Puerto Rico

Judge Besosa’s Ruling on PROMESA Stay Spells Trouble for Plaintiffs in Other Cases



If U.S. District Court Judge Francisco Besosa’s recent ruling is any indication, the litigants in four consolidated cases that are seeking a lift of the Puerto Rico Oversight, Management, and Economic Stability Act’s (PROMESA) stay in legal challenges to the Puerto Rico Emergency Moratorium & Financial Rehabilitation Act may be in trouble, Caribbean Business reported today. Judge Besosa yesterday declined to lift the stay in the consolidated cases of Peaje Investments LLC; Altair Global Opportunities Fund, which includes some 30 hedge funds; and Assured Guaranty Corp., a monoline insurer. In the cases of Peaje and Altair, the judge said that they didn’t lack adequate protection, and he also ruled that Assured failed to prove injury in fact. Assured, which sued to stop the government from diverting funds from the Puerto Rico Highway and Transportation Authority (PRHTA), isn’t a bondholder and therefore isn’t directly owed money by the PRHTA, the judge said. He said facts indicate that an event of nonpayment by PRHTA won’t transpire during the pendency of PROMESA’s stay, which expires in February. Judge Besosa said that Peaje has adequate protection of its interests because provisions of both the Moratorium Act and PROMESA preserve its interest in PRHTA’s pledged revenues.

Get an in-depth look at the PROMESA Control Board and the issues it will be tackling with this ABI podcast.



In related news, Puerto Rico Secretary of the Treasury Juan Zaragoza said that the Government Development Bank for Puerto Rico, with about $3.8 billion of debt outstanding, may fail and that it’s possible that the island’s cities and public corporations won’t get all their deposits back, The Bond Buyer reported yesterday. In a response to Zaragoza earlier this week, Puerto Rico Mayors Federation executive director Reinaldo Paniagua said that the cities had more than $300 million in deposits at the GDB. The bank’s possible inability to return all deposits also jeopardizes loans for projects already underway, he said. Zaragoza sent a formal letter about the matter to municipal governments and public corporations on Oct. 18 and then followed up with a press release on Tuesday. GDB managers have “substantial doubt about the ability of the GDB to continue as a going concern,” Zaragoza said in the letter.



Do not miss the “Puerto Rico, ‘Super Chapter 9’ and the Future of Sovereign Debt” session at ABI’s Winter Leadership Conference, taking place Dec. 1-3 at Terranea Resort in Rancho Palos Verdes, Calif. Haven’t booked your hotel room? Act fast: ABI’s room block rate expires on Nov. 5!



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

Appeals Court Rules Texas Laws Govern Utah Foreclosures by Bank of America



The U.S. Court of Appeals for the Tenth Circuit ruled yesterday that Texas laws and not those of Utah govern home foreclosures in Utah by Bank of America, the Salt Lake Tribune reported today. The decision means that thousands of Utah homeowners who were foreclosed on by Bank of America will not be able to recover monetary damages based on the claim that those actions were illegal under Utah law. In a separate opinion, Judge Carlos Lucero warned that the decision is a serious blow to state sovereignty and that regulations from the Office of the Comptroller of the Currency on which the court's decision was based "create[] a race to the bottom in which national banks can choose to be governed by the state with the most bank-friendly rules." The decision comes in a lawsuit that stemmed from a wave of foreclosures in Utah by Bank of America's ReconTrust, which is headquartered in Texas. Many of the foreclosures stemmed from BofA's 2008 purchase of Countrywide Financial, whose shoddy loan practices were exposed during the bursting of the housing bubble. As many as 10,000 Utah homeowners have been foreclosed on since 2001 by Bank of America, according to the proposed class action lawsuit filed in 2011. Under Utah law, a foreclosure that is not filed in court can only be carried out by a Utah attorney or title company. ReconTrust is Bank of America's foreclosure arm and was the entity that foreclosed on Utah homeowners who had defaulted on their loans. The lawsuit sought awards to former homeowners as a result of the alleged violations of state law.

Click here to read the opinion.

New Jersey Tops Illinois as State with Worst-Off Pension System



New Jersey became the state with the worst-funded public pension system in the U.S. in 2015, followed closely by Kentucky and Illinois, Bloomberg News reported yesterday. The Garden State has $135.7 billion less than it needs to cover all the benefits that have been promised, a $22.6 billion increase over the prior year, according to data compiled by Bloomberg. Illinois’s unfunded pension liabilities rose to $119.1 billion from $111.5 billion. The two were among states whose retirement systems slipped further behind as rock-bottom bond yields and lackluster stock-market gains caused investment returns to fall short of targets. The median state pension had 74.5 percent of assets needed to meet promised benefits, down from 75.6 percent the prior year. The decline followed two years of gains. The shortfall for states overall was $1.1 trillion in 2015. Pressure on governments to increase pension contributions has mounted because of investment losses during the recession that ended in 2009, benefit increases, rising retirements and flat or declining public payrolls that have cut the number of workers paying in. U.S. state and local government pensions logged median increases of 3.4 percent for the 12 months ended June 30, 2015, according to data from Wilshire Associates.

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Commentary: Financial Plan Offered by Puerto Rico’s Governor Falls Short of Remedying Problems



Congress passed legislation this summer enabling Puerto Rico to restructure its debts under the auspices of a federal control board. Lame-duck Governor Alejandro García Padilla is now promising to make the commonwealth fiscally chaste — just not yet, according to a Wall Street Journal editorial today. Puerto Rico must propose a structurally balanced fiscal plan for the approval of the seven-member oversight board before it can seek to adjust its $72 billion of public debt in federal court. The plan García Padilla laid out to the board last Friday asks the feds for billions in aid while offering pennies on the dollar in change. Puerto Rico desperately needs to escape its debt-negative growth spiral, according to the editorial. The island has been in recession for a decade and its population has declined by 9 percent. Debt service consumes more than a third of its budget. Public pension funds are nearly broke with $44 billion in unfunded liabilities. These problems demand a structural reboot that includes spending reductions and changes to the island’s labor, education and tax laws, but García Padilla’s plan relies on band-aids, according to the commentary.

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



For a ABI podcast on the early work of the control board, please click here.

Bankrupt California City Seeks to Fix Politics and Finances



San Bernardino, Calif., is trying to become the first U.S. municipality to overhaul its political structure while in bankruptcy, asking voters to approve a new charter that strips the mayor and city council of day-to-day operational control, Bloomberg News reported yesterday. If the ballot measure wins in November, San Bernardino would join the majority of U.S. cities in which elected officials hire a professional manager to run operations, according to the National League of Cities. San Bernardino’s "charter doesn’t properly delegate responsibility between various city officials,” said bankruptcy attorney Marc Levinson, who led the California cities of Stockton and Vallejo through the bankruptcy process. The city filed for bankruptcy in 2012, blaming a loss of tax revenue, high-priced employee pensions, and a city charter that separated the cost of police and fire salaries from the city’s ability to pay. It’s now nearing the end of its time under court protection, having negotiated settlements with its biggest creditors, including pension bondholders owed about $90 million. Final approval on a plan to reduce debt by about $200 million could come as early as next month when the city is due back in court. In a hearing on Oct. 14, U.S. Bankruptcy Judge Meredith Jury praised the city’s progress and said that the plan is nearly ready for her approval. Once Judge Jury signs off, the city could exit court oversight. While that will straighten out the city’s finances, its politics depend on the ballot measure. San Bernardino now has both a city manager and a mayor, each employed full-time to oversee different aspects of the bureaucracy. The seven members of the elected city council also have a hand in managing the municipal workforce, from street workers to librarians, city manager Mark Scott said.

Commentary: Reining in Risky Bank Loans



U.S. bank regulators are going after risky lending, but they're having a tough time reining it in, according to a Bloomberg Gadfly commentary. The Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. have spent the last three-and-half years enforcing guidance designed to restrict banks within their purview from extending loans that lift a company's indebtedness into a territory that sets off alarms, according to the commentary. Although there is no bright line, regulators have said that a debt-to-EBITDA ratio above 6 raises concern for most industries. Plenty of deals are still getting done at these leverage levels with the help of alternative lenders. Regulators fear that without their intervention, a chunk of corporate America may be unable to repay excessive borrowings and could be forced into bankruptcy when interest rates eventually rise. A secondary fear is that, as happened during the global financial crisis, banks will be left on the hook for some of this debt if they're unable to sell it to investors. The increased scrutiny has been somewhat successful in deterring banks from risky lending — or, as in the case of the Fed's warning about Goldman Sachs's recent financing of the UFC buyout, has raised red flags when they do. But even when banks have retreated, borrowers have been able to find ready financing from alternative lenders.

Analysis: Ex-Wells Fargo Bankers Describe Abuses



Among the customers whom bankers at Wells Fargo targeted for unauthorized or unnecessary accounts to meet steep sales goals were Mexican immigrants who speak little English, older adults with memory problems and small-business owners with several lines of credit, according to the New York Times DealBook blog yesterday. “The analogy I use was that it was like lions hunting zebras,” said Kevin Pham, a former Wells Fargo employee in San Jose, Calif., who saw it happening at the branch where he worked. “They would look for the weakest, the ones that would put up the least resistance.” Wells Fargo would like to close the chapter on the sham account scandal, saying that it has changed its policies, replaced its chief executive and refunded $2.6 million to customers. But lawmakers and regulators say that they will not let it go that quickly, and emerging evidence that some victims were among the bank’s most vulnerable customers has given them fresh ammunition. This week, three members of the Board of Supervisors in San Francisco, Wells Fargo’s hometown, introduced a resolution calling on the city to cut all financial ties with the bank. They cited both the recent scandal and past cases — particularly the $175 million that Wells Fargo paid in 2012 to settle accusations that its mortgage brokers had discriminated against black and Hispanic borrowers. After the Senate Banking Committee held a blistering hearing last month with the bank’s chief executive, John G. Stumpf, who has since retired, it followed up with a letter containing 58 additional questions for the bank. Among them: What proportion of the harmed customers are old, members of ethnic minorities or military veterans? The committee is still waiting for a response. The Justice Department and California’s attorney general are also investigating the bank.

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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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