China Faces Massive Corporate Default

HONG KONG — For weeks, global markets have been watching the struggles of China Evergrande, a teetering real estate giant weighed down by $300 billion or more in obligations that just barely seemed able to make its required payments to global investors.

On Thursday, three days after a deadline passed leaving bondholders with nothing but silence from the company, a major credit ratings firm declared that Evergrande was in default. Instead of resolving questions about the fate of the Chinese behemoth, the announcement only deepened them.

The firm, Fitch Ratings, said in its statement that it had placed the Chinese property developer in its “restricted default” category. The designation means Evergrande had formally defaulted but had not yet entered into any kind of bankruptcy filing, liquidation or other process that would stop its operations.

It’s the nature of that next step — bankruptcy, a fire sale or business as usual — that remains unknown. In the United States and many other places, bondholders could push an unwilling company into some form of reorganization, usually in court, and divvy up the pieces.

That may still happen. But Evergrande is faltering in China, where the Communist Party keeps a firm hand on corporate meltdowns to keep them from spreading out of control. With Evergrande, the risk is high: A sudden unwinding of the company could hit the country’s financial system or, potentially, the many homeowners in China who have already paid for Evergrande apartments that are yet to be built.

The company’s largely resigned investors are now waiting to see what Evergrande, under the advice of a group of financial types tied to the state, will do next.

“We all expected that Evergrande was not going to be able to pull a rabbit out of their hat,” said Michel Löwy, chief executive of SC Lowy, an investment firm that has a small position in Evergrande bonds.

“Now, the ball is in their court to come up with some form of restructuring proposal,” he said.

Evergrande did not respond to a request for comment. Fitch said the company had not responded to its own request for confirmation about whether it had met or missed an $82 million payment to bondholders due on Monday, which prompted the ratings firm’s Thursday move.

Fitch on Thursday also put Kaisa, another large and distressed developer, into its “restricted default” category after the company failed to pay bondholders $400 million earlier this week.

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For more background information, see this. 

Forbes: Illinois Will Be The Poster Case For State Bankruptcy

The dispute between Senate Majority Leader Mitch McConnell and House Speaker Nancy Pelosi as to whether the next stimulus bill will contain money for state and local governments should resonate in Illinois because, absent a very big dollop of federal dollars or a miraculous economic rebound, the state will soon need Senator McConnell to make good on his alternative plan to create a path to bankruptcy for the states.

At this point, Illinois has no hope of its underfunded state pension programs ever returning to solvency—even a quick economic recovery and a robust bull market won’t make a dent in its structural deficit, and its aging—and fleeing—population means that pension costs are going to continue to grow and outpace revenues without some sort of structural change that cannot be accomplished without federal help.

The passage of the amendment in November that would allow the state to impose progressive taxation may buy it some time—expect it to follow California's lead and increase tax rates for all of 2020 shortly after the election—but even that windfall won't be enough to fix things.

But the promise that top tax rates will only go to 7 percent and only for those who earn over $250,000 a year is simply untenable: income taxes will have to go up a lot and for everyone, sooner rather than later.

Ultimately, it may not be the state's decision alone regarding future tax increases: At some point the municipal bond investors will come to realize that there’s little hope that the state can make good on its contractual obligations to repay them, and the market for Illinois bonds will freeze up. If the state cannot access capital markets and the federal government won't give or lend them money, they will be stuck. At that point, negotiations between the state and its creditors will ensue—and the federal government will need to get involved.

We already know the broad parameters of any such deal: The lenders will take a haircut on the money owed them in exchange for the state fixing its problem, which will mean collecting more money from taxpayers, providing less services, and giving less money to pensioners one way or another.

Read the rest here.

Puerto Rico’s Bankruptcy Plan Is Almost Done ...

...And bondholders are going to get screwed.

For the benefit of those w/o a subscription here is a summary of where things look to be heading.

* Pensioners are being treated as having first claim on the territory's resources, ahead of bond holders. This appears to contradict PR's constitution and laws.
* Under the current proposals, 61 percent of the retirees would keep receiving their full pensions and none will receive less than 91.5%.
* Bond holders will receive no more than 64 cents on the dollar. Many will receive less.
* The board intends to declare bonds sold in 2012 and 2014 unconstitutional and effectively null and void.
* Bonds issued before 2012 will be honored at 64 cents on the dollar.
* Those issued in 2012 would be offered only 45 cents on the dollar. And those issued in 2014 only 35 cents on the dollar in a take it, or leave it and get nothing settlement offer.
* Lawsuits are expected to challenge the basis for the settlement. But many bondholders are expected to take what they can, given that the recent Detroit bankruptcy essentially followed the same pattern of putting pensions ahead of bondholders.

Thoughts: If this goes through and survives the court challenges it's going to send a signal that municipal bonds are nowhere near as safe as hitherto believed. It will almost certainly encourage states in serious fiscal trouble like Illinois to try the same thing. And my guess is the bond market is going to have to recalibrate it's risk reward ratio for municipal bonds. All of which means that municipal bonds at all but the highest credit ratings, could take a hit in their market valuation. And that hit will also be felt by those seeking to borrow money who are suddenly going to find that their legal guarantees are being viewed with skepticism by potential lenders demanding higher yields for their paper.

How bankruptcy law could keep money — and the truth — from Weinstein’s victims

On Monday, New York Attorney General Eric Schneiderman wrote an open letter urging anyone who might bid on the Weinstein Co., the now-bankrupt studio founded by Harvey Weinstein, to include money to compensate the Hollywood mogul’s accusers. On Tuesday, a proposal surfaced that would do just that, from Broadway producer Howard Kagan.

But by Tuesday afternoon, the Weinstein Co. had rejected that proposal and announced that its preferred buyer, a Texas private-equity company with no experience in the entertainment industry, was the only entity it would allow to bid for its valuable film library and other assets.

Which means the 80-plus women (and at least one man) who say Weinstein assaulted or abused them are likely to find that there’s little or no money left on the company’s books to compensate them by the time the bankruptcy process is finished. I studied rapid bankruptcy sales, like the kind the Weinstein Co. is using, while on a fellowship at Harvard. They can be a taxpayer-supported path for companies to arrange insider sales while ditching corporate responsibilities — to workers, to the environment and, as in the Weinstein case, to alleged victims of corporate misbehavior and sexual abuse. The set-up also could make it harder for law enforcement to determine who facilitated Weinstein’s predations.

Until now, from the outside, the Weinstein Co. bankruptcy looked fair. On the same day the company filed for bankruptcy in March , it publicly released employees who say they were victims of or witnesses to Weinstein’s actions from nondisclosure agreements they’d been pressured to sign. And it gave two of the women who accused him of wrongdoing a seat at the table for the bankruptcy negotiations. At the time, Bob Weinstein, Harvey’s brother and the studio’s co-founder, said the company was pleased to have a plan for “pursuing justice for any victims.”

But in bankruptcy, as in the movies, appearances can be misleading.

Read the rest here.

What do with Illinois?

llinois is like Venezuela now, a fiscally broken state that has lost its will to live, although for the moment, we still have enough toilet paper.

But before we run out of the essentials, let's finally admit that after decade upon decade of taxing and spending and borrowing, Illinois has finally run out of other people's money.

Those "other people" include taxpayers who've abandoned the state. And now Illinois faces doomsday.

So as the politicians meet in Springfield this week for another round of posturing and gesturing and blaming, we need a plan.

And here it is:

Dissolve Illinois. Decommission the state, tear up the charter, whatever the legal mumbo-jumbo, just end the whole dang thing.

We just disappear. With no pain. That's right. You heard me.

The best thing to do is to break Illinois into pieces right now. Just wipe us off the map. Cut us out of America's heartland and let neighboring states carve us up and take the best chunks for themselves.

The group that will scream the loudest is the state's political class, who did this to us, and the big bond creditors, who are whispering talk of bankruptcy and asset forfeiture to save their own skins.

Read the rest here.

Puerto Rico Seeks de-facto Bankruptcy Protection Under New Law

...Puerto Rico has roughly $120 billion of bond debt and unfunded pension obligations to restructure, which dwarfs the second-largest similar episode. When Detroit went bankrupt in 2013, it set the previous record, with about $18 billion of bond debt and retirement obligations.

The island’s case will not be formally called a bankruptcy, since Puerto Rico is barred from using Chapter 9, the bankruptcy route normally used by insolvent local governments. Instead, the governor of Puerto Rico, Ricardo Rosselló, petitioned for relief under Title III of a new federal law for insolvent territorial governments, called Promesa. It contains some bankruptcy provisions and has never been used before, so there is no road map to follow.

Read the rest here.

This is going to send shock waves through the bond market, and that may be a good thing. Too many people have been placing too much confidence in paper I.O.U's. The basic law of economics still applies. If a debtor doesn't have the money to pay you back, it doesn't matter how many legal papers you wave under their nose, you're still not getting your money back.

People buying bonds issued by Greece, New Jersey, Illinois, the city of Chicago and a few other entities take note.

Speaking of Greece

Puerto Rico’s Governor Says Island’s Debts Are ‘Not Payable'

Many banks defy bankruptcy rulings and demand payment

In the netherworld of consumer debt, there are zombies: bills that cannot be killed even by declaring personal bankruptcy.

Tens of thousands of Americans who went through bankruptcy are still haunted by debts long after — sometimes as long as a decade after — federal judges have extinguished the bills in court.

The problem, state and federal officials suspect, is that some of the nation’s biggest banks ignore bankruptcy court discharges, which render the debts void. Paying no heed to the courts, the banks keep the debts alive on credit reports, essentially forcing borrowers to make payments on bills that they do not legally owe.

Read the rest here.

Banks are the enemy!

Battle over police pensions turns ugly

(Reuters) - A drive by some American cities to cut costly police retirement benefits has led to an extraordinary face-off between local politicians and the law enforcement officers who work for them.

In Costa Mesa, California, lawmaker Jim Righeimer says he was a target of intimidation because he sought to curb police pensions. In a lawsuit in November, Righeimer accused the Costa Mesa police union and a law firm that once represented them, of forcing him to undergo a sobriety test (he passed) after driving home from a bar in August 2012.

That followed a call to 911 by private detective Chris Lanzillo, who worked for the police union and the law firm that represented it, according to the suit. Lanzillo is also named as a defendant, accused of following Righeimer home from the bar.

Disputes such as these have intensified as Detroit and two California cities, Stockton and San Bernardino, have gone bankrupt in the past two years. Police pension costs were a major factor in the financial troubles facing all three. Now large cities, including San Jose and San Diego, say they have no choice but to alter pension agreements lest they end up in bankruptcy too.

Read the rest here.

Judge declares Detroit eligible for Chapter 9 bankruptcy

Detroit will become the largest city in U.S. history to declare bankruptcy after a federal judge ruled Tuesday the city had met the legal criteria to win protection from its creditors.

U.S. Bankruptcy Judge Steven Rhodes delivered the 140-page ruling after four months of legal wrangling between a state-appointed emergency manager and unions worried about the bankruptcy’s impact on pensions. Rhodes presided over a nine-day trial to determine whether the city met the requirements for bankruptcy protection.

“This once proud and prosperous city can’t pay its debts. It’s insolvent. It’s eligible for bankruptcy,” Rhodes said from the bench. “At the same time, it also has an opportunity for a fresh start.”

Detroit, once a city of 1.8 million and the home of the American auto industry, has suffered a long descent into financial crisis. The city was home to just 713,000 people, according to the 2010 Census, a mere shadow of its post-war apex. Huge pension costs and a recession that sent American automakers into their own financial tailspins exacerbated Detroit’s budget gaps.

Read the rest here.

Shock: Greece will need a third bailout

And a fourth and a fifth... until people decide to stop throwing good money after bad. Greece is the Detroit of the EU. They are broke. They owe more money than they can repay. Period. They have already defaulted on their debt. It's long past time to just let the country go bankrupt so they can begin rebuilding and healing. Yes, that will mean a lot more near term pain. But this is a situation where there are no good alternatives. Bankruptcy is the least bad and the only one that holds out the hope of eventual recovery.

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Detroit's Death by Democracy

In 1860, an uneasy Charles Darwin confided in a letter to a friend: “I had no intention to write atheistically” but “I cannot persuade myself that a beneficent and omnipotent God would have designedly created the Ichneumonidae with the express intention of their feeding within the living bodies of caterpillars.” What appalled him had fascinated entomologist William Kirby (1759-1850): The ichneumon fly inserts an egg in a caterpillar, and the larva hatched from the egg, he said, “gnaws the inside of the caterpillar, and though at last it has devoured almost every part of it except the skin and intestines, carefully all this time avoids injuring the vital organs, as if aware that its own existence depends on that of the insect on which it preys!”

Government employees’ unions living parasitically on Detroit have been less aware than ichneumon larvae. About them, and their collaborators in the political class, the question is: What. Were. They. Thinking? Well, how did Bernie Madoff or the Enron executives convince themselves their houses of cards would never collapse?

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US Judge halts lawsuits challenging Detroit bankruptcy

Detroit can proceed with its bankruptcy filing unencumbered by lawsuits that sought to block the largest municipal Chapter 9 in U.S. history, a federal judge ruled Wednesday.

The decision by U.S. bankruptcy court judge Steven Rhodes halts lawsuits by pension funds and creditors, who argue that the bankruptcy violates provisions in Michigan’s constitution that protect public pensions. The judge also ruled that the federal court will decide if Detroit is eligible for Chapter 9 bankruptcy.

The Chapter 9 filing, which is expected to be a long, drawn-out process, will be closely watched by other cities and public pension funds around the country that are also tight on funding amid a weak recovery and a growing number of retiring baby boomers.

Read the rest here.

Detroit Files Bankruptcy

Well they did it. Not surprising, but sad. There are going to be serious ramifications even for people who don't own municipal bonds.

The dangers of one party government; or how Detroit became America's municipal train wreck

Liberal economists have a ready response to conservatives who fret that U.S. debt might spiral out of control, a la Southern Europe: “America is not Greece.”

It’s true. Greece has much more public debt than does the United States, relative to economic output. Unlike Greece’s euro-denominated obligations, U.S. debt is in U.S. dollars. The U.S. economy is far more competitive than Greece’s tourism-and-tomatoes operation.

Certain parts of the United States, however, are like Greece. Just read emergency manager Kevyn Orr’s134-page report on Detroit, which has $20 billion in unpayable debt.

Couched in the workmanlike prose of a bankruptcy lawyer — which is what Orr is — the document nevertheless tells a harrowing story of institutional rot and social collapse, brought on by decades of government of, by and for special-interest groups. 

Read the rest here.

Detroit’s Creditors Asked to Accept Pennies on the Dollar

DETROIT — An emergency manager who was sent to reverse the fortunes of this financially troubled city asked some of its creditors on Friday to accept pennies on the dollar as he laid out his plan for tackling Detroit’s staggering debt, kick-starting negotiations that could determine whether the city is headed to bankruptcy court. 

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Judge Clears Stockton for Bankruptcy

A U.S. bankruptcy judge’s decision Monday cleared the way for indebted Stockton, Calif., to seek relief through Chapter 9 bankruptcy. Experts say the precedent-setting case has implications for other financially struggling cities such as Detroit, as well as municipal bondholders, public workers and retirees.

“The fact of the matter is, the city can’t pay its bills,” said Marc Levinson, lead bankruptcy counsel for the city of Stockton. With the judge’s ruling, “We have a forum to try to discuss the city’s debts.”

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Detroit Nearing Bankruptcy

Governor Rick Snyder of Michigan on Friday declared a fiscal state of emergency in Detroit in a move that could lead to the appointment of a financial manager who could file for the largest municipal bankruptcy ever.

Snyder's decision allows the city a 10-day grace period to formulate a plan to fix its finances before the governor reconsiders appointing an emergency manager who would likely drastically reduce services.

The Republican governor said he had identified a top candidate for the position, but he declined to name the person.

"I believe it's appropriate to declare the city of Detroit in financial emergency," Snyder said at a forum in Detroit.

Snyder said he agreed with a Feb. 19 report by a six-member team of experts that concluded Michigan's largest city is in dire financial shape and a plan put in place last April to aid Detroit was not sufficiently working.

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San Bernadino Hires a New Manager

LOS ANGELES - The bankrupt city of San Bernardino has hired a new city manager who, according to court filings, has twice declared personal bankruptcy and was recently ousted from the board of a small community's water company after being sued by shareholders.

The city council voted unanimously on Tuesday night to hire Allen J. Parker, 71, as its city manager on an annual salary of almost $222,000. He replaces an interim city manager who resigned last month because, according to friends, she was exasperated by the city's internal divisions.

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