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Stores that Stocked Up on Debt Face a Harsh Holiday Reckoning



Retailers are strapping in for the final days of their traditional do-or-die holiday shopping period. For some, that could be meant literally, as creditors and vendors decide which ones are still worth supporting in a field plagued by fewer shoppers, more online competition and too much debt, Bloomberg News reported. Some of the most familiar names — Forever 21 Inc., Barneys New York Inc. and Payless Inc. — have already collapsed into bankruptcy or liquidated this year. Among the survivors, fates have diverged, according to the restructuring experts at FTI Consulting Inc. “The retail sector is becoming more segmented between winners and losers,” Christa Hart, a senior managing director in FTI’s retail and consumer practice, said in an interview. “The ‘average’ has disappeared.” Merchants could use a strong finish after last year’s holiday season, when retailers wound up with their worst sales drop for December since 2008, according to U.S. Census Bureau data analyzed by FTI. This holiday season “will be disproportionately great for the strong players and disproportionately weak for the other ones,” Hart said. Some of the most vulnerable are the traditional department store chains. Moody’s Investors Service predicted in a November report that by the end of 2019, those retailers will have seen their operating income fall by more than 15 percent, despite heavy investing to improve inventory efficiency and to build their online capabilities. “It’s not 1985 anymore,” said Perry Mandarino, head of restructuring and co-head of investment banking at B. Riley FBR Inc. “People don’t need a one-stop shop where they can get everything from vacuum cleaners to jewelry.” 

Commentary: Trump’s New Plan to Make Student Loans Great Again



Student loan debt is the second-highest category of consumer debt after mortgages, averaging about $30,000 per borrower, according to a Forbes commentary. As first reported by the Wall Street Journal, President Trump has been meeting with advisers from the White House and U.S. Department of Education, led by Betsy DeVos, to create a plan to address student loans. During the 2016 presidential campaign, Trump proposed combining the existing student loan repayment plans into a single simpler repayment plan to help borrowers pay off student loans faster. Trump also proposed an income-based repayment plan that would cap monthly student loan payments at 12.5 percent of discretionary income and forgive remaining balances after 15 years. While Trump’s proposal raises the monthly payment cap from 10 percent to 12.5 percent of income, his proposal would forgive the remaining student loan balance five to 10 years sooner than the current income-driven repayment plans. Read the full commentary.







Student loan debt and bankruptcy was the first issue addressed by ABI’s Commission on Consumer Bankruptcy. To view the Commission’s recommendations on student loan debt and bankruptcy, please click here.



Be sure to also read “Game of Loans: Is Student Debt Forgiveness Coming?” in the December edition of the ABI Journal.



Also, the cost of rising tuition was a focus of an ABI Talk at the 2019 Winter Leadership Conference. Click here to watch the presentation by Inez Stepman of the Independent Women’s Forum (Washington, D.C.).

Survey: Private Capital Aimed at Distressed Businesses in 2020



With a majority of venture capital and private-equity firms expecting a recession to hit within two years, a massive volume of “dry powder” may be targeted at distressed businesses in 2020, CFO.com reported. In a survey of 100 VC fund managers and 100 PE fund managers by BDO, 40 percent and 39 percent of them, respectively, said they expected such businesses to be a “key driver” of deals next year. That represented an enormous departure from BDO’s previous survey of such investors a year ago, when only 1 percent of PE respondents anticipated distressed businesses being a key investment driver in 2019. BDO acknowledged that the current availability of distressed opportunities is “quite low.” However, the professional services firm noted, during the Great Recession private capital flocked to distressed-debt funds, which typically outperform other private investment strategies during an economic downturn. In the survey, 72 percent of private-equity respondents and 56 percent of venture capital respondents said they expected an economic downturn to arrive within two years. And 92 percent and 87 percent of them, respectively, anticipated a downturn within four years, which BDO characterized as “less than the length of most investment holding periods.”

Analysis: Congress Saves Coal Miner Pensions, but What About Others?



The $1.4 trillion spending bill passed by Congress last week quietly achieves what a parade of select committees and coordinating councils could not: the rescue of a dying pension fund that is the lifeblood of nearly 100,000 retired coal miners, the New York Times reported. For the first time in 45 years of federal pension law, taxpayer dollars will be used to bail out a fund for workers in the private sector. And now that there’s a precedent, it might not be the last. One coal company after another has gone bankrupt and stopped paying into the miners’ pension plan, but the retirees are still there. Its assets are dwindling, but the liabilities have stayed about the same. When the mine workers’ retiree health plan ran out of money in 1989, Congress arranged for new funding sources, including the Abandoned Mine Lands Reclamation Fund and, later, the Treasury. That precedent is now being followed for the miners’ pensions. Starting next year, the Treasury’s transfers to the Abandoned Mine Lands fund will rise to a maximum $750 million a year, and will help pay for pensions as well as retiree health care. This may prompt other unions to seek federal assistance for their plans, too.

Fed’s U-Turn on Assets Faces a Year-End Test



The Federal Reserve over the last three months has flooded money markets with hundreds of billions of dollars in cash to avoid a repeat of the volatility that roiled cash markets in September, the Wall Street Journal reported. The success of the moves — which reversed roughly half of the Fed’s shrinkage of its asset portfolio over the prior two years — will encounter a test around Dec. 31. That is when some financial institutions could face incentives from regulations to limit their lending, which could cause supply and demand imbalances for cash. Fed officials have said they believe reserves held at the Fed grew scarce enough in mid-September to put pressure on an obscure but important lending rate in the market for repos. “You can flood the markets with reserves, but are the reserves going to be redistributed to the corners of the markets that need it? That’s the big question,” said Ward McCarthy, chief financial economist at financial-services company Jefferies LLC. To prevent a squeeze from happening again, Fed officials have been buying short-term Treasury bills from financial institutions to put more reserves back into the financial system. They also have conducted daily injections of liquidity into markets. Altogether, those operations could add nearly $500 billion in net liquidity to markets around Dec. 31. (Subscription required.)

The Financial Lesson of 2008-09 that Most Investors Have Forgotten



If 2000-2009 was the Lost Decade for investors, 2010-2019 was the Decade of Forgetting, according to the Wall Street Journal. At year-end 2009, most investors — individuals and professionals alike — expected interest rates to rise, inflation to return, the dollar to weaken, commodities to boom and U.S. stocks to struggle. The giant investment firm Pacific Investment Management Co. and its then-influential co-founder Bill Gross were actively promoting their scenario of “the new normal,” which they described as “likely to be a significantly lower-returning world” for stocks and bonds alike for years to come. (Gross left Pimco in 2014 and retired from money management earlier this year.) Instead, over the ensuing 10 years, interest rates fell to historic lows, inflation all but vanished, the dollar strengthened, commodities languished, and U.S. stocks earned among the highest returns they have produced in any decade. Investors en masse pulled money out of active funds run by people trying to pick the best stocks or bonds, and poured cash into passive funds run by computers holding everything in a market index. Over the decade, according to Morningstar, investors withdrew more than $160 billion from all active funds combined, while adding more than $3.76 trillion to index funds. (Subscription required.)

Crisis Looms in Antibiotics as Drug Makers Go Bankrupt



At a time when germs are growing more resistant to common antibiotics, many companies that are developing new versions of the drugs are hemorrhaging money and going out of business, gravely undermining efforts to contain the spread of deadly, drug-resistant bacteria, the New York Times reported. Antibiotic start-ups like Achaogen and Aradigm have gone belly up in recent months, pharmaceutical behemoths like Novartis and Allergan have abandoned the sector, and many of the remaining American antibiotic companies are teetering toward insolvency. One of the biggest developers of antibiotics, Melinta Therapeutics, recently warned regulators it was running out of cash. Experts say the grim financial outlook for the few companies still committed to antibiotic research is driving away investors and threatening to strangle the development of new lifesaving drugs at a time when they are urgently needed. The problem is straightforward: The companies that have invested billions to develop the drugs have not found a way to make money selling them. Most antibiotics are prescribed for just days or weeks — unlike medicines for chronic conditions like diabetes or rheumatoid arthritis that have been blockbusters — and many hospitals have been unwilling to pay high prices for the new therapies. Political gridlock in Congress has thwarted legislative efforts to address the problem. The challenges facing antibiotic makers come at a time when many of the drugs designed to vanquish infections are becoming ineffective against bacteria and fungi, as overuse of the decades-old drugs has spurred them to develop defenses against the medicines.

U.S. Consumer Comfort Hits Nine-Week High on Economic Optimism



Confidence among U.S. consumers advanced to a nine-week high on greater optimism about the economy and brighter views of personal finances and the buying climate, Bloomberg News reported. Bloomberg’s index of consumer comfort increased to 62.3 in the week ended Dec. 22 from 61.1, according to data released today. A measure of confidence in the economy climbed to the highest since the end of July, while the personal finances gauge also was the strongest in nine weeks. Record stock prices, unemployment at a five-decade low and steady wage gains continue to lift spirits, putting the 2019 average sentiment level on track for the best since the 1999-2000 dot-com boom. Combined with elevated sentiment, this backdrop helps explain the economy’s resilience in the face of business-investment cutbacks and global demand concerns.

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Job Cuts from Bankruptcies Hit Highest Level Since 2005



Data by global outplacement firm Challenger, Gray & Christmas Inc. found that the number of job cuts announced in 2019 due to companies filing for bankruptcy protection hit the highest level in more than a decade, the Wall Street Journal reported. More than 62,100 job losses have been announced by U.S.-based employers in the past 12 months due to bankruptcy, according to the report. That number is higher than the annual totals for bankruptcy-related job cuts any year since 2005, when 74,200 were announced. Bankruptcy was one of the leading causes of job cuts, along with restructuring, trade difficulties and tariffs, in the past year, Challenger found. Employers said they were going to slash more than 592,500 jobs for various reasons, with the retail industry leading the way with nearly 77,500 cuts. About 10.5 percent of all job cuts announced through year-end 2019 were attributed to bankruptcies. In December alone, there were more than 5,500 job cuts due to bankruptcy, Challenger’s data show. There were more job cuts related to bankruptcy in 2019 than during the recession years. More than 62,100 jobs were affected due to bankruptcy in 2008, while about 50,900 were cut in 2009. (Subscription required.)

Financial Tug-of-War Emerges over Fire Victims' Settlement



A financial tug-of-war is emerging over the $13.5 billion that the nation's largest utility has agreed to pay to victims of recent California wildfires, as government agencies jockey for more than half the money to cover the costs of their response to the catastrophes, the Associated Press reported. Pacific Gas & Electric declared bankruptcy nearly a year ago as it faced about $36 billion in claims from people who lost family members, homes and businesses in devastating wildfires in 2017 and 2018. The utility acknowledged that its power lines ignited some of the fires. Those claims were settled as part of the $13.5 billion deal that PG&E reached last month with lawyers representing uninsured and underinsured victims. Meanwhile, insurers had been threatening to try to recover roughly $20 billion in policyholder claims that they believe they will end up paying for losses from those fires. PG&E settled with the insurers for $11 billion. PG&E must keep working on its broader bankruptcy exit plan to meet the approval of state regulators and a bankruptcy judge by June, as planned. In the meantime, the $13.5 billion settlement leaves open just how much would be used to compensate victims, their lawyers, and federal and state agencies for the money they spent on rescue and recovery operations.

Sales-Tax Ruling Strains Small Online Sellers



Eighteen months after the Supreme Court gave states the green light to tax online transactions, small companies that sell things as diverse as recycled yarn and gold bullion are struggling to adjust, the Wall Street Journal reported. In its June 2018 ruling, the Supreme Court held that states had the authority to make online retailers collect sales taxes even if they didn’t maintain a store, warehouse or other physical presence. Before the decision, consumers were supposed to pay what is known as use tax on out-of-state purchases, but most didn’t. The decision came in a lawsuit filed by South Dakota against home-furnishings retailer Wayfair Inc. and other online sellers. What is taxed and how often those taxes are paid varies from state to state. Some states, such as Colorado, allow localities to administer their own taxes. Some states share definitions and procedures to make it easier for companies to comply, but some of the biggest jurisdictions have their own rules. “Small businesses are definitely the ones that are really adversely affected,” said Clark Calhoun, a state and local tax attorney in Atlanta. “A bigger business is typically going to have more robust sales-tax software,” he said, as well as “a better sense of where their products are going and will be well over the sales thresholds every single year.” Verenda Smith, deputy director of the Federation of Tax Administrators, which represents state taxing authorities, said the state laws were never intended to affect small businesses. But “the fairness issue is equally on the table, and it can be at odds with the burden issue,” she said. Most states have tried to limit the impact on the smallest companies, with many following the lead of South Dakota, which exempted out-of-state sellers with $100,000 or less in sales or fewer than 200 transactions in the state a year. But limits vary, with a threshold of $500,000 in California and none in Kansas. (Subscription required.)

Corporate Debt Issuers to Kick Off Sales with Up to $35 Billion



Sales of U.S. high-grade bonds will total between $30 billion and $35 billion next week, according to an informal survey of dealers at some of Wall Street’s biggest banks, Bloomberg News reported. The market remains inviting for potentially supercharged debt-issuance, with funding costs at the best levels ever for the start of a year and incentive to get ahead of potential U.S. election-induced volatility beginning in March. About $120 billion is forecast for January, an increase of 9 percent from last year. The high-grade bond spread, the added premium over U.S. Treasuries that investors get paid to hold riskier debt, fell to 93 basis points on Tuesday, the tightest level since February 2018. Meanwhile, there is about $78 billion in U.S. high-grade corporate bonds coming due or that may be called in January, according to data compiled by Bloomberg.

Americans Are Taking Cash out of Their Homes — And It Is Costing Them



Many U.S. homeowners who need cash are taking it out of their properties, but the trade-off is higher interest rates, according to a Wall Street Journal analysis. Over the past two years, a big chunk of homeowners took on higher interest rates when they refinanced to tap into their home equity. These cash-out refinancings, as they are known, free up money that homeowners can use to pay down credit card debt, renovate or invest in a new property. Nearly 60 percent of cash-out refinancings in 2018 came with higher interest rates, the biggest share since before the financial crisis, according to Black Knight Inc., a mortgage-data and technology firm. This year, that number fell to around 44 percent of cash-out deals, but it remains at more than three times its average between 2009 and 2017. This corner of the mortgage market illuminates the crosscurrents in the U.S. economy: After roughly a decade of rising home prices, homeowners are flush with record amounts of home equity they can tap. But many Americans remain short on cash and are increasingly relying on debt to fund their lives. “There’s something in their life that is causing them to need money,” said Sam Polland, a mortgage-loan officer at Sandy Spring Bank in Rockville, Md. “They are willing to go up in rate to get the equity out of their house.” (Subscription required.)

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