April 9, 2010

Los Angeles Faces Threat of Insolvency

A bitter political dispute between Los Angeles' elected leaders and its powerful municipal utility threatens to push the city into insolvency as early as next month, the Wall Street Journal reported today. Los Angeles City Controller Wendy Greuel warned this week that the city's general fund could run out of money and fall $10 million into the red by May 5 unless the Los Angeles Department of Water & Power transfers a planned $73.5 million payment it has so far said that it would withhold. Without the payment, the city would need to dip into its reserve fund, leaving that contingency dangerously low in the event of other emergencies. The Los Angeles utility, the nation's largest municipal utility, said that it was not making the payment because the city council earlier this month failed to approve substantial increases in electricity rates. Utility officials say they need those higher rates to help cover the costs of investing in renewable energy, such as wind and solar, that are mandated by state and municipal laws. Read more. (Subscription required.)

Report: Large Company Bankruptcy Cases Skyrocketed in 2009

Bankruptcy filings for large companies, defined as those with assets of more than $10 billion, rose in 2009 to 11 cases, compared to 3 in the previous year, according to the Deal Pipeline's Bankruptcy Insider Report that was released yesterday. The biggest case was General Motors Corp, $82 billion in assets. Larger companies, those the report defines as having asests of $100 million or more, sought court protection at an even higher rate compared with the previous year. There were 225 chapter 7, 9, 11 or 15 filings in 2009 listing assets of at least $100 million, up 49 percent from the 151 a year earlier, according to the report. Click here to access the report. 

Tribune Receives Creditor Agreement on Bankruptcy Exit

Tribune Co. said yesterday that it has agreed with creditors on a plan that would help it exit chapter protection later this year, Reuters reported yesterday. The publisher of the Chicago Tribune and Los Angeles Times, which filed for bankruptcy protection in December 2008, said it reached a deal with major creditors and lenders including JPMorgan Chase & Co., Angelo Gordon, Centerbridge Partners and its unsecured creditors. The company's senior credit facility lenders would control 91 percent of the stock of the reorganized company and senior noteholders would receive a combination of cash, debt and stock to repay their claims. The agreement also settles all potential claims stemming from the $8.2 billion Tribune leveraged buyout led by real estate developer Sam Zell in 2007, Tribune said in a statement. Read more.

Court Says Philadelphia Newspapers Can Proceed with Auction

An appeals court denied a request by lenders to halt the auction of Philadelphia Newspapers LLC despite their insistence that an important bankruptcy issue could remain unresolved if a sale were allowed to proceed, Dow Jones Daily Bankruptcy Review reported today. The three-judge panel that last month ruled in favor of Philadelphia Newspapers - barring its lenders from bidding debt for the company - again came out in the publisher's favor by permitting it to place its assets on the auction block April 27. Only Judge Thomas L. Ambro, a former bankruptcy attorney who held the lone dissenting opinion last month, was in favor of delaying the auction until the full appeals court, and potentially the Supreme Court, considered taking on the dispute. All three judges, however, agreed to quickly review the lenders' recent motion for a rehearing en banc. If the judges agree to the lenders' request, the entire Third Circuit Court of Appeals would re-evaluate the appeal. But in court papers filed earlier this week, the lenders warned that a rehearing en banc could be irrelevant by the time the appeals court is ready to take up the topic. If the company is allowed to hold an auction and consummate a sale, the lenders' fight to use the debt they're owed by the company to buy back their collateral could be moot, they said.

New York Fed: Big Banks Mask Risk Levels

Federal Reserve Bank of New York released data showing that major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, the Wall Street Journal reported today. A group of 18 banks?which includes Goldman Sachs Group Inc., Morgan Stanley, JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc.?understated the debt levels used to fund securities trades by lowering them an average of 42 percent at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters. Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished. That practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time. Read more. (Subscription required.)

Paulson, Centerbridge Offer $905 Million for Extended Stay

Extended Stay Inc. has reached an agreement for Paulson & Co. and Centerbridge Partners to invest $905 million to take the hotel chain out of bankruptcy protection, Dow Jones Daily Bankruptcy Review reported yesterday. Marcia Goldstein, Extended Stay's lawyer, said at a court hearing that the company favored the agreement over a competing deal with an investor group led by Starwood Capital Group because the hotel chain won't have to pay certain fees. Goldstein told Bankruptcy Judge James Peck that Extended Stay will set a May 17 deadline for investors to make competing bids for the company. It will then schedule an auction of its assets for May 27.

Experts Spar over Value of Lehman Assets Sold to Barclays

The trustees and creditors involved in the bankruptcy of Lehman Brothers this week asked Bankruptcy Judge James Peck to throw out the opinion of an expert hired by Barclays PLC, a Stanford professor, who says Barclays appropriately valued assets it bought from Lehman in 2008 just after the Wall Street firm collapsed, Dow Jones Daily Bankruptcy Review reported today. The Lehman estate's argument employs a fiery report by its own expert, a Chicago forensic accountant, who says that the Stanford professor, Dr. Paul Pfleiderer, relied on 'flawed' and 'misguided' research to sign off on Barclays' method for valuing the assets. Pfleiderer's report supports the Barclays claim that it basically got what the approved deal specified and nothing more.

States Skip Pension Payments, Delay Day of Reckoning

State governments from New Jersey to California that are struggling to close budget deficits are skipping or deferring payments to already underfunded public-employee pension plans, the Wall Street Journal reported today. New Jersey has proposed not making the state's entire $3 billion contribution to its pension funds because of the state's $11 billion budget deficit. Virginia has proposed paying only $1.5 billion of the $2.2 billion required pension contribution. Connecticut Republican Gov. M. Jodi Rell (R) is deferring $100 million in payments this year to the pension fund for state employees to help close a $518 million budget gap. The deferrals come as pension experts say the funds need the money more than ever, after losses during the financial crisis. Before the 2008 market collapse, 54 percent of public pensions for states and local governments had assets totaling at least 80 percent of their liabilities. Last year, only 33 percent of plans met that criterion, according to a study released yesterday by the Center for State and Local Government Excellence and the Center for Retirement Research, both nonpartisan groups. Read more. (Subscription required.)

Foreclosures Hit the Rich and Famous

Houses with loans of $5 million or more will likely see a sharp rise in foreclosures this year, according to a RealtyTrac study for the Wall Street Journal released today. Just this week, a mansion belonging to film star Nicolas Cage was in foreclosure auction and reverted to the lender. On Wednesday, Richard Fuscone, a former top Wall Street executive, declared personal bankruptcy, forestalling a foreclosure auction that had been scheduled this week on his 14-acre mansion. Last month a Manhattan condominium owned by Italian film producer Vittorio Cecchi Gori was sold in a foreclosure auction for $33.2 million. In February alone, 352 homes nationwide in this category were scheduled for foreclosure auction. That is the largest monthly number of these so-called notices of sale since the financial crisis began. By comparison, in all of 2009, there were 1,312 such notices. Read more. (Subscription required.)

International

Click here to review today's global insolvency news from the GLOBAL INSOLvency site.