. 23, that will start incorporating consumers’ debt levels into their scoring model. This comes as total household debt in the U.S. has steadily increased for about two years, and currently sits at about $13.95 trillion as of September 2019, according to the Federal Reserve Bank of New York. That’s higher than the previous high of $12.68 trillion seen right before the 2008 financial crisis. FICO estimates that about 110 million consumers will see a change to their score under the new credit score model, with most people seeing less than a 20-point swing in either direction. Roughly 40 million will see a shift upward over 20 points and another 40 million will see a shift downward, FICO says. The new scoring model will also likely create a wider gap between those who are considered good credit risks and those who are not. Consumers who already have good credit, for example, and who continue to whittle down their existing loans and make on-time payments will see higher scores. But those who score below 600 will see bigger dips in their scores under the new model.

Commentary: Chicago Doubling Down on Dangerous ‘Securitized Bonds'

Chicago's already sold off its share of future sales tax revenue that flows from the state to secure other bonds, and new bondholders will be taking a junior ownership position in that, according to a Crain's Chicago Business commentary. The city indeed will get about $250 million up front, from refunding savings, to put toward this year's budget. The exact numbers on that and some other aspects of the new bond offerings were still pending as this was being written. While chances may be remote that Chicago would go bankrupt, bond buyers are not that optimistic. That's why they want conveyance of full ownership of streams of income to collateralize their loans, called "securitized bonds." Prevailing legal opinion says they are likely, though not entirely certain, to get priority for payment over everything else, even in bankruptcy. The big losers may end up being taxpayers, service recipients, public pensioners and everybody else with a stake in government except the muni bond community: bondholders, underwriters, bankers, lawyers and so on, according to the commentary. Securitized bonds raise the risk of an "assetless bankruptcy," the worst of all outcomes. The debtor then has nothing to work with to get a fresh start, and there's nothing left for unsecured creditors. Those unsecured creditors would include pensioners insofar as pensions are underfunded.

Shadow Banks Come into the Light in Global Lending

According to Bank for International Settlements data released this week, nonbank financial institutions are leading the growth in cross-border lending, with cross-border banking claims in the third quarter up 17 percent from a year earlier. That’s the fastest growth in at least six years, when records began, the Wall Street Journal reported. Banks’ cross-border claims on and liabilities to nonbank financiers have risen by nearly $8 trillion since the end of 2013, while their cross-border exposure to other banks has actually declined slightly under the weight of increasingly stringent regulations. Shadow banks typically include brokers, clearinghouses, funds, investment trusts and structured finance vehicles. While there is nothing inherently wrong about their becoming more important, the shift raises questions among experts about how they’ll behave in a sharp slowdown or financial crisis. (Subscription required.)

First Published Opinion on Retroactive Application of the HAVEN Act References ABI's Veterans Affairs Task Force

Hon. Robert Jones of the U.S. Bankruptcy Court for the Northern District of Texas provides good supporting authority in a Nov. 21, 2019, dicta opinion for the retroactive application of the HAVEN Act to cases that were pending when the President signed the bill into law on Aug. 23, 2019. The In re Price opinion is also notable for its reference to ABI's Veterans Affairs Task Force. See below:

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New on ABI’s Bankruptcy Blog Exchange: Denial of Stay Relief Is a Final Order, Says the U.S. Supreme Court

The Supreme Court in Ritzen Group Inc. v. Jackson Masonry LLC issued a unanimous opinion last week, ruling that the Sixth Circuit Court of Appeals correctly denied the ability of creditor Ritzen Group Inc. to appeal the bankruptcy court’s order denying as untimely Ritzen’s motion for relief from the automatic stay in Jackson Masonry’s chapter 11 case, according to a recent blog post.

For further information on the Supreme Court's opinion in Ritzen, be sure to read ABI Editor-at-Large Bill Rochelle's analysis.

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PwC: Retail M&A Deals Fell 19 Percent in 2019

ABI Bankruptcy Brief

January 30, 2020

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

PwC: Retail M&A Deals Fell 19 Percent in 2019

A new report from PricewaterhouseCoopers found that retail's merger and acquisition deal volume fell 19 percent between 2019 and 2018, with 465 total deals last year, RetailDive.com reported. In dollar terms, the report found that the total value of deals in 2019 fell 28 percent, to $27.8 billion, compared to the prior year. PwC attributed the "dwindling M&A activity" for the year overall in retail on a host of factors, including e-commerce disruption, growing competition from resale and rental, difficulties in keeping physical retail relevant, the challenges in managing inventory and merchandise flow, rising labor costs and trade disputes. And the already relatively sluggish deal pace in 2019 would have yet been lower if not for the fourth quarter, which saw a spike in M&A activity and accounted for 67 percent of retail investments for the year, according to PwC. Q4 hit the highest number in quarterly value since Q2 of 2018, PwC said. The average deal size also got a 220% boost in the back half of the year from the Tiffany-LVMH "megadeal." At $16.2 billion, that deal accounted for 58 percent of all retail deals in 2019.

Opinion: Borden Dairy’s Bankruptcy and the Continued Decline of the Milk Industry

Borden Dairy Co. filed this month for bankruptcy protection, but it’s not the first big milk producer to take this step in the past year: Dean Foods Co. filed for bankruptcy in November. This is sad news, but it is also an opportune time to consider the little-appreciated ways that capitalist enterprise and government regulation went hand-in-hand to create the modern milk business that Borden, founded in 1857, once represented. Gail Borden patented a method for condensing milk using a vacuum process, but his company originally struggled. Borden’s fortunes changed on a single order during the Civil War of 500 pounds of condensed milk, which led to many more. In the late 19th century, most city-dwellers continued to buy conventional milk, not the safer condensed stuff, and infant mortality rates remained at eye-popping levels. Only when the state and city governments began cracking down on unhealthy dairies and other abuses did things begin to change. Large vertically integrated companies like Borden, which had already instituted rigorous quality-control programs, could readily meet the new regulations in a way that smaller, independent dairies and distributors could not. As milk became safer and cheaper, it became the drink of choice. When combined with a host of other government initiatives — New Deal subsidies and price supports, school-lunch programs and others — big milk became further entrenched in the nation’s diet. But then, beginning in the 1970s, milk consumption began the slow, steady decline that helped fuel the Borden bankruptcy. The conventional explanation is that Americans started consuming other drinks: fruit juices, for example, and eventually, milk substitutes. Regulation may have played a role here, too. The federal government introduced food labeling in 1973, and a growing number of products eventually were forced to confess their amounts of healthy and unhealthy contents. Guidelines established in 1977 targeted a few villains, foremost among them fat. The milk industry’s pride of place in the nation’s diet is a function of regulation. But so, too, may be its long, inexorable decline.

Big Credit-Reporting Changes Sought in Bill Passed by U.S. House

Credit-reporting companies would have to remove negative data more quickly and give consumers more tools to dispute information they believe is inaccurate under a package of bills passed by U.S. lawmakers yesterday, Bloomberg News reported. The legislation, which cleared the Democrat-controlled House on a 221-189 vote, calls for major changes in business practices by Equifax Inc., Experian Plc, TransUnion and rival firms. It would also expand the Consumer Financial Protection Bureau’s power to validate credit scores and prohibit certain practices used to calculate them. Rep. Maxine Waters (D-Calif.), who chairs the House Financial Services Committee, has made reform of credit-reporting companies a priority as part of a broader effort to improve credit access for minority and lower-income consumers. The legislation faces long odds of passage by the Republican-controlled Senate, where some majority lawmakers say that the government shouldn’t get involved in managing a private-sector process. The credit-scoring companies came under public scorn and lawmakers’ scrutiny after a massive data breach at Equifax in 2017 compromised the personal data of almost half the U.S. population. The company agreed last year to pay as much as $700 million to resolve federal and state investigations into the cyberattack.

Fraudulent Social Security Calls Now No. 1 Phone Scam, According to Senate Report

An annual report from the Senate Aging Committee released yesterday found that Social Security impersonation calls are now the nation’s most-reported phone scam, The Hill reported. Fraudulent IRS calls were also the most prevalent scam reported in the previous five years. The typical scam involves a robocall from someone impersonating the Social Security Administration (SSA) and asking for the recipient’s personal information. The calls resulted in scammers bilking Americans, mostly seniors, for $38 million last year, according to the Senate report, citing the Federal Trade Commission. SSA Commissioner Andrew Saul and Inspector General Gail Ennis, both confirmed in 2019, told members of the Senate Special Committee on Aging at a hearing Wednesday that they have made combating the scams a top priority. “The magnitude of this problem caught us off guard,” Saul said. “Americans trust our agencies, and we do not allow swindlemen to erode that trust.” Saul stressed that educating Americans about which calls are suspicious is the best way to tackle the problem. He said that now when anyone visits the agency’s website, they’ll see a banner linking to tips on how to avoid the scam. The SSA and Office of the Inspector General partnered to create an online reporting forum so they can investigate and stop the scammers. They said they have received more than 115,000 reports of fraudulent calls since the forum went live in mid-November.

Worried Reporters Make a Plea: Please Buy Our Paper

As hedge funds take on a greater role in newspaper chains, journalists at the Chicago Tribune and elsewhere are sending out an S.O.S., the New York Times reported. After having bought up roughly 32 percent of Tribune Publishing in recent years, Alden Global Capital is the company’s largest shareholder. It can buy more Tribune Publishing stock as soon as July. This month, the company asked journalists at newspapers across the country to volunteer for buyouts. In response, some Chicago Tribune journalists are undertaking efforts to have wealthy Chicagoans purchase the company away from its private-equity owners. Overall, journalists are wary of Alden because of its cut-to-the-bone management strategy. In 2018, a group of writers and editors at the Alden-owned Denver Post published a special package devoted to attacking the company, which had enacted deep staff cuts at the paper. It is certainly not news that the newspaper business is in trouble. Its onetime profit center, print advertising, has declined sharply as readers increasingly prefer to get the news on screens. The finance industry, looking at newspapers as distressed assets with hidden value, has swooped in, scooping up struggling publications, cutting their staffs and wringing them for profits. Journalists in other cities have made moves to protect their jobs — by working to form unions, seeking out new ownership or putting a spotlight on private-equity's actions in their newsrooms.

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New on ABI’s Bankruptcy Blog Exchange: Regulators Propose Volcker Rule Changes to Allow VC Stakes

In another rollback of the bank trading ban, federal agencies have unveiled a plan to allow financial institutions to invest in multiple companies through certain fund structures, according to a recent blog post.

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As Americans Sour on Milk, Could Famous Dairy Brands Disappear?

ABI Bankruptcy Brief

February 6, 2020

 
ABI Bankruptcy Brief
 
 
 
 
NEWS AND ANALYSIS

As Americans Sour on Milk, Could Famous Dairy Brands Disappear?

As consumers increasingly turn to milk alternatives and thousands of dairy farms are collapsing, milk producers are now faltering, too, putting thousands of jobs at risk and threatening their brands, USA Today reported. The recent chapter 11 bankruptcies of two major milk producers, Dean Foods and Borden Dairy, have shown how a sharp decline in milk sales poses an existential threat to leading dairy brands like Land O' Lakes and TruMoo. Consumption of dairy milk fell about 41 percent from 1975 to 2018, dropping from 247 pounds per person annually to 146 pounds, or about 17 gallons, according to the Department of Agriculture’s National Agricultural Statistics Service. The trends have contributed to a financial crisis for dairy farms for years. More than 94,000 family dairy farms shut down from 1992 to 2018, according to the National Farmers Union. Part of the problem is that even as dairy farms disappear, overall milk production has increased — in part due to improved techniques for cow milking — which has flooded the market with milk. Now, after several years of price drops due to excess supply, farmers have boosted milk prices to try to make up for their own losses. In November, the most recent month in which data was available, the price of raw milk was $21 per 100 pounds, up 22 percent from November 2018, according to the USDA.

CFPB Director Assailed Over Restricting Power to Police ‘Abusive’ Conduct

The Consumer Financial Protection Bureau’s leader came under criticism Thursday from U.S. House Democrats over recent enforcement guidance that some critics said would undercut the regulator’s ability to crack down on abusive industry practices, the National Law Journal reported. Appearing before the House Financial Services Committee, CFPB Director Kathy Kraninger was scolded by Democratic lawmakers over the guidance, in which the bureau said that it was aiming to bring clarity to an enforcement area that financial industry advocates have described as poorly defined. Indeed, in the decade since the Dodd-Frank Act created the CFPB, the financial industry has broadly bemoaned the agency’s power to police “abusive” practices, authority that came in addition to long-established standards for pursuing “unfair or deceptive” conduct. U.S. Rep. Maxine Waters (D-Calif.), chairwoman of the House financial services committee, described Kraninger’s leadership of the bureau as “misguided” and said the new guidance “undercuts” its enforcement abilities. Kraninger’s appearance came two weeks after the CFPB released the guidance. The new policy said the agency would only challenge conduct as “abusive” if the harm to consumers outweighed the benefit. The CFPB also said it would generally avoid labeling conduct “abusive” in addition to “deceptive” or “unfair,” instead bringing standalone cases that would more clearly demonstrate how the agency defines “abusive.” The bureau said it would impose fines only in cases where there has been a “lack of a good-faith effort to comply with the law,” although the agency plans to continue seeking restitution for harmed consumers. 



In related news, Kathy Kraninger, director of the Consumer Financial Protection Bureau (CFPB), said today that she asked the Supreme Court to strip her immunity from President Trump to settle “uncertainty” lingering over the agency, The Hill reported. Kraninger said that she is supporting a legal challenge to the bureau before the Supreme Court in order to resolve questions about the agency’s structure. The Supreme Court is set to hear arguments in March on Seila Law vs. CFPB, a lawsuit that accuses the bureau of being unconstitutional because it infringes upon the president's authority. Kraninger and the Trump administration filed a brief in September asking the Supreme Court to strip a provision from the Dodd-Frank Act, which created the CFPB, that protects her from being fired at will by the president. Under Dodd-Frank, the president may only fire the CFPB director “for cause,” which is generally understood to be misconduct or incompetence. “Congress obviously provided a clear mission for this agency, but there are some questions around this and I want the uncertainty to be resolved,” Kraninger said in testimony before the House Financial Services Committee. “I would very much like to see a resolution on this question because it has hampered the CFPB and its ability to carry out its mission virtually since its inception.”

Analysis: How the Risk Profiles of Large U.S. Bank Holding Companies Changed After the Global Financial Crisis

After the global financial crisis, regulatory changes were implemented to support financial stability, with some changes directly addressing capital and liquidity in bank holding companies (BHCs) and others targeting BHC size and complexity. Although the overall size of the largest U.S. BHCs has not decreased since the crisis, the organizational complexity of these same organizations has declined, with less notable changes being observed in their range of businesses and geographic scope, according to an analysis by the Federal Reserve Bank of New York's "Liberty Street Economics" blog. The analysis explores how different types of BHC risks — risks that can influence the probability that a BHC is stressed, as well as the chance of systemic implications — have changed over time. The results are mixed: Levels of most BHC risks tend to be higher than in the years immediately preceding the crisis, but are markedly lower than the levels seen during and immediately following the crisis.

Commentary: Reforms May Be the Downfall of Pension Funds

The shock of U.S. state and local pension fund losses in 2008 led to a flurry of reforms. These may not have actually improved aggregate funding ratios, but they did stop the decline, according to a Bloomberg commentary. In the next potential recession, the reforms of 2008-16 may prove to be the undoing of a system that has staggered along for decades. The next recession could be mild, or perhaps the current system will prove resilient, according to the commentary. It would still be very painful, of course, to public sector workers, government creditors and taxpayers, but alternative ways of resolving underfunded pension funds might be more painful. Much of the focus has been on the funding ratio of pensions, which is the ratio between the value of assets in a fund to the present value of its liabilities. But this is a theoretical calculation that depends on several hard-to-estimate parameters. Moreover, it only tells us that at some point in the future either someone will have to kick in more funds or promised benefits cannot be paid. It doesn’t tell us when that will happen. Funds can survive for decades — perhaps forever — without full funding. Looking at aggregate numbers is misleading, as a crisis will be triggered by the funds in the worst financial shape, not the average fund, according to the commentary. It is possible for an optimist to hope that aggregate pension assets could cover aggregate benefit obligations with perhaps a few only mildly painful adjustments. But even if that’s true in the aggregate, if enough of the 6,300 state and local pension plans fail, it will cause legal and political changes that will likely end the current system of partially funded defined-benefit plans for public sector employees.

Upcoming ABI Webinar and New Website Will Help Practitioners Navigate the Small Business Reorganization Act Before It Takes Effect on Feb. 19

As the Small Business Reorganization Act of 2019 (SBRA) takes effect on February 19, ABI is holding a special webinar next Tuesday with a panel of experts to identify key provisions to be aware of within the new law. ABI also launched the "SBRA Resources" website to help practitioners and struggling small businesses learn about the new law and stay updated on SBRA developments. To register for free for the "What's the Last Word on SBRA?" Webinar on February 11 at 1 p.m. EDT, please click here.

To visit ABI's SBRA Resources site, please click here.

Duberstein Bankruptcy Moot Court Competition – Call for Preliminary Round Judges

Each year, the American Bankruptcy Institute and St. John’s University School of Law co-sponsor the Duberstein Bankruptcy Moot Court Competition, which brings teams from law schools throughout the country to New York to argue two sophisticated bankruptcy issues. This year, 60 teams are participating in the competition in New York, which will be held from Saturday, February 29, through Monday, March 2, 2020. More than a dozen bankruptcy, district and court of appeals judges will judge the advanced oral rounds and attend the Gala Awards Reception at Gotham Hall on March 2. This year’s hypothetical addresses §§ 365(c)(1) and 1129(a)(10) as tied together by a compelling business bankruptcy fact pattern. The hypothetical can be viewed here.

The Duberstein Competition is looking for volunteers to serve as judges for the preliminary rounds of the competition on Saturday, February 29, and/or Sunday, March 1, at St. John’s University’s Queens campus. We have a particular need for judges on Sunday morning. CLE credit is available, and the commitment is only for one half-day (unless you are interested in participating in multiple sessions). To register to serve as a judge for one or more sessions of the preliminary rounds, please complete this Preliminary Judge Form.

If you have any questions about the Duberstein Competition or serving as a preliminary round judge, please do not hesitate to contact Paul R. Hage, co-director of the Duberstein Competition, at (248) 840-9079 or phage@jaffelaw.com.

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New on ABI’s Bankruptcy Blog Exchange: CFPB Settlement Would Bar Lender from Doing Business in 17 States

Think Finance, which had teamed with tribal lenders to offer high-interest installment loans, could no longer make or collect on loans in states that have caps on interest rates, under terms of a proposed settlement with the Consumer Financial Protection Bureau (CFPB), 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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