April 30, 2010

Regulators Watch 'Amend and Pretend' Debt Deals

U.S. securities regulators are looking at whether financial firms may be downplaying exposure to troubled loans by using 'overly optimistic' accounting assumptions when they do so-called 'amend and pretend' debt restructurings, Reuters reported yesterday. Paul Beswick, deputy chief accountant of the U.S. Securities and Exchange Commission, said that in the aftermath of the recession, the U.S. agency has seen an 'uptick' in questions and concerns related to accounting assumptions companies use for debt restructurings or placing market values on difficult-to-value assets. He said there were similar issues about accounting assumptions in debt restructurings, where banks have given a recent flurry of waivers, extensions and amendments to troubled companies and borrowers on their loans to help avoid defaults. Beswick said companies that engage in these transactions should look carefully at assumptions they are using when deciding whether a loan is impaired, or needs to be written down. 'A loan is impaired when based on current market information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement,' Beswick said. Read more.

Oceanaire's Reorganization Plan Confirmed

Bankrupt Oceanaire Inc. can be acquired by Landry's Restaurants Inc. now that the upscale seafood eatery chain's reorganization plan has been confirmed by Bankruptcy Judge Barbara Houser, the Deal Pipeline reported yesterday. Landry's has offered roughly $23.4 million for Oceanaire, though its official bid is for far less. Landry's, for example, will make an equity infusion into Oceanaire large enough to pay senior lender Wells Fargo Capital Finance in full in cash on a $16.8 million claim. Oceanaire noted that unsecured creditors might ultimately recoup 100 percent of their claims since the plan would also establish a creditor trust that could boost the payout for those creditors. Read more. (Subscription required.)

U.S. Said to Open Criminal Inquiry Into Goldman

Federal prosecutors have opened an investigation into trading at Goldman Sachs, raising the possibility of criminal charges against the Wall Street giant, the New York Times reported today. While the investigation is still in a preliminary stage, the move could escalate the legal troubles swirling around Goldman. The Securities and Exchange Commission, which two weeks ago filed a civil fraud suit against Goldman, referred its investigation to prosecutors for the Southern District of New York, which has now opened its own inquiry. Goldman has vigorously denied the accusations by the SEC, which accused Goldman of defrauding investors involved a complex mortgage deal known as Abacus 2007-AC1. Many in Congress have been pressing for a criminal inquiry as 62 House members this week sent a letter to the Justice Department asking it to conduct an investigation into Goldman?s actions. Read more.

Commentary: Let's Keep Banks from Growing Too Big to Regulate

While Wall Street executives argue that it is not size but the systemic risk and the interconnectedness of 'too big to fail' banks that matter, they are wrong as too big to fail is simply too big, according to a commentary by Sen. Sherrod Brown (D-Ohio) in today's Washington Post. Two years ago -- after failing to detect or address growing risk in the financial sector -- the Bush administration stepped in to save those institutions deemed 'too big to fail.' By intervening to save some banks but not others, the federal government essentially set a size threshold, according to Brown. While all of the institutions that foundered in 2008 were tightly woven into the fabric of our economy, some were big enough to shatter our economy. Those institutions received bailouts and the smaller institutions were allowed to fold, taking countless small businesses and jobs with them. The Wall Street reform bill that is before the Senate will make important changes to our laws to provide for the orderly liquidation of these trillion-dollar banks if necessary, and while those changes are important, Brown thinks they are not sufficient. These concerns are why Brown said that he introduced the SAFE Banking Act with Sen. Ted Kaufman (D-Del.) as an amendment to the bill being debated on the Senate floor to ensure that no bank becomes so large that it could overwhelm our ability to regulate, and, if necessary, liquidate it. The legislation imposes sensible size and leverage requirements: No bank could grow larger than $1 trillion in liabilities, and no investment bank could be larger than $420 billion -- with these limits rising as the economy grows. Moreover, banks could not borrow more than $16 for every $1 they hold in capital. Read the full commentary.

Geithner Expects GSE Reform to Follow on Senate Bill

Treasury Secretary Timothy Geithner said yesterday that he expects his department to roll out proposed reforms of mortgage backers Freddie Mac and Fannie Mae in approximately six months, after Wall Street reform has potentially been enacted, CongressDaily reported today. Geithner, testifying before a Senate committee, said that he preferred to pass Wall Street reform first and take a deliberate approach of soliciting public comment and holding hearings on the issue in an attempt to get more support. Geithner was grilled about Treasury's efforts to get more people to participate in the government's Home Affordable Modification Program (HAMP), the voluntary program to help servicers reduce borrowers' payments. Financial Services Appropriations Subcommittee Chairman Dick Durbin (D-Ill.) said that HAMP, enacted in February 2009, has only helped approximately 230,000 underwater borrowers receive permanent mortgage modifications, and 1.4 million have received trial modifications. Treasury announced modifications to the program in March and is in the process of implementing them, including standardized documentation for enrollees, attempting to make the enrollment process quicker and requiring the consideration of principal write-downs for borrowers that have negative equity.

Tronox Receives Extension to File Reorganization Plan

Bankruptcy Judge Allan L. Gropper on Wednesday agreed to give chemical company Tronox Inc. until July to finalize its bankruptcy-exit plan, Dow Jones Daily Bankruptcy Review reported today. Without the extension, creditors or other parties could have offered rival plans for the company as it works to complete its own. Tronox said that it needed more time to complete negotiations on its plan. The talks are focused on a potential settlement that will dictate recoveries to creditors and shareholders so that both groups back the restructuring plan. The basis for Tronox's potential chapter 11 plan centers on deals it reached with lenders, led by Goldman Sachs Group Inc., and bondholders. The lenders have offered a new $425 million loan that will replace Tronox's existing secured debt and convert into exit financing when the company emerges from bankruptcy protection.

Lehman Presses Its Ex-CFO on Alleged Conflict in Barclays Sale

Lehman Brothers Holdings Inc. pressed its case yesterday that former executives of the firm were conflicted as they worked on closing a deal to sell its assets to Barclays Plc in 2008, Dow Jones Daily Bankruptcy Review reported today. Lehman, which is fighting to recover billions of dollars from Barclays, has claimed top executives working on the sale had conflicted loyalties because they were negotiating new employment contracts with Barclays when they were supposed to be acting on Lehman's behalf. Lehman worked to support that claim in court yesterday during testimony by former Chief Financial Officer Ian Lowitt. Lowitt acknowledged that during the week the transaction was negotiated, he signed an employment agreement with Barclays that would pay him $6 million in total compensation.

U.S. Concrete Files for Chapter 11

U.S. Concrete Inc. filed for chapter 11 protection yesterday as part of a pre-arranged restructuring deal with bondholders to cut its debt by $272 million, Reuters reported yesterday. The proposed restructuring will convert the company's 8.325 percent senior subordinated notes due in 2014 into equity in the reorganized company. Existing shareholders will get warrants to buy 15 percent of the reorganized company's stock. The company also sought bankruptcy court approval for an $80 million debtor-in-possession financing led by JPMorgan to continue operations while under bankruptcy protection. U.S. Concrete, which listed 43 affiliates in its bankruptcy petition, said it expects the chapter 11 process to be concluded within 90 days. Read more.

W Boston Hotel Developer Files for Bankruptcy

The developer of the 235-room luxury W Boston Hotel filed for chapter 11 protection  along with four affiliates, Reuters reported yesterday. SW Boston Hotel Venture LLC listed both assets and debt in the $100 million to $500 million range. Bovis Lend Lease LMB Inc was named the largest unsecured creditor with a claim of about $700,000.  The company's affiliates include Auto Sales & Service Inc, General Trading Co, Frank Sawyer Corp and 100 Stuart Street LLC. The case is In re: SW Boston Hotel Venture LLC, U.S. Bankruptcy Court, District of Massachusetts, No.10-14535. Read more.

Airlines Approach Final Deal to Merge

Continental Airlines Inc. and UAL Corp.'s United Airlines are expected to announce Monday that they are merging to form the world's largest airline, the Wall Street Journal reported today. While insiders caution that negotiations could still fall apart as they did in 2008, when Continental backed away, the talks now appear on track. United is much stronger financially than it was in 2008. This week, United posted a narrower first-quarter loss of $82 million, compared with a year-earlier loss of $382 million. A weekend impasse over which share-price ratio should be used to calculate the deal's value appeared to resolved itself as UAL's share price declined this week. The market is now expecting a swap of about 1.057 UAL shares for each share of Continental. Read more. (Subscription required.)

International

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