Puerto Rico

PROMESA Breaks from Muni Traditions on Collective Action, According to Experts

The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) makes its biggest break from municipal finance tradition in a section dealing with collective action, public finance lawyers said, Bond Buyer reported on Tuesday. The section is "unique in our justice system," said James Spiotto, managing director of Chapman Strategic Advisors; it is the first law in U.S. history that carves out a period outside of bankruptcy for bondholders to negotiate terms of a restructuring. Title VI, section 601(j) of PROMESA addresses how bondholders can agree to modify their own bond terms. It says that holders of at least two-thirds of each pool's principal who vote must approve the modification, and that holders of at least 50 percent of total principal outstanding in each pool must approve it. According to the Act, every bond issuer has at least one pool of bonds, and these bonds are divided into different pools if they have different priorities or security features. Under the Trust Indenture Act, which normally applies to municipal bonds, 100 percent of bondholders have to agree to changes in certain terms like principal, interest and maturity, Spiotto said. PROMESA, which Pres. Obama signed on June 30, trumps the Trust Indenture Act with regards to Puerto Rico bonds. Normally in chapter 11, at least two-thirds of the holders of the debt by amount and half by number of holders must vote to accept a restructuring offer before the deal can be accepted. Ballard Spahr attorney Matthew Summers said this was similar to the PROMESA section.

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

Analysis: Despite Plunging Interest Rates, Cities and States Steer Away from Borrowing

Wall Street is urging governments to invest in big-ticket infrastructure projects, but voters and public officials are not so keen on the idea, according to a Wall Street Journal analysis on Monday. Plunging global interest rates have made borrowing cheaper than ever. But instead of spending on aging roads, bridges and buildings, many state and local governments are scaling back. New government-bond issues have dropped to levels not seen in the past 20 years. Municipal borrowers issued about $140 billion in bonds for new projects last year. Adjusted for inflation, that is 53 percent lower than in 2006 and 21 percent lower than in 1996. So far this year, municipalities have borrowed $95.1 billion, about $10 billion more than at this time last year. Seven years after the recession ended, voters and government officials remain scarred by the deep budget cuts they endured at the height of the financial crisis and the sluggish revenue growth that has constrained spending since then.

U.S. Household Debt Climbs to $12.3 Trillion in 2Q 2016

Total U.S. household debt increased by $35 billion to $12.3 trillion in the second quarter, according to the New York Fed's latest quarterly report on household debt, FoxBusiness.com reported yesterday. That increase was driven by two categories: auto loans and credit cards. From 2008 to 2013, total household debts dropped by more than $1.5 trillion. First student loan and auto loan balances began to rise, then mortgages and finally credit cards. Total household debt balances are now $400 billion below their 2008 peak. Now, credit card use is returning among individuals with low credit or subprime credit scores below 660. Among people with credit scores between 620 and 660, the share that had a credit card rose to 58.8 percent in 2015 from a low of 54.3 percent in 2013. Among those with scores below 620, the number of people with a credit card increased to 50 percent from a low of 45.6 percent two years ago. Both figures for 2015 are the highest since 2008. The report "highlights a positive ongoing trend in household debt," said Donghoon Lee, a New York Fed economist. "Delinquency rates continue to improve, even as credit has become more widely available." Less than 1 percent of credit card balances are 90-180 days delinquent, the lowest on record in data going back to 2003. Severely derogatory balances, including those that have been written off by banks, are at 6.2 percent, near the lowest levels in the available data. 


For more on U.S. household debt, be sure to check out yesterday's ABI Chart of the Day.
 

Layoffs Matched a Record Low in June, but Hiring Still Hasn’t Recovered

The rate of layoffs in the U.S. dipped to 1.1 percent in June, matching the lowest in records dating back 15 years, according to the Labor Department’s monthly survey of labor market turnover, the Wall Street Journal reported today. Despite a low rate of layoffs, the report presents an ambiguous picture of the U.S. labor market, showing that the rate of hiring still has yet to fully recover from the decline that occurred during the recession from 2007 to 2009. The new figures are from the Job Openings and Labor Turnover Survey (JOLTS). The report is released with a one-month lag from the main jobs report, which showed that the economy added 255,000 jobs in July.

Commentary: New Bank Rules Won't Stop Bailouts

Since the 2008 financial crisis, policymakers around the world have put new rules in place to make banks less risky and more transparent. While they're confident that these changes have made the financial system safer and eliminated the need for taxpayer bailouts, that may not be the case, according to a Bloomberg commentary on Tuesday. Prodded by regulators, banks have been increasing their buffers against losses with higher levels of shareholder capital and total loss-absorbing capital (TLAC). But more capital won't reduce the incidence of losses: In any future crisis, the problem will simply be transferred to shareholders and holders of TLAC securities, such as private investors, pension funds and insurance companies. Given the systemic and political importance of those investors, a government bailout is still the likely result. Similarly, banks are now required to hold more high-quality assets, typically government bonds, to protect against a run on deposits or a disruption to money markets. While this arrangement has helped governments finance themselves, it also introduces new problems. The credit quality of many government issuers has deteriorated, and the default risk of governments and banks are inherently linked. In a crisis, banks may not be able to sell these assets, according to the commentary.

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Ranks of the "Unbanked" Decline, FDIC Survey Finds

Fewer Americans are going without bank accounts, according to a new government survey, a trend expected to support consumer spending and housing investment in the coming years, the Wall Street Journal reported today. Reflecting economic recovery, the percentage of Americans without access to banking services fell to 7 percent in 2015 from 7.7 percent in 2013 and a peak of 8.2 percent in 2011, according to the survey by the Federal Deposit Insurance Corp. Last year’s proportion of “unbanked” households was the lowest since the FDIC started the biennial survey in 2009. That year, the share was 7.6 percent. A household is considered unbanked if no one in the family has an account with a federally insured financial institution. The survey also looks at “underbanked” households, which have a bank account but also use services such as check cashing, money transfers, payday loans and pawnshops. The percentage of the underbanked was 19.9 percent last year, little changed from 20 percent in 2013.

Analysis: Implosion of ITT Technical Institute Tough on Students, Taxpayers

The closure of ITT's 136 campuses threatens to throw nearly 29,000 indebted students off their educational tracks and to saddle taxpayers with nearly half a billion dollars in losses, according to a Bloomberg News analysis today. The collapse of ITT Tech, owned by ITT Educational Services Inc., wasn't unexpected: The Consumer Financial Protection Bureau had sued it in 2014, saying that it misled students into taking out loans with false promises about their career prospects; last year, the Securities and Exchange Commission sued, too, accusing it of defrauding investors. ITT has vigorously denied all allegations of wrongdoing. In June, the U.S. Department of Education demanded ITT stump up additional collateral, beyond the $94.4 million on file, to cover the costs of a potential failure. And last month, after the school's accreditor expressed concern about its operations, the agency barred new students from using federal aid to enroll and ratcheted up its demand for collateral—a move experts warned would trigger the school's demise. ITT soon stopped accepting new students altogether. Since another big for-profit college chain, Corinthian Colleges Inc., went under last year, the government has as of June canceled at least $97.6 million in student loan balances on students' requests. That's less than half of the roughly $214 million owed by Corinthian students at the time it shut down. ITT's students carry a total of $478.8 million in federal debt. The Education Department is frantically trying to limit debt cancellations. Students who transfer even one ITT credit toward what the agency considers "comparable" programs at other schools and then complete their studies aren't eligible to have their loans wiped. But federal regulations don't clearly define "comparable"—giving the department the authority to reject borrowers' pleas for forgiveness. The application borrowers must fill out is similarly vague.

BlackRock Says Bond Market Views Puerto Rico Board as Positive

The bond market is viewing a new federal control board charged with overseeing Puerto Rico’s finances as a positive for investors, according to BlackRock Inc.’s Sean Carney, Bloomberg News reported yesterday. "Some of the better-secured bonds had a bit of a relief rally after the board was named,” Carney, head of municipal strategy, said yesterday. BlackRock manages about $124 billion of municipal debt, including Puerto Rico bonds. President Barack Obama last week appointed seven members to the board from lists submitted by congressional leaders of both parties. The panel must curb the island’s recurring budget shortfalls, oversee any restructuring of its $70 billion of debt and address a $43 billion unfunded pension liability. “We don’t know what questions they’re going to have to answer or what hurdles they’ll have to clear," Carney said. "So there’s still a lot of unknown, but I think the market appreciated a little bit of certainty in an uncertain environment.”


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

Commentary: What’s Next if Payday Loans Go Away?

As the Consumer Financial Protection Bureau prepares to finalize proposed rules cracking down on payday lenders, critics and proponents alike are speculating on what would fill the need for short-term, small-dollar loans, according to a MorningConsult.com commentary yesterday. Payday lending has garnered criticism from progressive Democrats, such as Sens. Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio, who argue that the practice preys on the poor, trapping low-income borrowers in a cycle of deepening debt. If payday lending were to become less profitable because of the rules, it could result in increased use of installment loans, advocates say. Stronger regulation of payday lending could increase the use of financial technology such as online marketplace lending, said William Michael Cunningham, founder of Creative Investment Research, which studies trends in banking in black communities. Democratic lawmakers have also expressed hope that financial technology will fill credit access gaps in underbanked communities. The proposed CFPB regulation — with a comment period ending in October — would require lenders to confirm that borrowers are able to repay a loan, aiming to prevent borrowers from being stifled by high interest rates and monthly payments. It would also take aim at repeated short-term borrowing practices, require lenders to offer lower-risk loan options and crack down on fees against delinquent borrowers.

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