8 posts from May 2020

Why Is Anyone Paying Retention Bonuses in Today's Economy?

posted by Adam Levitin

Wall Street Journal today has a story about Hertz having paid out $16 million in retention bonuses before filing for bankruptcy. It seems that several other firms have done the same recently.

In normal times, a retention bonus isn't a crazy idea--there are downsides to remaining employed at a bankrupt company, particularly the uncertainty about the company's future--will it survive, in what form, and under what management? An employee might reasonable look at other employment options if bankruptcy looms. 

But in today's economy, I have trouble seeing a justification for paying retention bonuses for executives. With real unemployment at nearly 25% and few firms hiring (and certainly not rental car companies), the alternative to sticking with the bankrupt company is likely unemployment, not a similar position at another firm. The bonuses just look like corporate waste (and perhaps self-dealing). But if I had to guess, given their size, they'll go unchallenged, whether because of terms of the carve-out for the official committee in the DIP financing or because of a release in the plan.  

We Can Cancel Student Loans for Essential Workers Now

posted by Alan White

While the House HEROES bill's scaled-down student loan forgiveness is unlikely to become law, many essential workers are eligible for student loan cancellation now under existing law. The Public Service Loan Forgiveness program covers all police, firefighters, public school teachers, nurses, soldiers, prison guards, and contact tracers, among others. Once public servants complete 10 years of payments, the law says they get their remaining federal student debt cancelled. So far nearly 1.3 million public servants are working towards their PSLF discharges, but the US Education Department has granted only 3,141 discharges out of 146,000 applicants.

In the month of March, 5,656 borrowers applied for PSLF. 114 received a discharge.  Meanwhile another 15,000 entered the pipeline by having their first employment certification approved, bringing the total to almost 1.3 million public servants. 

I have written elsewhere about how Congress and the Education Department could fix this program, even without new legislation.

The average total student loan debt discharged for PSLF borrowers is more than $80,000. For a median income earner, monthly payments range from $250 to $900 depending on the payment plan. PSLF discharges can yield an immediate and significant savings for these workers. 

American Predatory Lending and the North Carolina model

posted by Melissa Jacoby

My coauthor Ed Balleisen has co-founded a program on consumer lending of interest to Credit Slips readers. Its initial data collection is particularly useful in documenting the North Carolina experience and its implications for other states. The quote below is from Balleisen's post on Consumer Law and Policy:  

Data visualizations of statistics about the North Carolina mortgage market and consumer protection enforcement complement the oral histories, as do a set of policy timelines and memos about state- and national-level regulation of mortgage lending. Our key findings suggest that more stringent oversight of aggressive mortgage practices moderated the housing boom in North Carolina, and so partially insulated the state from the broad collapse in housing values across the country.

The Brown M&M Theory of Telltale Minor Regulatory Violations or What's Wrong with "Earn a savings rate 5X the national average"?

posted by Adam Levitin

A CapitalOne savings account ad has got me thinking about whether Van Halen has anything to teach regulators. Van Halen is famous for its use of a contract that requires provision of M&Ms for the band, but expressly prohibits provision of any brown M&Ms. It's not that they taste different, of course, but that if a concert promoter fails to adhere to the brown M&M term in the contract, it's a red flag that there might be other more serious problems, so the band will undertake a safety check of the stage and equipment. 

IMG_5469So what does this have to do with CapOne?  I'm one of the few folks in the world who bothers to teach the Truth in Savings Act, so I'm probably more inclined to pay attention to deposit account advertising than most folks. I was about to throw out an early May issue of The Economist (yes, my tastes run distinctly to middle brow), when a CapitalOne ad caught my eye.

The ad, which I've posted to the right says, "Why settle for average?  Earn a savings rate 5X the national average."  In smaller, less bold font it then says "Open a new savings account in about 5 minutes and earn 5X the national average." Under that, in smaller, but bold, "This is Banking Reimagined®." Faint, fine print on the bottom says "ONLY NEW ACCOUNTS FOR CONSUMERS. RATE COMPARISON BASED ON FDIC NATIONAL RATE FOR SAVINGS BALANCE < $100,000. OFFERED BY CAPITAL ONE, N.A. MEMBER FDIC © 2019 CAPITAL ONE" Above this is a photo featuring some random dude (or celebrity I don't recognize) with a croissant and coffee and faux casual outfit (jeans and a t-shirt, but a jacket with a pocket square) inviting the reader to join him. Breakfast and banking perhaps? But in the background, over his shoulder is a sign that says "Savings Rate 5X National Average" (its hard to read in the original, and doesn't come across in my photo, unfortunately).

So what's the problem here?

Continue reading "The Brown M&M Theory of Telltale Minor Regulatory Violations or What's Wrong with "Earn a savings rate 5X the national average"?" »

Total Bankruptcy Filings Remain Low, Chapter 11s Not So Much

posted by Bob Lawless

(Updated and corrected, 5/22). An earlier post noted that bankruptcy filings were down substantially over 50% the first two weeks of April. As the American Bankruptcy Institute reported, bankruptcy filings declined by 46% over the entire month and on a year-over-year basis. I wondered whether the expected increase in bankruptcy filings had begun, and the answer appears to be "not yet."

Using PACER docket searches, I get the following filing numbers for the past six weeks. The decline in filings for the first two weeks of May was roughly the same as the last two weeks of April. There were the same number of business days in all these time periods so the numbers should be comparable:

Total Bankruptcy Filings
  2019 2020 change
April 1 - April 15 33,017 16,097 -51.2%
April 16 - April 30 38,289 22,347 -41.6%
May 1 - May 15 31,958 18,578 -41.8%

Continue reading "Total Bankruptcy Filings Remain Low, Chapter 11s Not So Much" »

The Drama Over the Windstream Case: Boiled Down

posted by Mitu Gulati

One the most discussed and debated corporate finance/contracts cases of 2019 was Windsteam LLC v. Aurelius (SDNY 2019) (Stephen L posted on this here).  A couple of days ago, Elisabeth de Fontenay put up her article "Windstream and Contract Opportunism" on ssrn (here) that is one of first deep dives into the implications of what happened in the case.

I find this case especially interesting because it is about contract arbitrage. Cribbing from Elisabeth's superb narrative, the saga starts when the company in question, Windstream, does a sale-leaseback transaction in violation of its bond covenants (it claims it is not actually violating the covenant because it did the transaction through a subsidiary blah blah -- but as the judge points out, its attempt to elevate form over substance falls flat). As it turns out though, none of the bondholders seem to have either noticed or cared about the violation at the time it happened. The violation only bubbles to the surface when Aurelius, a notorious hedge fund, shows up two years later and demands that the trustee declare a default. At this point, I'd have expected that Windstream would have paid Aurelius greenmail to get them to disappear and everyone would have lived happily after.  But that doesn't happen.  Instead, Windstream officials and Aurelius fund managers get into a nasty battle of words in the press and (I'm guessing) both sides decide that they will fight this to the death.

At this point, Windstream tries to retroactively cure its covenant violation by getting the non-Aurelius creditors to say that they were okay with the transaction and do not want to call the company to the carpet. In theory this should have been doable via exit consents and other familiar corporate moves.  But, in a comedy of errors, Windstream manages to screw up the retroactive cure (and the judge wasn't willing to elevate substance over form on this side of the equation).  End result: Windstream loses and goes into bankruptcy.  That is, everyone loses, including the bondholders, because the value of their bonds goes into the toilet.

Continue reading "The Drama Over the Windstream Case: Boiled Down" »

How Are So Many EM Sovereigns Issuing New Debt?

posted by Mark Weidemaier

Mitu Gulati and Mark Weidemaier

We have been working on building a dataset of sovereign bonds and their contract terms. Given the economic fallout of the Covid-19 pandemic--close to 100 countries have approached the IMF for assistance--we would not have been surprised if few low- to mid-income countries had issued sovereign bonds in recent months. Instead, there have been large issuances by Guatemala, Paraguay, Peru, Chile, Philippines, Hungary, Mexico and others. 

Take Mexico, one of the biggest players in the sovereign debt market. The country has been badly hit not only by Covid-19 but by brutal drops in oil prices, tourism, and remittances. These developments surely increased the need to borrow in dollar/euro bond markets, but we would have expected investors to balk, or at least to demand punitive coupons. But that doesn’t seem to have happened.

What explains investors’ continued willingness to lend? Might they have drunk the bleach-flavored Kool-Aid and decided that there will be no deep and sustained economic downturn? Possible, we suppose, but unlikely. More plausible explanations include (i) that financial markets are so awash with QE money that investors have few places to go for yield and (ii) that investors may be betting that countries will be bailed out by an official sector desperate to prevent widespread defaults on sovereign debt.

But, because we are interested in the terms of sovereign bonds, we also wondered if investors were demanding extra contractual protections against the risk of non-payment. That would be a sensible precaution given the likelihood that many countries will be unable to make payments. Indeed, colleagues working on M&A contracts have documented a trend towards including risk-shifting clauses that explicitly address pandemic-related events (for a recent paper by Jennejohn, Talley & Nyarko, see here). With superb research assistance from Amanda Dixon, Hadar Tanne, and Madison Whalen, we wondered whether we would find a similar trend in the sovereign bond markets.

Continue reading "How Are So Many EM Sovereigns Issuing New Debt?" »

Letter from 163 Bankruptcy Judges Backs Venue Reform

posted by Bob Lawless

Support seems to keep building even more for changes to where large corporate debtors can file chapter 11. The latest is a letter from "163 sitting, recalled, or retired United States Bankruptcy Judges." From the letter:

The venue selection options for bankruptcy cases under current law have led to forum shopping abuses that have disenfranchised local employees, creditors, and parties in interest from participation in bankruptcy cases, undermined public confidence in the integrity of the United States Courts and the bankruptcy process, inhibited the development of uniform, national bankruptcy jurisprudence, and led to inefficient allocation of judicial resources. 

The judges join forty-two state attorneys general who signed a February letter supporting similar changes. The House bill (H.R. 4421) now has fifteen co-sponsors, which I believe is more than any venue reform bill has had. With all of that support, my views don't matter much, but I agree too

Like I wrote before, there have been lots of efforts at venue reform, but this time feels different.

Contributors

Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed

Categories

Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

OTHER STUFF