Commentary: Getting Puerto Rico’s Financial House Back in Order*​​​​​​

Puerto Rico has completed the biggest public-debt restructuring in American history, whittling $33 billion of obligations down to $7 billion over the past five years and rescuing its pension system. To put this in perspective, Puerto Rico resolved three times as much debt as Detroit did in its bankruptcy and more than 10 times Detroit’s unfunded pension liability, according to Puerto Rico Oversight Board Executive Director Natalie Jaresko and Chairman Prof. David Skeel. “It is the court’s hope and expectation,” Judge Laura Taylor Swain said after approving the restructuring, “that the confirmation of the plan marks the beginning of Puerto Rico’s brightest chapter.” The most innovative features of the plan of adjustment seek to ensure that repayment never becomes unaffordable. The recoveries of many creditors are based in part on a contingent-value instrument linked to sales-tax revenue. Only if the revenue is higher than projected — and thus, Puerto Rico’s economy is doing well — will creditors receive a higher recovery. To ensure that Puerto Rico never fails to make its pension payments, the plan of adjustment shifts future pensions from defined-benefit promises, which lawmakers repeatedly failed to fund, to defined contributions to individual retirement accounts. For the $50 billion of accrued but unfunded obligations, the plan creates a unique pension trust that will be funded over the next 10 years with at least $175 million a year. (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.

Latest ABI Podcast: Former ABI Executive Director Sam Gerdano Discusses His Career Arc Toward Bankruptcy, Chapter 12’s Enactment and His Time on the Hill ​​​​​​

A special two-part podcast features ABI Editor-at-Large Bill Rochelle talking with former ABI Executive Director Sam Gerdano, an alumnus of Syracuse University, about his career arc toward bankruptcy, chapter 12, how ABI has grown as an organization, and what bankruptcy policies he sees on the horizon for congressional consideration. The first podcast, accessible below, features Sam's insights on his move toward bankruptcy policy, his time on the Hill in Sen. Charles Grassley's (R-Iowa) office, and the enactment of chapter 12.

Gerdano's reflections on his career were featured in the Bankruptcy Symposium edition of the Syracuse Law Review (scroll to "Book 2: Bankruptcy Symposium 2020-2021"). In addition to Gerdano's oral history, the edition features articles by many ABI members on key bankruptcy issues. Sen. Grassley also provided a foreword for the edition.

Weekly Jobless Claims Report Drops After Weeks of Increases​​​​​​

New applications for jobless aid fell sharply by 30,000 last week after several weeks of increases, according to data released today by the Labor Department, The Hill reported. In the week ending Jan. 21, seasonally adjusted new claims for unemployment insurance totaled 260,000, falling from the previous week’s revised level of 286,000. The four-week moving average of claims rose by 15,000 to 247,000. After falling below pre-pandemic levels in November, jobless claims rose steadily through January as the omicron variant drove a record-breaking spike in COVID-19 cases. Roughly 12 million Americans missed work at the beginning of January because either they or a loved one they cared for contracted COVID-19, according to Census Bureau data released last week.

U.S. Economy Grew 5.7 Percent in 2021​​​​​​

The U.S. economy grew by almost 6 percent in 2021 as the country staged a rapid rebound from the blow of the coronavirus pandemic, according to data released today by the Commerce Department, The Hill reported. U.S. gross domestic product grew 5.7 percent last year after falling 3.4 percent in 2020 as the onset of COVID-19 derailed the global economy and wiped out 21 million domestic jobs, according to the Bureau of Economic Analysis. Growth also accelerated during the last quarter of the year, hitting an annualized pace of 6.9 percent even as high inflation strained consumers and businesses. That means the U.S. economy would have grown almost 7 percent if the fourth-quarter pace of growth lasted an entire year. Economists credit the combination of unprecedented fiscal and monetary aid, and the quick development of COVID-19 vaccines, for the economy's swift bounceback from the steepest decline since the Great Depression. The BEA said increases in consumer spending and investments in business equipment led most of the year’s economic growth. Personal consumption expenditures rose 7.9 percent in 2021, with goods purchases spiking 12.1 percent and spending on services rising 5.9 percent. Exports rose 4.6 percent in 2021, but imports — which detract from GDP — rose 14 percent last year.


 

Auto Lenders Can See This Pothole Coming​​​​​​

For auto lenders, soaring used-vehicle demand and rising prices have factored into fast-loan growth coupled with high recovery values on loans and leases. But Ally Financial said last week that it is embedding a potential 15% to 20% cumulative decline in used-auto values by the end of 2023 into its assumptions, the Wall Street Journal reported. Lenders such as Ally and Capital One Financial are trading at forward price-to-earnings valuations that are relatively low compared with where they normally trade versus S&P 500 banks overall, according to FactSet data. Industry-tracker Cox Automotive has forecast that the Manheim index of used-car prices will be a mere 3% lower by this December than it was in December 2021. Perhaps a price decline could accelerate quickly the following year. For the time being, though, things like the supply-chain snarls for computer chips that are making new cars take longer to build still appear to be a factor. Ally said that, although it is forecasting cautiously, “recent trends indicate ongoing resilience” in used values. (Subscription required.)

Latest Installment of ABI's Industry Viewpoints Examines Mass Tort Chapter 11 Cases​​​​​​

Catch the latest episode of ABI's Industry Viewpoints, featuring ABI Editor-at-Large Bill Rochelle talking with Derek Abbott of Morris, Nichols, Arsht & Tunnell LLP (Wilmington, Del.) about the growing trend of mass tort chapter 11 cases. As cases such as the Boy Scouts of America, USA Gymnastics and diocesan mass tort chapter 11s have been in the spotlight by the press, public and Congress, Abbott led a panel of experts at ABI's Winter Leadership Conference in December that provided insights on the evolving case law. He and Rochelle delve into the key issues of these cases and more. Watch here.

Upcoming February Issue of the ABI Journal: Nonconsensual Third-Party Releases, Flaw in CARES Act's Correction to "Small Business Debtor," Executive Compensation Changes Needed to Code, "No Surprises Act" and More! ​​​​​​

Be on the lookout next week for the February edition of the ABI Journal! Some of its great articles include:

- "'The Great Unsettled Question': Nonconsensual ThirdParty Releases Deemed Impermissible in Purdue”
- "A Flaw in the CARES Act’s Correction to 'Small Business Debtor'"
- "Executive Compensation: Need for a Change to the Bankruptcy Code”
- "No Surprises Act and the Provider/Patient/Payor Dynamic Backdrop"

Want to view the Journal online? Click here.

Feb. 8 abiLIVE: PwC Presents: 2022 Restructuring Outlook​​​​​​

PwC joins ABI on February 8 at 12:30 PM ET to discuss restructuring activity in 2021 and trends we may see in 2022. Additionally, we will explore industries to watch and host a live Q&A with the audience. Speakers include Rachel Albanese of DLA Piper, Lorie Beers of Cowen and Company, Steven Fleming of PwC US and David Tyburski of PwC US (all based in New York). ABI Editor-at-Large Bill Rochelle will moderate the session. Register for FREE by clicking here.

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