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Commentary: Puerto Rico Oversight Board's Success May Hinge on the Ballot Box



A forthcoming financial turnaround plan for Puerto Rico, which the territory's oversight board wants on its desk in nine days, will probably change after the island's November election, according to a Reuters commentary yesterday. The bipartisan board, created by the Puerto Rico rescue law known as PROMESA, set Oct. 14 as a deadline for the territory's governor Alejandro García Padilla to deliver a draft plan for how to boost island revenues and tackle its $70 billion debt. García Padilla has unsettled Puerto Rico's creditors by insisting on deep debt cuts and defaulting on some payments, but he is not seeking a second term, so it will ultimately fall to his successor to work with the board to finalize the plan. Ricky Rossello, the leading candidate for his job, is seen as more likely to deliver a plan compatible with the philosophy of the board, according to the commentary. The board is largely reviled in Puerto Rico, where locals feel it infringes upon the U.S. territory's self-governance. Rossello and his main opponent, ruling party member David Bernier, have both taken issue with the scope of the board's powers, but said they would cooperate with it.

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage. 

Ultra’s Collateral-Free Bankruptcy Leaves Lenders Confounded



Ultra Petroleum went into chapter 11 in April listing $3.76 billion in funded debt, none of it secured by the driller’s more than $1 billion in assets, Bloomberg News reported yesterday. Banks led by JPMorgan Chase & Co. didn’t demand collateral when they lent to the company in October 2011. The price of oil was jumping, and lenders were eager to win energy business amid the U.S. shale boom. The senior lenders held an unsecured $1 billion revolving loan. They have sold much of the loan to distressed-debt funds, including Oaktree Capital Group LLC and Anchorage Capital Group. Some of the banks have fully exited their positions, getting out when the company went into chapter 11 amid concerns that, given their uncertain precedence and the driller’s low asset values, they’d be forced to exchange their debt for equity in a reorganized Ultra Petroleum, rather than cash. Their departure has set up what promises to be a contentious fight over which remaining creditors get paid first, and how much.



 

Get a better understanding of what happens when an oil, gas or other natural resources company goes bankrupt. Order your copy of ABI's revised and expanded When Gushers Go Dry: The Essentials of Oil & Gas Bankruptcy, Second Edition.

Analysis: Scrutiny of Commercial Real Estate Loans Chills Small Lenders



Financing commercial property has been local banks’ bread-and-butter business for years, but a post-crisis push for loan growth prompted regulatory warnings about lax lending standards, and small banks are now shying away from the market, according to a New York Times DealBook analysis on Tuesday. A shakeout in commercial real estate is underway as some banks unwind or sell off the loans that are under regulators’ microscopes, and bankers say they are wary of making new loans. Brokers say that they are finding fewer lenders for some commercial property deals. Aaron Appel at Jones Lang LaSalle in New York said that there has been less competition for $5 million to $10 million in commercial property deals, particularly loans that involve construction or redevelopment projects, which are considered riskier because they are not properties that are generating income. Commercial property brokers have been working more with institutional investors, like private-equity and pension funds, partly as a result of some banks taking a step back, Appel and others said. And foreign banks have stepped in on some of the deals.





While commercial real estate values have largely recovered since the 2007 crash and underwriting has loosened, some borrowers are treading water as their property values have not fully recovered, NationalMortgageNews.com reported yesterday. The sheer volume of loans maturing this year and next — $232.4 billion, according to data provider Trepp — leaves some borrowers scrambling for funds to refinance their loans, which repay most of their principal in a final balloon payment. By comparison, $70 billion of CMBS loans matured in 2015 and just $37 billion did in 2014. Analysts at JPMorgan Chase estimate that the net issuance of commercial mortgage bonds was negative $57 billion in the first nine months of the year. Some of the underlying loans that came due were refinanced by other kinds of lenders, such as commercial banks or insurance companies.



 

Commentary: The Subprime Superhighway



The U.S. and Europe are lowering capital standards for ‘investments’ in public infrastructure — ignoring the lessons from 2007-08, according to a Wall Street Journal commentary. In January, the EU lowered capital standards for infrastructure investments by as much as 40 percent, but cited no major errors in the old risk model or any new empirical evidence to justify the change. Instead, the EU repeatedly emphasized its need for “€2 trillion in [infrastructure] investment” by 2020. The U.S. seems set to follow Europe’s lead, according to the commentary. The Treasury Department’s new Federal Insurance Office released a report last year encouraging “state insurance regulators to assess the current [risk-based capital] approach and explore appropriate ways to increase incentives for infrastructure investments by insurers.”



 

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Scotiabank Sues Puerto Rico over Loan Repayment

Scotiabank filed a lawsuit against Puerto Rico's government yesterday seeking repayment of a multimillion-dollar loan despite a debt moratorium imposed amid an economic crisis, the Associated Press reported. The Canadian-based bank's Puerto Rico operation argued in the filing that the moratorium is unlawful. It said that it loaned the island's Metropolitan Bus Authority nearly $38 million in 2012 and accused the state agency of not making any payments since November 2015. The lawsuit marks the first time that the U.S. territory's government is being sued over a loan and not over bond payments since the governor declared Puerto Rico’s $70 billion in public debt unpayable last year. The lawsuit is the latest of more than a dozen that Puerto Rico's government is facing as it seeks to restructure its public debt. A federal judge is expected to decide soon whether Puerto Rico will have to pay its debts despite U.S. legislation enacted in June that protects the island from lawsuits through February 2017.

In related news, Puerto Rico's newly created federal oversight board, charged with helping the U.S. commonwealth navigate through its $70 billion debt burden, will hold its first meeting tomorrow in New York City. The seven-member board, created by the U.S. Congress in part to stave off a massive default and help the Puerto Rican government renegotiate its debt obligations, is scheduled to meet at 8:30 a.m. EDT, when it will elect a chairperson. The board also said that it will formally request from Puerto Rico's governor the submission of a fiscal turnaround plan, which is a key requirement of the federal Puerto Rico rescue law that created the board, known as PROMESA. Click here to view the agenda.



For more perspective on Puerto Rico's oversight board, make sure to listen to this ABI podcast.



For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage.

Commentary: Student Loan Defaults Drop, but the Numbers Are Rigged



The good news is that Americans are taking longer to default on their federal student loans, the U.S. Department of Education announced yesterday, but the bad news is that the overall number of defaults continues to rise, according to a Bloomberg News commentary. Defaults fell by a half percentage point, to 11.3 percent, compared with a year earlier. This measures the number of former students who went 360 consecutive days without making a payment since their first bill came due in fiscal year 2013. About 593,000 former college students out of 5.2 million total borrowers defaulted on their federal debt as of Sept. 30, 2015, the department said. Default rates at public and for-profit colleges dipped, while private, nonprofit schools experienced a slight increase. The default rate doesn’t accurately represent the degree to which former students struggle to repay their loans, federal officials and higher education experts have said. This is because of school efforts to push back eventual defaults to later years by persuading students to postpone payments under federally approved programs. Of 6,155 schools with default rates, just 10 may lose access to federal student aid as a result of their high default rates, the department said.

Wells Fargo Isn’t the Only Bank that Draws Cross-Selling Complaints



Problematic sales practices at banks may extend beyond the abuses revealed in this month’s $185 million enforcement action against Wells Fargo & Co., according to a new analysis of customer complaints maintained by the U.S. government, the Wall Street Journal reported yesterday. While customer complaints don’t equal illegal conduct, the complaint database run by the Consumer Financial Protection Bureau shows that Wells Fargo hasn’t been much of an outlier when it comes to complaints associated with cross-selling and other sales abuses. The analysis of the database by S&P Global Market Intelligence shows that the CFPB received 1,576 complaints about Wells Fargo’s account management, including how it opened and closed accounts, from Jan. 1, 2015 to Sept. 20, 2016. That area, which generally corresponds with the recent allegations that Wells Fargo opened unwanted accounts for its customers, generated about 1.3 complaints for every billion dollars in deposits at the bank as of June 30, according to a Wall Street Journal analysis of the S&P report. Other banks had similar levels of complaints. Citigroup Inc. customers’ 1,722 account-management issues during the nearly 21-month period represented 1.8 complaints for each $1 billion of deposits at the bank. Bank of America Corp. customers had 1.7 complaints, using the same metric, while customers of JPMorgan Chase & Co. had 1.1.

Lehman Brothers to Pay Another $3.8 Billion to Creditors



The team winding down Lehman Brothers Holdings Inc. said Thursday it would be paying out $3.8 billion to creditors next week, more than eight years after the investment bank’s collapse triggered the financial crisis, the Wall Street Journal reported today. The distribution, the 11th since the investment bank failed in 2008, will bring the total payout in the firm’s bankruptcy to more than $113.6 billion. The bulk of the cash – $83.6  billion – has gone to pay so-called third-party claims. Lehman said in a filing today in U.S. Bankruptcy Court in New York that its senior unsecured creditors, Lehman bondholders who were estimated to receive about 21 cents on the dollar when the bank’s bankruptcy plan went into effect in early 2012, will have recovered more than 40 cents on the dollar after the next distribution is completed.

Latest ABI Podcast Examines How Artificial Intelligence and Technology Is Changing the Practice of Law



ABI Editor-at-Large Bill Rochelle talks with Prof. Lois Lupica of the University of Maine School of Law, a former ABI Resident Scholar, about artificial intelligence (AI) in the practice of law. As IBM has already rolled out "ROSS," the first AI attorney, Prof. Lupica discusses the potential ways that AI will change the way that bankruptcy practitioners do business, including document discovery, case-predictive software and more.

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