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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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IRS Provides Tax Relief for Those with Discharged Student Loans



The IRS and Treasury Department released guidance yesterday that will allow more people with discharged student loans to receive tax relief, The Hill reported. Under the guidance, certain taxpayers with discharged student loans will not have to report the amount of the loan as gross income on their federal tax returns. The guidance applies to taxpayers whose federal loans were discharged by the Department of Education because they were attending a school that closed or because they established that "a school’s actions would give rise to a cause of action against the school under applicable state law," the IRS said. The guidance also applies to taxpayers whose private loans were discharged as a result of legal settlements against colleges and certain private lenders. The new guidance comes after Treasury and the IRS in recent years have provided similar tax relief to taxpayers who took out loans in order to attend schools owned by Corinthian Colleges Inc. or American Career Institutes Inc. — now-defunct for-profit institutions. Treasury and the IRS said in the new guidance that they determined that it's appropriate to extend that tax relief to people who had taken out loans to finance attendance at other schools as well.

New Jersey Could Soon Become First State to Mandate Severance for Employees in Mass Layoffs



New Jersey state lawmakers approved a bill Monday that would compel employers to give more notice and pay severance to laid-off workers, after a public backlash against the treatment of workers who lost their jobs in the retail apocalypse, the Washington Post reported. The bill, which has been called the “Toys ‘R’ Us bill,” after workers of the retail chain that filed for bankruptcy in 2017, requires larger employers to pay workers one week of severance for each year of service. It also gives employees 90 days’ notice, rather than just 60 days, in the event of a mass layoff. It was approved 55-21. “When businesses go bankrupt or close, far too often, workers are given little notice or severance pay. We saw this happen right here in New Jersey last year when Toys “R” Us filed for bankruptcy," lawmaker Annette Quijano (D), a primary sponsor of the bill, said in a statement. "Employees deserve to be treated fairly, especially when they are forced to leave a job due to circumstances beyond their control.” The bill, which only applies to employers with 100 or more full- or part-time workers laying off 50 or more people, was approved by the state’s Senate in December. It now goes to the desk of Gov. Phil Murphy (D).

Consumer Spending Solid at End of Holiday Shopping Season



Consumers headed into 2020 on a solid footing, driving up retail sales in the final month of the holiday season, the Wall Street Journal reported. December retail sales, a measure of purchases at stores, restaurants and online, increased a seasonally adjusted 0.3 percent from a month earlier, the Commerce Department said today. Solid gains in nearly every category offset a drop in motor-vehicle sales, the data showed. Consumer spending has been supported by a strong jobs market and wage gains, as well as diminished tariff uncertainty over the U.S.-China trade dispute. Excluding the volatile categories of autos and gas, retail sales rose 0.5 percent in December, the strongest pace of growth in five months. Still, updated numbers from Commerce showed retail sales outside of motor vehicles and gasoline declined in the prior three months. December department-store sales slipped 0.8 percent from November and declined 5.5 percent from a year earlier. Meanwhile, sales at nonstore retailers, a category that includes internet merchants such as Amazon.com Inc., were up 0.2 percent from November and increased 19.2 percent compared with a year earlier. (Subscription required.)

Banks Reported 2019 Large Profits with the Help of Consumers’ Credit Card Debt



A growing tide of consumer debt helped propel some of the country’s largest banks to major profits last year, the Washington Post reported. JPMorgan Chase, the country’s largest bank, said this week that it earned a record $36 billion profit last year with credit card loans increasing 8 percent. U.S. Bancorp said yesterday that it brought in $7 billion last year with the help of a 7.6 percent increase in its credit card business. Citigroup, which reported a profit of $19 billion last year, said that its branded cards business increased 8 percent in North America last year. Even Wells Fargo, which has been struggling to rebound from scandals, found a bright spot with consumers, reporting that credit card loans were up $2 billion during the fourth quarter. “Even though consumers are confident, people are still carrying significant debt,” said Ted Rossman, an analyst for CreditCards.com. Consumers’ appetite for credit cards has not been dampened by relatively high interest rates. The average rate is 17.3 percent, near a record high, for consumers with a good credit score, according to CreditCards.com, which surveys the country’s 100 most popular cards. The cost is steeper for consumers with lower credit scores, 25.30 percent, according to the site.

Lawmakers Press Rulemaker on Economic Impact of Credit-Loss Standard



The chairman of the Financial Accounting Standards Board on Wednesday faced a barrage of questions from lawmakers seeking to better understand the economic effects of a controversial new rule on credit-loss accounting, the Wall Street Journal reported. During an oversight hearing, members of the House Committee on Financial Services’ Subcommittee on Investor Protection, Entrepreneurship and Capital Markets questioned FASB Chairman Russell Golden, expressing concern that the new accounting rule would negatively affect banks, consumers and the economy at large. Lawmakers cited fears from the banking industry that the rule would curtail credit availability, make credit losses worse in a recession and heighten volatility of bank earnings. “We are setting ourselves up for an even larger problem going forward, caused by accounting,” said Rep. Trey Hollingsworth (R-Ind.). The Current Expected Credit Losses rule (CECL) requires lenders to record expected future losses as soon as loans are issued. The rule was adopted in 2016 and started to go into effect for large public banks on Dec. 15. FASB in October delayed the rule’s effective start date for private and nonprofit lenders until after Dec. 15, 2022. Before CECL, lenders didn’t have to recognize losses until they had evidence the losses had been incurred. FASB, which sets U.S. accounting standards, changed the rule to provide investors with more transparency about the loan-issuing process. (Subscription required.)

2020 Edition of the Mini-Code Now Available for Purchase



Now available for purchase and immediate delivery: The 2020 edition of the Mini-Code (incorporating the Small Business Reorganization Act, the Family Farmer Relief Act, and the HAVEN Act), plus the 2020 edition of the Mini-Rules (including all rules adopted as of Dec. 1, 2019). Order your copies today at store.abi.org!

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Coronavirus Fallout Poses Challenges for Most Vulnerable U.S. Retailers



Lenders and analysts say that the weakest U.S. retailers will face the biggest risks from the coronavirus epidemic if Chinese factories overseas remain understaffed and customers at home stay away from brick-and-mortar stores, the Wall Street Journal reported. Luxury chain Neiman Marcus Group Ltd., fabric and craft supplies chain Jo-Ann Stores Inc., and apparel seller J.Crew Group Inc. are among the junk-rated retailers that are exposed to the potential fallout from the coronavirus outbreak, they said. China’s efforts to contain the epidemic have weighed on its manufacturing sector as small private factories and larger state-owned facilities endure extended shutdowns. U.S. retailers have varied exposure to the manufacturing contraction, depending on how much of their inventory comes from China or other affected regions. Economists say that it is too soon to know how much the virus might affect consumer spending but that it could upend supply chains and cause some product shortages, especially as retailers run out of Chinese-made goods already stocked in warehouses. The biggest risk facing weaker retailers is a possible pullback in demand as the virus spreads in the U.S., spooking consumers, said Moody’s Investors Service managing director Mickey Chadha. But if production in China doesn’t return to normal levels by late April, U.S. retailers also could face challenges stocking up in time for the back-to-school and holiday shopping seasons, said Thomas O’Connor, a senior director and research analyst for supply chains at Gartner Inc. (Subscription required.)

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IATA: Global Airlines Could Suffer Up to $113 Billion in Lost Revenue Due to Coronavirus Crisis



The International Air Transport Association (IATA) said in an updated analysis that passenger airline business could suffer losses between $63 billion and $113 billion because of the novel coronavirus, depending on the severity and length of the outbreak, the Washington Post reported. Alexandre de Juniac, IATA’s director general and CEO, said that the outbreak amounts to a “crisis” for the industry. The IATA had published on Feb. 20 an estimate that lost revenue would hit $29.3 billion, but that was based on a scenario confining the fallout to markets associated with China. “Since that time, the virus has spread to over 80 countries and forward bookings have been severely impacted on routes beyond China,” the industry body said. Airlines around the world have begun canceling flights due to lower demand and complicated travel restrictions amid the coronavirus outbreak, with airlines outside Asia suffering amid a global pullback. IATA said the range of its newest estimate was based on different scenarios, with the lower estimate reflecting the costs if the coronavirus is contained in current markets with over 100 cases as of March 2, and the higher end if the outbreak spreads further. The analysis noted that financial markets were already pricing in a shock to industry revenue greater than its worst prediction, with airline share prices falling nearly 25 percent since the outbreak began. Although falling oil prices may help airlines offset some of the cost, IATA suggested the industry would need government help.

In Restaurant Glut, Strategic Buyers Keep Bankrupt Chains Afloat



Decreased foot traffic, competitive marketing strategies and rising debt loads have choked the restaurant industry and led to a flurry of bankruptcy filings — but strategic buyers haven’t shied away from chains in distressed situations, Bloomberg News reported. Strategic buyers, usually restaurant groups that already own other brands, often get a good deal when purchasing a failing chain because they have existing operations like restaurant management to run additional locations. Private-equity firms, on the other hand, often have to carry that overhead themselves, meaning the risk is higher and the reasoning behind the purchase has to be stronger, said David Bagley, managing director at Carl Marks Advisors. At one time, private-equity firms including NRD Capital Management LLC, Sun Capital Partners Inc. and TriArtisan Capital Advisors LLC put a lot of capital into the restaurant space, buying brands including Ruby Tuesday, Boston Market and TGI Friday’s, respectively. The level of private-equity investment in restaurants, however, fell to $4.75 billion in 2019 compared to a decade high of $18.29 billion in 2017, according to data from Pitchbook. Private equity used to make money on restaurants by using high levels of capital to increase the number of locations, expanding brand presence and driving additional revenue, Bagley said. That old strategy doesn’t make sense anymore because there’s so much additional restaurant square footage while foot traffic is shrinking, he said. One of the major struggles for restaurant brands recently has been driving customer traffic in an environment where a few chains — those with strong investment in food innovation and marketing — are top-of-mind for the restaurant-goers.

Fifth Third Latest Bank in CFPB Crosshairs over Phony Accounts



The Consumer Financial Protection Bureau is continuing its crackdown on banks opening unauthorized accounts after Wells Fargo's phony-accounts scandal prompted the agency to investigate aggressive sales tactics at other institutions, American Banker reported. The latest institution in the bureau's crosshairs is Fifth Third Bancorp, which disclosed in a securities filing this week that the CFPB intends to file an enforcement action related to “alleged unauthorized account openings” at the Cincinnati-based bank. Last year, the CFPB began investigating whether Bank of America also violated federal law by opening credit card accounts without customer authorization. The $169 billion-asset bank says it plans to fight the action brought by the agency. Further details about the CFPB's allegations are unclear. Fifth Third spokeswoman Laura Trujillo said the bank will “fully cooperate with any regulatory and government inquiries,” but she would not say what types of accounts are under investigation by the CFPB.

Don't Miss the abiLIVE Webinar "Preference Update: SBRA’s Due Diligence Requirement" Next Thursday!



Hosted by ABI's Young and New Member Committee, the panel on next Thursday's webinar will discuss the Small Business Reorganization Act’s requirement that a trustee (or debtor-in-possession) take into account a defendant’s defenses before bringing an action. This amendment, which is applicable in all cases, requires the plaintiff to engage in reasonable due diligence regarding a defendant’s affirmative defenses before initiating a preference action. Click here to register for FREE!

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