Struggling Companies that Got Debt Lifelines Are Failing Anyway​​​

Struggling companies like Incora and Envision Healthcare Corp. asked lenders for lifelines, and got them, in contentious transactions that sometimes triggered lawsuits. Then they went bust anyway, Bloomberg News reported. The bankruptcy filings, which came as recently as last week, underscore how floundering companies that seek more money from investors are often only delaying the inevitable. And when they do fail, their final financings might leave everyone worse off. A study by Fitch of 30 transactions from ailing companies seeking to borrow more, delay maturities, or otherwise manage liabilities found that 24 of these deals either amounted to defaults, or were followed by a bankruptcy or default down the line. Instead of cutting back debt as a true restructuring would, these deals often just move it around. The corporations’ debt loads typically ended up being bigger and more complicated, making it harder for creditors to untangle liabilities and figure out who will get repaid how much. Companies can also take longer to exit bankruptcy and return operations to normal. Although companies have for years sought to borrow more and otherwise tweak their liabilities when they were in decline, many of the latest iterations of these efforts have resulted in intense legal brawls. Some corporations allowed a handful of lenders that gave them additional money to jump to the front of the priority line for debt, giving those money managers a first claim on the failed company’s assets.​​​​​​ ​​​Read more.

Tomorrow: Judges, Practitioners and Trustees to Provide Testimony on Experiences with Subchapter V at First Virtual Public Hearing of ABI's Subchapter V Task Force

ABI’s Subchapter V Task Force will hold its first virtual public hearing at 3 p.m. ET on Friday, June 9, to receive witness testimony from bankruptcy judges, practitioners and subchapter V trustees on their general experiences with small business reorganizations under subchapter V of chapter 11 of the Bankruptcy Code. Witnesses scheduled to testify include:

- Hon. Hannah L. Blumenstiel (N.D. Cal.; San Francisco)
- Hon. Lori V. Vaughan (M.D. Fla.; Orlando)
- Katherine Clark of Thompson Coburn LLP (Dallas)
- John-Patrick M. Fritz of Levene Neale Bender Yoo & Golubchik, LLP (Los Angeles)
- Richardo I. Kilpatrick of Kilpatrick & Associates, PC (Auburn Hills, Mich.)
- David Mawhinney of Hart Advisory PLLC (Framingham, Mass.)
- Brian L. Shaw of Cozen O'Connor (Chicago)
- Michael St. James (San Francisco)

To register to join the public hearing administered via Zoom, please click here.

Also, the Task Force is seeking input from professionals who have worked or are working with the subchapter to study its effectiveness since it was enacted three years ago. The Task Force also intends to solicit input on subchapter V from the public via hearings and its forthcoming website, culminating in a final report to be delivered in April 2024. Please take a few moments to complete the survey. ​​​

Biden Vetoes Bill to Cancel Student Debt Relief​​​

President Joe Biden yesterday vetoed legislation that would have canceled his plan to forgive student debt, the Associated Press reported. The measure had been pushed by Republicans, but it garnered a handful of Democratic votes in the Senate as well. “It is a shame for working families across the country that lawmakers continue to pursue this unprecedented attempt to deny critical relief to millions of their own constituents,” Biden said in a statement when announcing his veto. Despite the veto, Biden’s plan still isn’t secure. The U.S. Supreme Court, which is dominated by a conservative majority, is reviewing a legal challenge that could eliminate the program. A decision is expected this summer. If enacted, Biden’s plan would forgive up to $20,000 in federal student loan debt for borrowers making less than $125,000 per year. Student loan payments were paused at the beginning of the COVID-19 pandemic. However, they will resume in August for anyone whose debt is not wiped out by Biden’s plan.​​​​​​ ​​​Read more.

Commentary: Opinions on Third-Party Releases After the Second Circuit’s Decision in Purdue Pharma*​​​

On May 30, 2023, the Second Circuit overruled the Southern District of New York (SDNY) and approved the third-party releases that had been tying up the Purdue Pharma case. Does the Second Circuit decision deepen the rift over bankruptcy releases, or is Purdue a special case? How will lower courts apply the new seven-factor test articulated by the court? Will the test prove to be rigorous and limit relief, or are the floodgates opened for businesses to seek redress in the SDNY to settle mass tort exposure? What can we expect next? How likely is a Supreme Court review? A CreditorCoalition.org blog post polled Martin Bienenstock of Proskauer (New York), Marshall Huebner of Davis Polk (New York), Edward Neiger of ASK LLP (New York), Phil Anker of WilmerHale (New York), Paul Silverstein of Hunton Andrews Kurth (New York) and Cliff White of AIS InfoSource (New York) to provide their insights on these questions. Bienenstock and White dissented from the Second Circuit’s opinion and argue that nonconsensual third-party releases are impermissible under the Bankruptcy Code and constitutional principles. While Silverstein sees only dubious statutory support for the court’s opinion, virtually all objectors had withdrawn their opposition (other than the U.S. Trustee) before the court’s decision, in effect making it a consensual case. Huebner and Anker think the Second Circuit got it right, variously arguing that statutory authority exists, and that the Purdue releases are supported by precedent and policy. Neiger disagreed, warning that would-be mass tort debtors should carefully read the Purdue Pharma decision and appreciate the convergence of the rare and unique facts and circumstances that formed the basis of the recent decision. The dissenters see the issue going up en banc or to the Supreme Court for further review given the remaining Circuit split.​​​​​​ ​​​Read more.

*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.​​​​​​

Buy Now, Pay Later Is Boosting Sales, but Signs of Users’ Stress Are Emerging​​​

Buy now, pay later options have boosted sales for some companies in recent quarters, but growing signs that consumers who tap the no- or low-fee loans are struggling suggest that businesses could soon feel a squeeze, the Wall Street Journal reported. BNPL options — from providers including Klarna, Affirm Holdings and Afterpay — gained popularity during the pandemic as shoppers leaned into the payment option for everything from cardigans to workout equipment and couches. BNPL typically consists of splitting the cost of a purchase into four or more payments, often for little or no interest, over the course of a few weeks or months. Unlike credit cards, which charge consumers interest if they don’t pay their monthly bill in full, BNPL options give users more repayment leeway and often offer a quicker and easier application process. With living costs up from a year ago and interest rates rising, the appeal of BNPL options has only gone up. In 2022, the share of online purchases using BNPL grew by 14% compared with a year earlier, according to Adobe Analytics, the data analytics arm of Adobe. In the first two months of this year, the order share was up by 10% from a year ago, the data show. But now there are indications that some buy now, pay later users are struggling. Shoppers, who continue spending at a steady clip, are using the BNPL option to delay payment not only on discretionary goods but also to buy necessities like groceries, Adobe Analytics said, with the share of these BNPL orders having grown 40% in the first two months of this year compared with a year earlier. What’s more, BNPL users, which accounted for some 17% of consumer borrowers between the first quarter of 2021 and the first quarter of 2022, were 11 percentage points more likely than non-BNPL borrowers to have a delinquency of at least 30 days on their credit records, according to a March report from the Consumer Financial Protection Bureau. (Subscription required.)​​​​​​ ​​​Read more.

Wednesday’s Virtual Happy Hour to Feature the Live Recording of ABI's Inaugural "Party in Interest" Podcast with Special Guest ABI President Soneet Kapila!​​​

Mark your calendars for Wednesday, June 14, at 5 p.m. for a special ABI Virtual Happy Hour featuring the taping of ABI's inaugural "Party in Interest" podcast at the beginning of the event! This first podcast of the series will feature a lively interview between ABI Executive Director Amy Quackenboss and new ABI President Soneet Kapila. Following the recording of the podcast, attendees will enjoy a "summer kickoff" networking session, so wear your favorite summer attire! Make sure to RSVP for this great networking event today by clicking here.​​​​ 

Analysis: The High Cost of Bad Credit​​​

Last year, according to one recent market estimate, the credit-repair industry had revenues of $4.4 billion, up from $3 billion in 2019, the New York Times reported. Despite this remarkable scale, many Americans are unaware of the industry’s existence, because the burdens associated with credit break down starkly along racial and class lines. In low-income communities, payment delinquencies on credit cards, mortgages and auto loans — all of which invariably lower credit scores — are twice as high. A report last year from the Federal Reserve indicates that only 11 percent of applicants whose incomes exceed $100,000 said they were turned down (or approved for less than they applied for) on credit applications during a 12-month-period; among those with incomes below $50,000, 43 percent of white applicants and 60 percent of Black applicants were denied credit. (Across all income levels, Black consumers are denied credit more often than their white counterparts.) The volume of denials, along with the sheer complexity of a credit-reporting system that all but forces people to seek help from others, has spurred the industry’s rise. An estimated 60,000 credit-repair businesses operate independently in the U.S., often remotely. The size of the industry and the depth of the need for credit fixes has also meant opportunity for scams and bad actors.​​​​​​ ​​​Read more.

Zombie Mortgages Could Force Some Homeowners into Foreclosure​​​

Long-dormant mortgages are coming back to bite: Homeowners around the country are facing large bills and even foreclosure threats from investors who own their second mortgages, the Wall Street Journal reported. The loans were often made more than a decade ago. High home prices have given investors a new incentive to try to collect. Many homeowners say they were unaware that their second mortgages still existed. Lenders often “charged off” these loans years ago, deeming them unlikely to be repaid after borrowers fell behind. Many homeowners stopped receiving monthly statements, giving them the impression that the mortgages had gone away. They hadn’t. The lenders sold the second mortgages to other investors, sometimes for just pennies on the dollar. Now, some borrowers could lose their homes, even though they have been consistently paying the bills they receive each month for their primary mortgages. Federal regulators have taken notice. Investors both large and small are part of the ecosystem that makes mortgage lending work in the U.S. Some investors say their goal is to positively impact homeowners’ lives by helping them resolve past debt. They also say that borrowers are obligated to pay what they owe. (Subscription required.)​​​​​​ ​​​Read more.

U.S. Weekly Jobless Claims Jump to 1 1/2-Year High​​​

The number of Americans filing new claims for unemployment benefits surged to the highest level in more than 1 1/2 years last week, but most economists were not convinced that layoffs were accelerating, Reuters reported. The largest increase in applications in nearly two years, reported by the Labor Department on Thursday, was driven by outsized rises in Ohio and California. The data also included last week's Memorial Day holiday. Initial claims for state unemployment benefits jumped 28,000 to a seasonally adjusted 261,000 for the week ended June 3, the highest level since October 2021. Economists polled by Reuters had forecast 235,000 claims for the latest week. Unadjusted claims increased only 10,535 to 219,391 last week, with applications in Ohio surging 6,345 and filings in California shooting up 5,173. The four-week moving average of claims, considered a better measure of labor market trends as it strips out week-to-week volatility, rose 7,500 to 237,250.​​​​​​ ​​​Read more.

Interest-Only Loans Helped Commercial Property Boom. Now They’re Coming Due​​​

Nearly $1.5 trillion in commercial mortgages are coming due over the next three years, according to data provider Trepp. Many of the commercial landlords on the hook for the loans are vulnerable to default in part because of the way their loans are structured, the Wall Street Journal reported. Unlike most home loans, which get paid down each year, many commercial mortgages are known as interest-only loans. Borrowers make only interest payments during the life of the loan, with the entire principal due at the end. Interest-only loans as a share of new commercial mortgage-backed securities issuance increased to 88% in 2021, up from 51% in 2013, according to Trepp. Typically, owners pay off this debt by getting a new loan or selling the building. Now, steeper borrowing costs and lenders’ growing reluctance to refinance these loans are raising the likelihood that many of them won’t be paid back. Many banks, fearful of losses and under pressure from regulators and shareholders to shore up their balance sheets, have mostly stopped issuing new loans for office buildings, brokers say. Office and some mall owners are facing falling demand for their buildings because of remote work and e-commerce. Interest rates have more than doubled for some types of commercial mortgages, analysts and property owners say. (Subscription required.)​​​​​​ ​​​Read more.

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