January 2, 2002
Spending Tempers Downturn, but Debts May Slow Recovery (The
Wall Street Journal)
Ten months into the current recession, consumer-credit defaults and
payment delinquencies are as high as they have been since the last
recession, a decade ago. This time around, however, lenders, who
were quick to reduce the flow of credit during past recessions, have
left the tap wide open, The Wall Street Journal reported.
That’s allowed Americans to continue borrowing to pay for homes,
cars and other big-ticket items, bolstering the weakened economy.
But the resulting growth in consumer credit — to a record $7.5
trillion at the end of the third quarter of 2001 — also has
exposed a potential new economic fault line.
Rising consumer debt is typically a sign of robust spending. In the
short term, consumer spending stimulates the economy. That’s
clearly what the Federal Reserve had in mind over the past year as it
repeatedly lowered U.S. interest rates. But the unusual growth in
consumer borrowing during the current recession also poses a danger:
that at some point, consumers will have to divert more and more of their
income away from spending on goods and services and toward repaying
their debts. Such a shift would slow the economy, reducing the
chances of a speedy recovery. That is, of course, unless consumers
defaulted under the weight of all that debt, packing the bankruptcy
courts and spreading financial distress among their creditors.
Either way, many economists argue, the current mountain of consumer debt
is likely to mean trouble. To continue reading, point your browser
to http://www.wsj.com (subscription
required).
More People Paying Off Student Loans Are Eligible to Deduct
Interest (The Wall Street Journal)
The new tax law makes some important changes, The Wall Street
Journal reported. First, it repeals a heavily criticized restriction
that previously limited borrowers to deducting only the interest due
during the first 60 months of the loan. Thus, borrowers now may
deduct interest due at any time during the loan. This change will not
only help many borrowers but also make it easier for the IRS to enforce
the law, tax advisers say.
Separately, the new law also increases the income phase out amounts,
thus enabling more taxpayers to qualify for the deduction. Both changes
are effective starting this year. They don’t affect tax returns
filed this year for 2001. The maximum deduction for 2001 is
$2,500. To read the entire story, point your browser to
href='http://www.wsj.com/'>http://www.wsj.com (subscription
required).
Credit Quality May Improve
Bond investors are cautiously optimistic that U.S. corporate credit will
improve in 2002 after its worst year in a decade, when recession, the
Sept. 11 attacks and a heavy debt load from the Go-Go 1990s combined to
hobble debt quality, reported Reuters. “What you’re seeing
is a topping out of defaults (and) a bottoming out of credit
quality,” said Patrick Cassidy, vice president and head of
corporate research at T. Rowe Price Associates Inc. in Baltimore.
“I expect credit quality to improve in 2002.” The
slumping economy and a series of unforeseen shocks¾the California
electric energy crisis and the attacks on Washington and New
York¾dragged down a blizzard of companies’ credit
ratings. These reflect the ability of bond issuers to repay debt
on time and in full, as assessed by ratings firms Moody’s
Investors Service, Standard & Poor’s and Fitch.
After a decade of expansion, the economy began to contract this
spring. Weakened corporate sales and profits¾led by
telecommunications and high-tech companies¾left many companies less
able to pay off debt. “It was a wretched year for
profitability,” said John Lonski, Moody’s chief
economist. “It sparked a sharp increase in the number of
credit rating downgrades.” Through Wednesday, Moody’s
has cut three ratings for every one it upgraded this year, comprising
639 downgrades and 215 upgrades. That is the worst ratio since
1991, when the United States last emerged from recession. It was
the fourth straight year that downgrades outpaced upgrades.
Credit quality was also shaken by California’s flawed
electricity deregulation scheme, which led to power shortages and the
bankruptcy of PG&E Corp. unit Pacific Gas & Electric Co.
Another huge credit hit was the collapse of Enron Corp.
“Given the surprises we’ve had, the credit market will show
a heightened sense of risk aversion,” said Lonski.
“Shareholders will put companies under more pressure to maintain
an adequate level of credit worth.” Analysts said that as
the economy improves, the ratio of downgrades to upgrades should
moderate.
Great Plains Units File for
Bankruptcy
Energy holding company Great Plains Energy Inc. on Monday said two of
its telecommunications units would file for chapter 11 bankruptcy
protection in a restructuring that would eliminate $300 million in debt
and narrow the units’ operations, according to Reuters. The
units, Digital Teleport Inc. and its holding company, DTI Holdings Inc.,
are 83 percent owned by KLT Telecom Inc., which in turn is a unit of KLT
Inc., a Great Plains subsidiary that invests in energy ventures that are
not regulated.
Great Plains said it would take a fourth-quarter after-tax charge of
$125 million, or $2.02 per share charge, in connection with the
filing. Before taxes, the charge represents a write down of $161
million of a $173 million investment. KLT Telecom has agreed to
provide $5 million in debtor-in-possession financing. The money
will be used to fund the company’s operations while it is in
bankruptcy protection.
Zomax Plans to Buy iLogistix
Assets
Zomax Inc. announced on Monday it plans to purchase assets of iLogistix,
according to the Associated Press. Plymouth, Minn.-based Zomax
released a letter of intent to buy iLogistix, which provides supply
chain services to leading technology companies, including procurement,
inventory management, e-commerce and distribution services. Zomax
provides services to software publishers, computer manufacturers and
other companies that make multimedia products,
Fremont, Calif.-based iLogistix has facilities in the United States,
Singapore, Taiwan, Mexico, Brazil and the Netherlands. It is
currently operating under chapter 11 bankruptcy protection while it
pursues the sale of its business. Zomax said it would attempt to
reach a definitive asset purchase agreement by Jan. 11, which will be
subject to approval of the U.S. Bankruptcy Court.
Auditor Doubts Globix Can Remain a
‘Going Concern’
Globix Corp.’s independent auditor Andersen LLP said it
has substantial doubt about the company’s ability to continue as a
going concern, according to Globix’s annual report filed on Monday
with the Securities and Exchange Commission, reported Dow Jones. The
auditor cited Globix’s recurring net losses, net operating cash
deficiencies and its significant stockholders’ deficiency as
reasons for issuing the going concern doubt. The company said that
it’s exploring debt restructuring alternatives.
Globix is in talks with an informal committee of its bondholders over
a reorganization through a prepackaged bankruptcy proceeding that would
reduce the company’s debt burden. The company is in similar
talks with its preferred shareholders. Globix said that
restructuring is necessary because its cash and cash equivalents
aren’t expected to be enough to meet all of its cash obligations
in the fiscal year ending on Sept. 30, 2002, including a $75 million
interest payment related to its 12.5 percent senior notes. New
York-based Globix provides Internet services for businesses.
Olympic Cascade Unit to File Chapter 7
Bankruptcy
Olympic Cascade Financial Corp.’s WestAmerica Investment Group
intends to file for chapter 7 bankruptcy protection, according to its
annual report filed with the Securities and Exchange Commission,
reported Dow Jones. In its filing on Friday, Olympic Cascade said
that last month WestAmerica voluntarily withdrew its membership with the
National Association of Securities Dealers and stopped conducting
business as a broker-dealer. The majority of WestAmerica’s
transactions with the public involved solicited trades.
Olympic Cascade said WestAmerica has been operating as a separate
legal entity. Olympic Cascade said it doesn’t believe it will have
any ongoing liability for any unpaid obligations of WestAmerica, but
said it cannot give any assurances that creditors of WestAmerica
won’t seek recovery of their claims from Olympic Cascade.
WestAmerica recently experienced operating losses and had arbitration
losses that exceeded its net capital, the filing said. In its
annual report, Olympic Cascade said it has entered into a forbearance
agreement with Chicago-based lender American National Bank & Trust
Co. on an event of default under its credit agreement. As a result
of the forbearance, the company’s credit line has been reduced to
$4 million from $5 million.
Polymer in Default of Credit Facility
On Monday Polymer Group Inc., a maker of non-woven consumer and
industrial fabrics, said it was in default on a senior credit facility
and its lenders exercised their right to block bond payments, reported
Reuters. The North Charleston, S.C.-based company said it was in
compliance with payments under its credit facility, but was technically
in default of a covenant waiver that kept it out of default in April but
expired on Dec. 29. Senior bank lenders already exercised the
right to block the company’s interest payment of $17.8 million to
be made today. Polymer Group said its default resulted when the
company exceeded its maximum allowable ratio of debt to earnings before
interest, taxes, depreciation and amortization (EBITDA) for the latest
four quarters.
Polymer said it has sufficient liquidity to meet its current
obligations and holds adequate cash and short-term investments to
continue to operate its business normally. It said it expected to
maintain existing payment terms and remain current with all of its
suppliers and other vendors. Polymer has $45 million in cash and
short-term investments, and has entered a forbearance agreement
preventing banks from taking action against it until March 29, although
that agreement could be terminated if the company fails to complete a
financial restructuring.
NPG Agrees Buy FootageQuest Trade, Assets
Newsplayer Group PLC (NPG), the new-media group, has signed a
conditional agreement to acquire the trade and assets of FootageQuest, a
distributor of rights protected and royalty free content, from Vienna,
Va.-based Motion Inc. for a maximum consideration of $7.5 million.
The acquisition will be made through NPG’s wholly owned subsidiary
NPG Inc. NPG announced the acquisition on Dec. 27. The total
consideration payable for the Acquisition will be equivalent to 90
percent of the revenue generated by FootageQuest in the second year of
operation under NPG’s control.
The initial consideration payable will be US$500,000 to be satisfied
through the issue of new shares in NPG. An interim and the final
consideration will be payable on the first and second anniversary of
completion through the issue of new shares in NPG. The maximum
consideration payable by NPG under this agreement is US$7,500,000 which
if fully satisfied through the issue of new shares in NPG would result
in eMotion owning a maximum of 23.75 percent. of the then-issued share
capital of NPG. NPG also has the option to satisfy the consideration in
cash. The acquisition is conditional upon the following conditions.
NextLec Inc, a provider of technical services to FootageQuest, based in
Tennessee, is currently in chapter 11 bankruptcy protection. As a
condition for closing, NPG will have received notification of
NextLec’s reorganization plan along with supporting documentation
evidencing the acceptance and approval of the reorganization plan of
NextLec under chapter 11 by the bankruptcy trustee and all required
parties.
AEP Acquires Wind-power Project
American Electric Power (AEP) acquired a 160-megawatt wind-power project
in West Texas from a subsidiary of bankrupt Enron Corp. for $175
million, according to the Associated Press. City Public Service,
San Antonio’s municipal electric utility, will buy power from the
recently completed Indian Mesa project under long-term contracts, AEP
said.
Under terms of the deal, which was announced on Monday, Enron Wind
Corp. will operate and maintain the wind-power project. Enron
Wind’s parent company filed for chapter 11 bankruptcy protection a
month ago. Stephen Williams, an AEP spokesman, said the companies
were not required to seek the bankruptcy court’s approval for the
sale, but successfully did so anyway.
ENRON UPDATE
Wall Street Journal Reports Enron Heads Knew of
Partnerships
Top Enron Corp. officials knew about the financial partnerships that
fueled the former energy-trading giant’s downfall, and were aware
of the possible conflict-of-interest issues surrounding its former chief
financial officer’s involvement in them, The Wall Street
Journal reported. Internal documents indicate that the
partnerships were viewed as essential to maintaining Enron’s rapid
growth rate, the newspaper said in its online edition. The
documents also confirm the theory that top officials, including Chairman
Kenneth Lay and former President Jeffrey Skilling, were very involved
with setting up and overseeing the partnerships, it added.
The documents include an internal memorandum from an Enron attorney
to Skilling regarding the way to monitor transactions with the
partnerships, as well as excerpts of minutes from the company’s
board and board finance committee meetings. The partnerships were run by
former chief financial officer Andrew Fastow, who was ousted in
October. He had been instrumental in forming outside partnerships,
known as special-purpose entities (SPEs), associated with Enron that are
a focus of an investigation by the U.S. Securities and Exchange
Commission. Houston-based Enron is thought to have used the SPEs
in transactions designed to take debt off its balance sheet and protect
the good credit rating critical to its highly leveraged capital
structure, according to lawyers involved in the case. After it was
forced to alter this strategy and restate its financial results to
consolidate the SPE transactions onto its books, Enron’s corporate
debt was downgraded and its stock price plummeted.
Enron Creditor Opposes Data Release
After demanding payment from insurance companies that backed more than
$1 billion worth of oil and gas contracts signed by Enron Corp., J.P.
Morgan Chase is trying to prevent the insurers from getting details
about the transactions, according to the Associated Press. The New
York-based investment bank on Sunday filed an objection to a request
made by the insurers, who are refusing to honor $1.1 billion in surety
bonds and are asking for access to Enron financial records to determine
if energy contracts actually existed. The request was filed last
month in U.S. Bankruptcy Court in New York. J.P. Morgan sought
payment of the surety bonds after the collapse of Enron. The
payment dispute between the bankers and the insurers is the subject of a
separate civil lawsuit taking place in U.S. District Court. The
fact that it is now spilling over into the federal bankruptcy court
proceedings shows how the interests of Enron’s creditors are
intertwined.
The insurance companies involved include Citigroup Inc.’s
Travelers unit; Kemper Insurance Co.’s Lumbermens Mutual Casualty
Co.; Allianz AG’s Fireman’s Fund Insurance Co.; Chubb
Corp.’s Federal Insurance Co.; St. Paul Cos.’s Fire and
Marine Insurance; CNA Surety Corp.’s Continental Casualty Co.;
Safeco Corp’s Safeco Insurance Co.; Hartford Financial Services
Group Inc.; and Liberty Mutual Insurance Co. The insurers backed a total
of $2 billion in transactions. Early last month, they asked J.P.
Morgan Chase for details of the contracts before they would pay off all
of the surety bonds. All but one of the insurers, Travelers,
subsequently asked a bankruptcy court judge in New York to void $1.1
billion worth of the obligations. As a result, J.P. Morgan had to
increase its estimated exposure in the collapse of Enron to $2.6
billion—more than double what it previously
acknowledged—with $965 million of that amount tied to surety bond
payments.
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