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Analysis: Bankruptcy Filings by U.S. Energy Producers Pick Up Speed

ABI Bankruptcy Brief

August 15, 2019

ABI Bankruptcy Brief

Analysis: Bankruptcy Filings by U.S. Energy Producers Pick Up Speed

Bankruptcy filings by U.S. energy producers so far this year have already nearly matched the total for the whole of 2018, according to a report yesterday by Haynes and Boone LLP, as volatile oil and gas prices are driving companies to seek protection from creditors, Reuters reported. A total of 26 firms with debts totaling $10.96 billion have filed for court restructuring through mid-August, according to the law firm’s report. Last year, 28 companies filed for bankruptcy listing $13.2 billion in debt, while 24 firms sought protection in 2017 with $8.5 billion in debt. Throughout most of 2019, U.S. light, sweet crude oil has been stuck in the $50 range on the New York Mercantile Exchange, finishing on Wednesday at $55.23. West Texas Intermediate averaged $65.06 a barrel last year. Natural gas prices also have fallen so low in some places that some companies have shut in wells and others have paid pipeline operators to take their gas. Buddy Clark, a partner at Haynes and Boone, said, however, that he did not predict a new wave of producer bankruptcies similar to that which followed the oil price collapse mid-decade. In 2015, there were 44 oil and gas producers filing for protection with combined debts of $17.4 billion. “We’re not going to see anywhere near the wave of bankruptcies in 2015,” Clark said. Many of 2019’s filings are pre-planned chapter 11 restructurings, where creditors agree in advance on a financial restructuring plan, Clark said.

Get a better understanding of what happens when an oil, gas or other natural resources company goes bankrupt. Order your copy of ABI's revised and expanded When Gushers Go Dry: The Essentials of Oil & Gas Bankruptcy, Second Edition.

Study: Student Loans and Auto Debts Comprise Increasing Share of Delinquency Rates

Total household debt balances increased by $192 billion in the second quarter of 2019, boosted primarily by a $162 billion gain in mortgage installment balances, according to the latest Quarterly Report on Household Debt and Credit from the New York Fed’s Center for Microeconomic Data (the mortgage installment balances exclude home equity lines of credit, which are reported separately and have been declining in balance for some time). The new mortgage total of $9.4 trillion is slightly higher than the previous high in mortgage balances from the third quarter of 2008 in nominal terms. In the data, there are several categories of delinquency — for example, 30, 60, 90 and 120+ days past due — plus “severely derogatory,” which includes any stage of delinquency paired with a repossession, foreclosure or “charge-off." During and after the Great Recession, the 90+ day delinquency rate, especially for mortgages, soared and an unprecedented number of properties entered foreclosure. This created a surge in severely derogatory balances that took years to work down, even as delinquencies other than severe derogatories were declining relatively rapidly. Although the housing crisis produced a huge increase in severely derogatory mortgages, that effect has dissipated as the foreclosure pipeline has cleared out in even the slowest states. Today, auto and especially student loan balances are the interesting components: In the second quarter of this year, the outstanding severely derogatory balance is comprised of 35 percent defaulted student loans, which have grown stunningly since 2012. Auto loans are now 21 percent of the outstanding severely derogatory balance, a larger share than what we’ve seen historically as the auto loan market has expanded and auto loan delinquencies have been increasing for subprime borrowers over the past five years.

New Puerto Rico Governor Finally Receives Support

Puerto Rico's new governor finally appeared to be overcoming some of the challenges to her authority yesterday following weeks of political turmoil in the U.S. territory, with key members of the majority New Progressive Party expressing support, the Associated Press reported. That may allow Gov. Wanda Vázquez, who has never held elected office, to turn her attention to the territory’s lagging efforts to recover from 2017’s devastating Hurricane Maria, as well as the grinding economic slump and debt crisis that has led to demands for austerity from a federal board overseeing its finances. Senate President Thomas Rivera Schatz, who had been seen as her chief challenger, issued a statement yesterday backing her and saying that he’d only been looking for a replacement because he thought Wanda Vázquez didn’t want the governor’s job — although his efforts had continued well after she said she did. Rivera Schatz had suggested the post go to the island’s congressional representative, Resident Commissioner Jenniffer González, but González too issued a statement of support for Vázquez on Tuesday. Under the territory's constitution, the governorship fell to Justice Secretary Vázquez on Aug. 7 when Gov. Ricardo Rosselló resigned after intensive public protests and his attempt to name a last-minute successor were knocked down by the territory’s Supreme Court.

U.S. Will Back More Condominium Loans Aimed at First-Time Buyers

The Trump administration is vastly expanding the scope of condominium purchases eligible for lower-down-payment loans, the Wall Street Journal reported. The move, announced yesterday by the Federal Housing Administration, could help revive the entry-level condo market for first-time buyers because FHA-backed loans require only a 3.5 percent down payment and lower credit score than conventional loans. It also loosens financial-crisis-era rules and could expose the government to a higher likelihood of loan default if the housing market continues to slow and prices fall. The FHA insured a million home loans last year made by banks and other private lenders, the vast majority of which were for single-family homes. With the new rules, the agency estimates it could insure as many as 60,000 additional condo loans each year, on top of the 16,000 condo loans it backed in 2018. The median price of an existing condo or co-op unit was just over $260,000 in June, compared with nearly $290,000 for the median existing single-family home, the National Association of Realtors said. (Subscription required.)

Commentary: Subzero Interest Lending Presents Alarming Signal for Global Financial Markets

For Americans accustomed to paying 4 or 5 percent mortgage rates, let alone the double-digit figures consumers endured in the early 1980s, the new loan from Denmark’s Jyske Bank might seem inconceivable, according to a Washington Post commentary. The Danish lender last week started offering home buyers 10-year mortgages at an interest rate of -0.5 percent. That means borrowers over a decade will pay back a little less than the amount borrowed, not including one-time fees. This highly unusual condition may be good for Danish home buyers, but economists say that it’s an alarming sign for the global economy. Several major governments and more than 1,000 big companies in Europe are now able to effectively borrow from global financial markets at a negative interest rate. For Jyske Bank, that means it can turn around and lend money at a subzero interest rate, too. The amount of this type of debt, issued as government or corporate bonds, has doubled since December and now totals $15 trillion. The sudden increase suggests that a fast-rising share of investors are so nervous about the future they’re willing to actually lose a little money by lending it to a borrower that is almost certain to pay it back, rather than risk betting on something that could go bust.

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Racial Divide Exposed in Lending to the Smallest of Small Businesses

A new report from the New York Fed found that African-American and Hispanic owners of one-person businesses are more likely to be discouraged from applying for financing, and they’re less likely to receive financing when they do apply for it, than their white counterparts, 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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First Circuit PROMESA Opinion Addresses the Automatic Stay and Trust Funds

Appeals court says that the bankruptcy court must always address the existence of a trust when ruling on a motion to modify the automatic stay.