January 182007

January 18, 2007

Ford Sees More Auto Supplier Bankruptcies on the Horizon

February could see more auto parts supplier bankruptcies than ever before, according to Ford Motor Co.'s global purchasing chief Tony Brown, the Detroit News reported today.'Industry experts and others at restructuring firms working with financially troubled suppliers expect we may well see in February the largest number of bankruptcy filings in the U.S. and Europe ever,' Brown said yesterday. 'The number of financially distressed suppliers that Ford has on our 'watch list' in 2007 has grown by 44 percent compared to this time last year.' Brown said that there could be some big-name 'Tier 1' suppliers among those filing in February, but declined to give specifics. Read more.

Calpine Seeks Investors to Finance Chapter 11 Exit

Calpine Corp. said it will seek new equity investors and has submitted a business plan to creditors that could form the basis of its proposed bankruptcy reorganization, Dow Jones Newswires reported yesterday. The San Jose, Calif.-based energy company, which has been in bankruptcy proceedings since December 2005, said Tuesday that it will soon ask U.S. Bankruptcy Judge Burton R. Lifland in Manhattan to allow it to hire investment bank Miller Buckfire Co. to help raise equity financing for its exit from chapter 11, according to papers Calpine filed in its bankruptcy case. Calpine has until June 20 to file a chapter 11 plan. Read more.

Ruling Faults Lender in Mortgage Lawsuit

A federal district court judge ruled that a Maryland bank must rescind loans made to certain borrowers who took out so-called option adjustable-rate mortgages because it violated the Federal Truth in Lending Act, the Wall Street Journal reported today. The case decided this week was filed by Susan and Bryan Andrews, a Wisconsin couple, against Chevy Chase Bank after they thought the 1.95 percent introductory rate on their option ARM was fixed for five years. Two months after obtaining the mortgage, they received a statement showing that their interest rate had jumped to 4.375 percent. The ruling, issued Tuesday by Federal District Court Judge Lynn Adelman of the Eastern District of Wisconsin, held that disclosures regarding the rate on the loan were unclear and confusing. Nearly $208 billion worth of these loans were originated in the first nine months of 2006, according to Inside Mortgage Finance. That is on top of $280 billion in option ARMs originated in 2005. Read more.

Commentary: Payday Loans Are a Scourge, but Should Wrath Be Aimed at the Lenders?

The current moral outrage directed at lenders who extend credit at extremely high rates of interest to economically disadvantaged groups might not be attacking the macro aspect of the problem, according to a New York Times commentary today. The payday loan industry, which didn’t exist in the early 1990s, now has approximately 10,000 retail outlets nationwide (more in some states than either McDonald’s or Burger King). Industry revenue, less than $1 billion in 1998, reached $28 billion last year. Payday lenders have been condemned as ruthless predators whose greed drives hapless borrowers into financial ruin. Without question, the proliferation of payday lending has harmed many families, and since lenders surely know that, the moral outrage directed at them is understandable.  Those concerned about the growing culture of consumer debt need to recognize that it stems far less from the greed of lenders than from recent liberalizations of lending laws. Read more .

Refco Paid $145.3 Million in Professional Fees Last Year

Refco Inc., the defunct commodities brokerage that was bankrupted by a corporate fraud scandal, has paid at least $145.3 million to the army of lawyers and restructuring professionals working on its bankruptcy case, the Associated Press reported yesterday.In papers filed with the U.S. Bankruptcy Court in Manhattan Tuesday, Refco said it paid the fees and expenses to 34 firms that worked for Refco or its creditors' committee through the end of last year. Refco paid out more than a quarter of those fees, nearly $40.3 million, in December alone. 'These fees are very high for a company of this size, and the explanation for that appears to be that there were a large number of professional firms authorized to work on the case,' said Lynn LoPucki, a professor of law at the University of California, Los Angeles, who has studied fees in big bankruptcy cases. Refco listed $16.5 billion in assets at the time of its bankruptcy filing in October 2005. Read more .

Senate Panel Limits Pay Deferrals for Executives

The Senate Finance Committee approved legislation yesterday to limit one element of the big pay packages awarded to corporate executives, the Washington Post reported today.On a voice vote, the committee agreed to change rules permitting some executives to amass millions of dollars in tax-deferred accounts. Limiting that perquisite would raise $806 million over 10 years, by congressional estimates. The money would be used to help cover tax breaks for small businesses hurt by a proposed increase in the minimum wage, a top Democratic priority. Read more .

House Votes to Reduce Rates on Student Loans

The House overwhelmingly approved a bill yesterday that is designed to cut interest rates from 6.8 percent to 3.4 percent over five years on college loans, creating a plan that potentially could save students $2,300 over the course of a loan, the Washington Post reported today. However, the reduction in rates would be phased in and would not take full effect until 2011, when the legislation would automatically expire unless renewed by Congress. Sen. Edward M. Kennedy (D-Mass.), chairman of the Senate Health, Education, Labor and Pensions Committee, supports the reduction in interest rates but plans to consider it as part of a broader package of bills to deal with the soaring costs of higher education. In February, Kennedy's committee is expected to take up a plan that will include the reduced interest rates, as well as increasing the Pell grant from $4,050 to $5,100 and limiting student loan payments to 15 percent of a borrower's annual income.Read more.

Philips Workers File Class Action over Health Care

Over 200 Philips Electronics retirees filed a class action against the company onTuesday, charging that a Philips subsidiary violated employee benefits laws by cancelling lifetime health plans after it went bankrupt last summer, Bankruptcy Law360 reported yesterday. The suit alleges that Philips Electronics North America Corp. breached a collective bargaining agreement the company made with hourly workers in its now-defunct Philips Display Components Co. plant after the company was merged into LG Philips Displays U.S.A. Hourly workers, as well as salary employees, who retired after the joint venture were stripped of their retirement health care plans after they stopped working, the suit claims. The case is Kenneth C. Schreiber, Mary Jane Lambert and George H. Vantine et al. v. Philips Display Components Co., Philips Electronics NorthAmerica Corp. and Philips PACE, case number 2:07cv10246, in the U.S. District Court Eastern District of Michigan Southern Division. Read more . (Registration required.)

Brookfield, Gazit-Globe Bid to Buy Struggling Mall Owner

Brookfield Asset Management Inc., the owner of New York's World Financial Center, agreed to pay $1.35 billion for Mills Corp., gaining 38 U.S. regional shopping malls at half the price it would have had to pay a year ago, Bloomberg News reported yesterday.Brookfield is buying Mills after the company's stock fell 44 percent in the last year amid an accounting investigation and earnings restatements. The purchase would give Brookfield malls in 22 states and the District of Columbia with a total of 48 million square feet, 1.3 times the size of New York's Central Park. U.S. retail sales will grow by 4.8 percent this year after a 6.3 percent gain in 2006, the National Retail Federation said yesterday. Toronto-based Brookfield's offer including assumed debt and preferred stock and would be worth $7.5 billion. The bid was approved unanimously by Mills directors. Read more.

Grand Jury Looking at Katrina Insurer on Possible Criminal Charges

A grand jury in Mississippi began hearing testimony yesterday on possible criminal charges against State Farm for its handling of claims after Hurricane Katrina, the New York Times reported today. Early last week, State Farm and other participants in the settlement talks said they were close to an agreement that could put hundreds of millions of dollars into the hands of policyholders along the coast who have been waiting for insurance money to begin rebuilding.  State Farm wanted to reach agreement before a grand jury began hearing evidence on whether it ordered adjusters and independent engineers to file paperwork that would lead to underpayments to homeowners. As part of the agreement, State Farm was insisting that Jim Hood, the attorney general of Mississippi, drop a criminal investigation into the company’s handling of claims and call off the grand jury. However, the talks were jolted last Thursday by decisions by a federal judge and jury in Gulfport that awarded a couple in Biloxi $2.7 million, mostly in punitive damages, in a separate lawsuit against State Farm. Read more.

TROUBLED COMPANIES IN THE NEWS

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Biomet Inc., a Warsaw, In. maker of medical orthopedic devices, was warned that it may be delisted from Nasdaq Global Select Market as a result of missing a deadline for filing certain financial reports.  Biomet said that it will appeal.

Dynaq Healthcare Inc., a Houston, Texas manager of acute-care hospitals, reported a fiscal net loss of $5.9 million. Revenue declined 14%--to $36 million.

Ford Motor Co.'s CEO, Alan Mulally, commented that the Dearborn, Mi. carmaker is making faster progress than had been expected in reducing its capacity in the U.S. so that it can better align its operations to market demand. The Dearborn, Mi. manufacturer is in the middle of an overhaul that calls for shutting seven assembly plants and slashing some 30,000 jobs.  Ford lost $7 billion in 2006's first nine months.

Lazare Kaplan International Inc., a Manhattan, N.Y. company that processes raw diamonds and sells them to wholesalers and retailers, reported a second quarter net loss of $1.4 million on a 2% revenue decline--to $94.4 million.

Mills Corp.'s stock price surged 26% after it entered into a deal to be acquired by Brookfield Asset Management of Toronto, Ontario for $1.35 billion in cash. When debt and preferred stock are added in, the acquisition of the troubled Chevy Chase, Md.-based real-estate developer is worth $7.5 billion. Mills, which owns thirty-eight malls, ran into trouble with debt and accounting errors and had recently warned that $1 billion it owes on a loan from Goldman Sachs might force it to file for bankruptcy protection. Two of its big shareholders, Israel's Gazit-Globe Ltd. and Farallon Partners, a hedge fund, had offered to invest hundreds of millions of dollars to prop Mills up, but the Brookfield buyout offer is close to the value of those two bids.

Pfizer Inc.'s strategy is becoming a bit clearer, with CEO Jeffrey Kindler now considered likely to undertake a path that could call for sharp workforce cutbacks.  Analysts believe that thousands of positions could be slashed as the big Manhattan, N.Y. drug company seeks to cut costs beyond an earlier announced plan to reduce expenses by $4 billion.  Mr. Kindler's realignment plan could be made public next week.

Spectrum Brands Inc., an Atlanta, Ga. consumer products company, is reorganizing by collapsing its four main operating groups into three units: Global Batteries & Personal Care, Home & Garden and Global Pet Supplies.  As part of the realignment, Spectrum will trim its payroll by 100 jobs in order to boost efficiency and competitiveness. In fiscal 2006, Spectrum lost $434 million on sales of $2.6 billion.

Retractable Technologies Inc., a Little Elm, Texas maker of syringes and related products, reported a third quarter net loss of $1.2 million. Revenue declined 15%--to just under $6 million.

Ultradata Systems Inc., a financially troubled Creve Coeur, Mo. company, is reportedly selling its remaining subsidiary, RW Data Inc., to Design Manufacture Distribution LLC, also in Creve Coeur, for about $200,000. Design Manufacture is a privately-held electronics-design firm that makes electronic kitchen scales, food timers and related products.