November 17, 2024

You are here: Home / Archives for bondholders

Residents of Detroit Go to Court for Pensions

September 19, 2013 by

William J. Howard, who retired after 35 years in the city’s Water Department, described working nights and weekends repairing Detroit’s sewers and incinerators.

“During that time, I worked in human waste with my fellow employees, working to serve the city of Detroit,” Mr. Howard said. “My fellow employees and I are entitled to a pension. I pray that Your Honor objects to this bankruptcy.”

His testimony and that of others homed in on some of the toughest questions before the judge, Steven W. Rhodes of United States Bankruptcy Court, as the case heads toward critical hearings next month on Detroit’s eligibility to file for Chapter 9.

Opponents of the bankruptcy, led by the city’s public employee unions, have argued that the filing in July violated Michigan’s Constitution, which expressly protects pension rights for workers.

They also assert that the state-appointed emergency manager, Kevyn D. Orr, did not bargain fairly with unions, bondholders and other creditors to cut costs and debt before recommending bankruptcy — the nation’s largest municipal bankruptcy filing — to Gov. Rick Snyder. The city is trying to reduce an estimated $18.5 billion in long-term debt.

Judge Rhodes has so far reserved decision on the pension and bargaining issues until formal eligibility hearings start on Oct. 23. He also ordered hundreds of creditors to participate in mediation sessions before then to possibly reduce some of the city’s debts.

But the judge made it clear Thursday that he considers the testimony of residents, retirees and community leaders to be a key element in deciding whether Detroit should be in bankruptcy, and how its 700,000 residents and rank-and-file workers should be treated.

“Everyone who has a stake in the outcome of this case should take the time to listen to this,” the judge said.

The hearing had its difficult moments. One woman, Lucinda Darrah, was removed by a security guard when she refused to leave the microphone after the three-minute limit. And tempers flared at times when residents raised a racial issue: whether Mr. Snyder, a Republican who is white, had deliberately imposed emergency managers on several Michigan cities that have largely black populations.

Sheilah Johnson, who worked for the city for 28 years, said she feared losing her $3,000 monthly pension, and blamed Mr. Orr and Mr. Snyder for seizing control of the city from its voters and elected officials.

“We do not need a dictator,” she said. “We do not need a slave owner. I’m not a slave.”

While Judge Rhodes cautioned people against making personal attacks on Mr. Orr and others, the frustration and anger of many homeowners and retirees repeatedly boiled over.

Paulette Brown, who rose from a junior typist to a manager during her 30-year career with the city, said longtime employees were being “treated worse than animals” in the bankruptcy. “I object to being referred to as a creditor,” she said. “We did our part and we need the city of Detroit to continue to do theirs.”

Others expressed concern that the dismal state of city services like police and fire protection would get worse because of cuts imposed in bankruptcy.

One resident, Jean Vorkamp, told of how a gunshot victim lay dead on her street last month for five hours because of staffing reductions in the county coroner’s office.

“This is austerity,” she said. “And there is no more room for any more austerity in Detroit.”

Bankruptcy experts said that allowing residents and retirees to testify was a prudent and compassionate move by Judge Rhodes, but not one that will likely affect whether the city is found legally eligible to file for bankruptcy.

“An individual objector that doesn’t have a lot of resources was probably not going to make an adequate case with sufficient evidence to overcome the city’s arguments on those issues,” said Michael A. Sweet, a bankruptcy lawyer with the firm Fox Rothschild.

Yet the stirring anecdotal testimony of regular Detroiters seemed to frame the case in ways far different from the legal issues at stake.

Cynthia Blair, the widow of a Detroit police officer, said she relies on her husband’s pension to make a home for her family. “The bankruptcy could take me and my daughter’s pension away,” she said. “And we would be thrown directly to the welfare rolls.”

About half of the 110 individuals who filed objections to the bankruptcy testified on Thursday. Judge Rhodes said he found their statements “moving, thoughtful and passionate,” and called the hearing a “truly extraordinary session of the court.”

A second hearing on Thursday addressed a motion by a retirees committee representing former city workers. The committee is seeking a stay of the bankruptcy and all further hearings until the Michigan constitutional issues are settled.

The committee’s lawyer, Claude Montgomery, argued that the questions about the state’s protection of pensions should be dealt with in Federal District Court rather than in bankruptcy court.

Judge Rhodes indicated that he believed the city could not afford to squander any time in its efforts to restore services and fix its finances. “If we put off the eligibility hearing, we delay the whole process,” he said.

The second hearing concluded without a decision from the judge, who said he would rule on the issue within a few days.

Steven Yaccino contributed reporting from Chicago.

Article source: http://www.nytimes.com/2013/09/20/us/residents-of-detroit-go-to-court-for-pensions.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Michigan Judge Rules Against Bankruptcy Push

July 19, 2013 by Leave a Comment

A judge in Ingham County, home to Michigan’s capital, Lansing, ruled that Mr. Snyder’s action had violated the state Constitution because it could cut the pension benefits of retired public employees. The judge, Rosemarie Aquilina, said pensions were protected under state law, and issued an order that the bankruptcy filing be withdrawn.

Her ruling was immediately challenged by Michigan’s attorney general, who appealed to the state’s Court of Appeals on the grounds that the Chapter 9 bankruptcy filing stayed all legal proceedings related to Detroit’s debt obligations.

While the ruling may be overturned, it underscored the mounting tension in the city and the legal battles ahead as bondholders, retirees and other creditors attempt to recover money owed them by the city.

Mr. Snyder and Detroit’s emergency manager, Kevyn D. Orr, estimate the city’s debt and other long-term obligations at $18 billion.

After weeks of mostly unsuccessful negotiations with creditors to settle debts, Mr. Orr recommended a bankruptcy filing to Mr. Snyder this week. The city then filed for Chapter 9 on Thursday, minutes before Judge Aquilina was to hold a hearing on the employee pension funds’ constitutional challenge to a potential bankruptcy proceeding.

The president of one public employees’ union hailed the judge’s decision on Friday. “There is too much at stake to play political games with the hard-earned retirement security of Detroit’s public workers,” said Lee Saunders, head of the American Federation of State, County and Municipal Employees union.

But at a joint news conference on Friday, Mr. Snyder and Mr. Orr were resolute on the need for a bankruptcy filing.

Mr. Snyder, a Republican who has pushed a pro-business agenda in the state, said Detroit had no other options to deal with its debts and improve city services ranked among the nation’s worst.

“This is the time to say enough is enough in terms of the downward decline of the city of Detroit,” he said.

Now that the city has filed, Mr. Snyder and Mr. Orr said they wanted to reassure Detroit’s 700,000 residents that police, fire and other essential services will continue to function.

Mr. Orr, who was appointed by the governor, predicted that residents might start to see improvements soon, saying that the bankruptcy filing offers “breathing room” and will allow Detroit to use its limited resources to put more police cars and ambulances into service.

Depending on the outcome of the appeal of Judge Aquilina’s order, the initial bankruptcy hearings could begin as soon as next week.

On Friday, Judge Steven W. Rhodes was picked to oversee the case. Mr. Rhodes is a hometown selection, having served for 28 years as a bankruptcy judge in the Eastern District of Michigan.

The initial stages of the case will consist of Mr. Orr and possibly state officials showing that there was no available remedy for Detroit’s troubles other than bankruptcy.

“We didn’t make this decision in haste,” Mr. Orr said. “This is a decision that has been winding its way through the city for the better part of six decades.”

Employee unions and creditors may argue otherwise — either by challenging the size of Detroit’s debt, or Mr. Orr’s assertions that he bargained in good faith to reach out-of-court settlements with bondholders, retirees and others.

Some labor unions had accused Mr. Orr of using bankruptcy as a threat during negotiating sessions.

Mr. Orr said that despite marathon talks with creditors, there was little or no movement toward settlements.

“We are finally at a point where we simply can’t kick this can down the road any further,” he said.

There is no blueprint for Detroit’s recovery at this point. In the short term, Mr. Orr said that a deal with two secured creditors, Bank of America and UBS, to accept 75 cents on the dollar for $340 million in liabilities would free up casino revenues that could be used for city services.

The arrangement would provide the city with about $11 million a month in casino receipts. That cash is critical to keep the city safe and functional during a drawn-out bankruptcy process.

Mr. Orr said he expected Detroit to emerge from bankruptcy before his term as emergency manager ends in 14 months.

For Mr. Snyder, placing the state’s largest city in bankruptcy is a calculated risk that its decline could be reversed under court supervision.

He said that he did not anticipate any direct state or federal money would be needed in the effort, but that government grants to help remove abandoned buildings and improve Detroit’s infrastructure would be essential to the city’s comeback.

Article source: http://www.nytimes.com/2013/07/20/us/breadth-of-bankruptcy-fight-detroit-faces-becoming-clear.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

DealBook: Co-operative Bank Turns to Bondholders to Fill Capital Shortfall

June 17, 2013 by Leave a Comment

LONDON – The British lender Co-operative Bank announced plans on Monday to raise an additional £1.5 billion ($2.4 billion) to replenish a capital shortfall.

Under the terms of the deal, junior bondholders will be asked to swap their debt securities for shares in the Co-operative Bank. The agreement represents the first time that a so-called “bail in” of bondholders has been used to recapitalize a British bank since the financial crisis began.

The move contrasts with previous efforts by local banks to raise capital, including the multibillion-dollar state bailouts of lenders like the Royal Bank of Scotland and the Lloyds Banking Group.

By requiring bondholders to exchange their debt securities for shares, Co-operative Bank is trying to avoid turning to the British government for help.

The Co-operative Bank, whose credit rating was downgraded last month to junk status by Moody’s Investors Service because of questions over its capital reserves, said the agreement would increase its so-called common Tier 1 equity ratio, a measure of a firm’s ability to weather financial shocks, to 9 percent by the end of the year.

The Prudential Regulatory Authority, a British regulator, has called for all of the country’s banks to have a common Tier 1 equity ratio of at least 7 percent by the end of the year under the accountancy rules known as Basel III.

British lenders must raise a combined £25 billion by the end of the year to meet the capital shortfall. Regulators will announce details on Thursday of how much each bank must raise by the end of the year.

The Co-operative Bank said on Monday that it planned to raise £1 billion this year through the bondholder swap, and increase its reserves by an additional £500 million next year.

“This announcement is good news for the Co-operative Group, the Co-operative Bank, its customers,” Euan Sutherland, chief executive of the Co-operative Group, said in a statement. “This solution, under which they will own a significant minority stake in the bank, will then allow them to share in the upside of the transformation of the bank.”

As part of the move to raise capital, the Co-operative Bank also plans to sell its general insurance unit. This year, the bank sold its life insurance and asset management businesses to the British pension company Royal London for around £220 million.

The Co-operative Bank’s financial difficulties stem from a mistimed acquisition in 2009 of a local rival, Britannia Building Society, that left the bank with a large pool of delinquent commercial real estate loans.

The bank also ran into trouble this year when its plan to buy part of the Lloyds Banking Group’s branch network collapsed. The move was an effort to increase its capital base, while also expanding across Britain to compete with larger lenders like Barclays and HSBC.

This post has been revised to reflect the following correction:

Correction: June 17, 2013

An earlier headline with this article misspelled the name of the bank. It is Co-operative Bank, not Co-operaritive Bank. The article also misspelled a company name. It is Moody’s Investors Service, not Moody’s Investor Services.

Article source: http://dealbook.nytimes.com/2013/06/17/co-operaritive-bank-turns-to-bondholders-to-fill-capital-shortfall/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Inside Europe: Troika Has a Patchy Record on Bailouts

June 10, 2013 by Leave a Comment

PARIS — If the troika that handles bailouts of distressed euro zone countries were a soccer team, it would probably be looking for a new manager after achieving a track record of one win, one loss and one draw.

The uneasy trio — the European Commission, the International Monetary Fund and the European Central Bank — was assembled in haste in March 2010 after Greece’s public debt and deficit exploded and it was about to lose access to market funding.

Last week’s “mea culpa” report from the I.M.F. about the failures of the Greek program blew the lid off the fiction that the three institutions saw eye-to-eye on the rescue packages they designed and are enforcing in Greece, Ireland, Portugal and now Cyprus. Behind closed doors, they clashed over whether Greece should restructure its debt, forcing investors to take losses, and whether Ireland should make bondholders in its shattered banks share the cost of a financial rescue.

They still differ over whether European governments should write off some loans to Athens to make its debt sustainable in the long term, an idea that is politically explosive before a German general election in September.

The public airing of such differences raises the question of whether the troika has reached the end of the road. The I.M.F. says it lowered its standards to support a flawed program for Greece; the European Commission says it “fundamentally disagrees” with the I.M.F.’s view that Greek debt should have been written off sooner; and the E.C.B. says the I.M.F. is applying misleading hindsight.

The Europeans contend that in the market panic of 2010, before the euro zone had begun to build a financial firewall, letting Greece default or making it restructure its debt could have caused massive contagion to other countries and perhaps swept away the euro itself.

“It would have been Europe’s Lehman moment,” said the Europe’s economic and monetary affairs commissioner, Olli Rehn, referring to the 2008 collapse of Lehman Brothers that sparked a global financial crisis. “I don’t recall the I.M.F.’s managing director, Dominique Strauss-Kahn, proposing early debt restructuring, but I do recall that Christine Lagarde was opposed to it.”

Ms. Lagarde was French finance minister at the time and replaced Mr. Strauss-Kahn as head of the I.M.F. in 2011.

The most damaging suspicion raised by the I.M.F. study of the Greek program is that the troika made overoptimistic growth forecasts and massaged the debt numbers because euro zone political leaders had exerted undue influence on the process.

Wrapped in the forensic jargon of financial analysis, the I.M.F. experts say European leaders made Greece’s economic crisis worse by delaying an inevitable debt write-off, buying time for their own banks to cut their losses at taxpayers’ expense.

“The troika is a unique set-up which has institutionalized political influence in I.M.F. decision-taking,” said Ousmène Mandeng, a former I.M.F. official. “Decisions were perceived to be taken in Berlin and Brussels rather than by the I.M.F. board. The I.M.F. should never again be a junior partner in this way.”

Mr. Mandeng argues that the fund should either pull out of the troika or take sole control of the rescue programs.

The E.C.B. president at the time, Jean-Claude Trichet, initially opposed bringing the I.M.F. on board, arguing that Europe should be able to sort out its own problems. He also rejected debt restructuring and making bank bondholders share losses, saying it would ruin the euro area’s standing in financial markets. Germany and its allies in Northern Europe insisted on I.M.F. involvement because they feared the commission would be too soft on indebted member states and too willing to commit taxpayers’ money.

But the I.M.F. is not the only body to give rise to misgivings. Some E.C.B. stakeholders, notably in Germany, are worried about potential conflicts of interest if the central bank stays in the troika while it is backstopping euro zone government debt through its bond-buying program and about to take over supervision of banks that lend to troubled sovereigns.

An E.C.B. executive board member, Jörg Asmussen, told the European Parliament that once the current crisis is over, the troika should be replaced by the euro zone’s rescue fund and the European Commission. But not now.

Many independent economic experts argued from the outset that Greece would never be able to repay its debt mountain and questioned the troika’s rosy forecasts for the Greek economy. The initial Greek program projected that gross domestic product would contract by just 3.5 percent between 2009 and 2013. In fact, it crashed by 22 percent. Troika officials repeatedly increased the amount Greece was supposed to raise by privatizing state assets, even as its economy crumbled and investors fled.

The biggest errors were in predicting unemployment. The troika foresaw a peak jobless level of 14.8 percent this year. The real figure is 27 percent.

Growth forecasts for Portugal, where the outcome of an E.U.-I.M.F. adjustment program remains uncertain, were also overoptimistic, though not to the same extent. Even in Ireland, the one “success” which returned to growth and expects to get back to market funding this year, the troika underestimated job losses and the related social damage.

Now I.M.F. members in Latin America and Asia, which endured harsh lending terms in the 1980s and 1990s, are loath to pour more money into one of the world’s richest regions.

“Operationally and financially, the I.M.F. has become much more involved in Europe than its global shareholders deem sustainable,” said Jean Pisani-Ferry, the departing director of the Bruegel economic study group in Brussels.

A person at the I.M.F., speaking on condition of anonymity because he is still involved with the bailout programs, said the real problem with the troika was that no one was in charge.

“It’s more like a soccer team with no manager and no clear definition of who plays where on the field,” he said.

Paul Taylor is a Reuters correspondent.

Article source: http://www.nytimes.com/2013/06/11/business/global/troika-has-a-patchy-record-on-bailouts.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

House Votes to Give Creditors Priority if Debt Ceiling Is Breached

May 9, 2013 by Leave a Comment

The legislation, which passed 221 to 207, would allow limited borrowing to make payments to federal bondholders, then Social Security recipients, even if the Treasury is prohibited from borrowing to finance the rest of the government. No Democrats voted for it. Eight Republicans were opposed.

Republicans said the measure effectively took the threat of a government default off the table if the debt ceiling was breached. But opponents, who included Democrats and some Republicans, said the bill was unworkable and would do nothing to stave off a messy default and economic chaos once the Treasury exhausted its payment options early this fall. The bill is unlikely to get a hearing in the Senate, and President Obama has promised a veto.

Senator Harry Reid of Nevada, the majority leader, called it “so shallow” that it would fail an eighth-grade model government class.

Instead, House Republicans used it to signal that for the third time since taking control in 2011, they would try to extract major concessions on fiscal policy from the president before they were willing to raise the government’s borrowing authority.

“We’re not in any different position than we were two years ago. We continue to spend more money than we bring in,” Speaker John A. Boehner of Ohio told reporters Thursday. “You can’t continue to do this.”

The bill, called the “Pay China First Act” by Democratic opponents, signaled an end to a truce in Washington’s budget wars that ensued after Republicans and Democrats agreed in January to allow taxes to rise mainly on affluent households, then let $85 billion in across-the-board spending cuts take effect in March. Amid those steps, Congress had temporarily set aside the government’s borrowing limit, but the statutory $16.4 trillion debt ceiling comes back into force May 19, at which time the government’s debt will actually already exceed that number.

Because of higher-than-expected tax receipts and large payments from the federally controlled housing agencies Fannie Mae and Freddie Mac, Treasury officials believe they can shuffle money within accounts to avoid any more borrowing until the fall.

That schedule sets up what lawmakers in both parties see as another conflagration approaching on Sept. 30, when the government would run out of money to operate and the Treasury would near exhaustion of its borrowing options.

House and Senate appropriations committees have begun work on 12 annual spending bills, but House Republicans will set total spending in those bills at $967 billion, expecting the automatic spending cuts known as sequestration to continue. Senate Democrats are expected to use the spending cap established in the first debt ceiling fight of 2011, $1.058 trillion. House Republican aides concede that a majority of the House might not be able to accept the cuts to domestic programs that would be needed to stay within the limit.

The brewing standoff could be resolved with a comprehensive deficit reduction agreement, but so far, House and Senate Republican leaders have refused to even convene a formal negotiating conference to resolve the vast differences between the budget blueprints passed by the Senate and the House.

“We should be talking about the budget in general and how we can get to conference and what we need to do to compromise,” said Senator Patty Murray, Democrat of Washington and the chairwoman of the Senate Budget Committee. “They’re over there debating how we’re going to create the next crisis that this country is going to have to face down.”

With little real negotiations going on, Democrats accused House Republicans of preparing for disaster. Representative Dan Maffei, Democrat of New York, said the House “prioritization” bill “maps out not if but when the United States defaults for the first time in the nation’s history.”

Some Republicans were no more charitable.

Even if the Treasury could pull off the difficult task of managing incoming taxes and outgoing payments on a daily basis, about 25 percent of the government would have to shut down for lack of money. And Tony Fratto, a Treasury and White House spokesman in the Bush administration, said it could not be done.

Daily tax receipts are “lumpy,” he said. They do not arrive in any steady or predictable way. At the same time, government payments are “spiky” and fluctuate in ways that do not mesh with income tax receipts. The bill also hands Democrats the talking point that Republicans are willing to make foreign creditors like China the first priority for tax receipts over veterans and the military.

Mr. Fratto called the bill “technically impossible and politically disastrous.”

But Republicans said they were merely being prudent and signaling to world financial markets that they would not let the United States government miss debt payments when they come due.

“This legislation credibly and permanently removes the threat of default on a U.S. debt payment and ensures that Social Security benefit payments are paid in full and on time,” said Representative Dave Camp of Michigan, the chairman of the House Ways and Means Committee.

Article source: http://www.nytimes.com/2013/05/10/us/politics/house-votes-to-give-creditors-priority-if-debt-ceiling-is-breached.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Cyprus and Europe Officials Agree on Outlines of a Bailout

March 25, 2013 by Leave a Comment

The deal, struck after hours of meetings here, was approved by the finance ministers from the euro zone, the 17 countries that use the common currency. It would drastically prune the size of Cyprus’s oversize banking sector, bloated by billions of dollars from Russia and elsewhere in the former Soviet Union.

The deal would scrap the highly controversial idea of a tax on bank deposits, although it would still require forced losses for depositors and bondholders.

“We have a deal,” President Nicos Anastasiades was quoted as saying by Greek media. “It is in the interests of the Cypriot people and the European Union.”

The head of the finance ministers, Jeroen Dijsselbloem of the Netherlands, said the agreement could “be implemented without delay” without a new vote by the Cypriot Parliament, which had rejected a deal last week. Lawmakers on Friday passed legislation that set the framework for the new action, he said.

“This has indeed been an arduous week for Cyprus,” he said.

He did not have exact timing for when Cyprus’s banks, which have been closed for more than a week, would reopen. Cyprus would receive the first payment of the bailout package worth 10 billion euros, or $13 billion, in early May.

Under the agreement, Laiki Bank, one of Cyprus’s largest, would be wound down and senior bondholders would take losses.

Depositors in the bank with accounts holding more than 100,000 euros would also be heavily penalized but the exact amount of those losses would need to be determined.

The plan to resolve Laiki Bank should allow the Bank of Cyprus, the country’s largest lender, to survive. But the Bank of Cyprus will take on some of Laiki’s liabilities in the form of emergency liquidity, which has been drip-fed to Laiki by the European Central Bank. That short-term financing, which the E.C.B. had threatened to cut off on Monday, will most likely continue.

Depositors in the Bank of Cyprus are likely to face forced losses rather than any form of tax. That plan, which set off outrage last week in Cyprus and as far away as Moscow, has now been dropped entirely.

Mr. Dijsselbloem said he was “convinced this is a much better deal” because under the revised agreement, the heaviest losses “will be concentrated where the problems are, in the large banks.”

These provisions should help reverse what, in recent days, has been Cyprus’s steady retreat into a surreal pre-modern economy dominated by cash.

Retailers, gas stations and supermarkets, gripped by uncertainty over whether Cyprus would really secure a 10 billion-euro financial lifeline, have increasingly refused to take credit cards and checks.

“It’s been cash-only here for three days,” said Ali Wissom, the manager at Il Forno di Jenny’s restaurant off Cyprus’s main square in Nicosia. “The banks have closed, we don’t really know if they will reopen, and all of our suppliers are demanding cash — even the beer company.”

With major banks in Cyprus shut for more than week, a trip to the cash machine became a daily ritual for anyone in need of money. The initial limit on withdrawals was 400 euros. It then fell to 260. As of Sunday night, it slipped to a meager 100 euros.

At the Centrum Hotel, Georgia Xenophontes, 23, an employee in the front office, said she drained her bank account at a cash machine last week — just in time to avoid being hit with the latest withdrawal limit.

“This is affecting everything in our lives,” she said. “Even though you don’t want to count on money, you need it. But we don’t have stability.”

In Brussels, the day was filled with confusion and rancor. Reports filtered out of heated confrontations between Mr. Anastasiades and European Union negotiators, and especially with the International Monetary Fund, which Mr. Anastasiades has accused of trying to push Cyprus up against a wall.

Mr. Anastasiades told officials including Christine Lagarde, head of the monetary fund, that accepting harsh terms might force him to step down.

James Kanter reported from Brussels, and Liz Alderman and Andrew Higgins from Nicosia, Cyprus.

This article has been revised to reflect the following correction:

Correction: March 25, 2013

An earlier version of this article referred imprecisely to the population of Cyprus. It should have said that the country, and not the island itself, has only 860,000 people.

Article source: http://www.nytimes.com/2013/03/25/business/global/cyprus-and-europe-officials-agree-on-outlines-of-a-bailout.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Court to Decide on Pensions in Stockton, Calif., Bankruptcy

March 25, 2013 by Leave a Comment

Wall Street is taking America’s biggest pension fund to court this week, for a long-awaited battle over who takes the losses when a city goes bust — workers and retirees, municipal bondholders, or both.

Stockton, Calif., declared Chapter 9 bankruptcy last year after suffering one of the country’s sharpest riches-to-rags swings when the mortgage bubble burst. Struggling to stay afloat, Stockton has slashed tens of millions of dollars’ worth of city services — firefighters, senior centers, library programs for at-risk children — and said it would cut its municipal bond repayments to a degree never seen before in a municipal bankruptcy.

But it has drawn the line at slowing down its current workers’ pension accrual, or cutting the benefits its retirees now receive.

Mutual funds that hold the threatened bonds, and the insurers that guarantee them, have cried foul, citing the principle that in bankruptcy, similar classes of creditors must be treated the same way. Their objections have prompted the federal bankruptcy judge handling Stockton’s case, Christopher M. Klein, to schedule a four-day trial this week, starting Monday.

The immediate question before the judge is whether Stockton qualifies for Chapter 9 at all; unlike companies, cities must meet certain criteria before they can get federal court protection from creditors.

But there is a looming, larger question that has pension funds around the country nervous: Will a victory by bondholders in Stockton pave the way for cuts in its workers’ pensions and its payments to Calpers, which, in turn, could lead to the demise of other public pension plans?

One small city in Rhode Island, Central Falls, has already cut its pensions severely, but legal experts say Rhode Island’s laws made it easier there than it would be in most other places — particularly California, where the huge state pension system has deep pockets to fight legal battles. Central Falls was not part of any state system, and its pension fund for police officers and firefighters nearly ran out of money.

“People will be watching very closely,” said Michael A. Sweet, a bankruptcy lawyer at Fox Rothschild in San Francisco, whose practice includes advising local governments on Chapter 9 issues.

Cities, school districts and local governments all over the country have promised their workers pensions that looked reasonable in better times, but have turned into budget-busters since the financial crisis. Local taxpayers are increasingly unwilling to shoulder the rising costs, yet conventional wisdom has it that public pensions cannot be reduced. Some officials are quietly wondering if that means not even in bankruptcy.

“Every member of every city council that’s struggling with these issues, who takes their job seriously, is looking for solutions,” Mr. Sweet said. “No one wants to talk about it, and no one really wants to go there. But if Calpers can be forced to take a haircut in Stockton, then what’s to stop another city from saying, ‘Gee, we’ll file for bankruptcy and cut in half our $10 million pension contribution?’ ”

He and other public finance lawyers said that what happens in Stockton could help guide Detroit, which is not in Chapter 9 but was recently put under emergency management by the state of Michigan.

Calpers is a $252 billion giant that administers pensions for California state employees and many municipal workers. It calculates how much its member cities must set aside each year, bills them, collects the money, invests it and sends retirees their benefits. When Calpers’s investments lose money, as they did in the stock market crash, the bills increase.

In 2011, Stockton paid a little more than $20 million to Calpers — about double what it paid to run its public libraries. Its payments are expected to nearly double in the next 10 years, making Calpers the city’s biggest creditor. Stockton says it has no choice but to keep paying, even as it pares other costs, including its payments to bondholders. It says that if it cuts the rate at which its workers build up their pensions, workers will leave — especially the police, who have been recruited with the promise of large, early pensions. Last year, Stockton asked Calpers for a “hardship exemption,” allowing it to slow down its contributions. Calpers said no, fearing that if Stockton fell behind, it might never catch up.

“They’re scared to death,” Mr. Sweet said. “Calpers says, ‘You can’t give us a haircut, because if you do, the world is going to collapse. If it happens in Stockton, it’s going to happen in San Bernardino, and if it happens in San Bernardino it’s going to happen in Modesto, and if it happens in Modesto it’s going to happen in Bakersfield, and if it happens in Bakersfield it’s going to happen in Fresno.’ ”

In fact, San Bernardino filed for Chapter 9 bankruptcy not long after Stockton did, then simply stopped making its contributions to Calpers. Calpers geared up to sue, but the judge handling San Bernardino’s case, Meredith M. Jury, stopped it, saying she would address the issue of pension contributions later in the bankruptcy.

A spokeswoman for Calpers, Amy Norris, praised Stockton for keeping up its pension contributions in bankruptcy, saying it had made “the right business decision.”

But the Wall Street creditors say Stockton is getting the money for Calpers by shortchanging its bondholders.

“The agenda is clear,” wrote Jeffrey E. Bjork, a partner at Sidley Austin in Los Angeles, in a court filing on behalf of Assured Guaranty, a bond insurer. “The city hopes to use the Chapter 9 plan process to impose permanent impairment, and to cram down a nonconsensual plan, on capital-market creditors.” Mr. Bjork said this was an improper use of Chapter 9 and asked Judge Klein to throw out Stockton’s case.

Other creditors making similar arguments include two high-yield mutual funds managed by Franklin Advisers; Wells Fargo Bank, the bond trustee; and the National Public Finance Guarantee Corporation, another bond insurer.

Article source: http://www.nytimes.com/2013/03/25/business/economy/court-to-decide-on-pensions-in-stockton-calif-bankruptcy.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Suntech Power on Verge of Takeover by Chinese Holding Company

March 13, 2013 by Leave a Comment

A woman answering the phone in the executive offices of the group headquarters of Wuxi Guolian, the holding company, said that a deal had already been reached for the acquisition of Suntech, which is traded on the New York Stock Exchange. The woman declined to identify herself.

Rory Macpherson, Suntech’s director of investor relations, declined to address a question about Wuxi Guolian, saying by e-mail only, “It’s our policy not to comment on market rumors.”

Suntech has been driven to the financial brink by an obligation to pay more than $541 million to holders of convertible bonds at the end of this week. It stopped releasing financial reports last year after disclosing in July that it had invested in 530 million euros, or $690 million, worth of German bonds that might prove fraudulent. The company’s cash reserves have been dwindling, analysts have said, and Chinese state-owned banks have been reluctant in recent months to lend more.

Suntech said it reached a deal with three-fifths of the bondholders early this week to give it a two-month reprieve to find an answer to its financial troubles. But some bondholders have questioned the announcement, saying that they were not even approached about a reprieve. Suntech’s convertible bonds have been trading this week for as little as 30 cents on the dollar. Its shares closed at $1.09 on Tuesday, down 5.2 percent for the day and down 63.2 percent in the last 12 months.

It was unclear late Wednesday in Asia what terms might be offered to Suntech’s bondholders or long-suffering shareholders. The shareholders might have to pass judgment on a merger, particularly if a merger were to take place without an initial bankruptcy filing to erase debt.

Suntech announced Tuesday that it was closing its factory in Goodyear, Ariz., at the cost of 43 jobs there. The factory put aluminum frames and electrical junction boxes on solar cells imported from China so that the fully assembled solar panels would qualify for “Buy American” incentives.

The collapse of Suntech is a milestone in the precipitous decline of China’s green energy industry in the last four years. More than any other country, China had bet heavily on renewable energy as the answer to its related problems of severe air pollution and heavy dependence on energy imports from politically unstable countries in the Middle East and Africa.

China is also exposed to global warming on its low-lying, densely populated coastline, which the Energy Department in Washington has estimated to have more people vulnerable to displacement from rising sea levels than anywhere else on earth.

But China’s approach to renewable energy has proved ruinous, financially and in terms of trade relations with the United States and the European Union.

State-owned banks have provided $18 billion in loans on easy terms to Chinese solar panel manufacturers, financing an increase of more than tenfold in production capacity from 2008 to 2012. This set off a 75 percent drop in panel prices during that period, which resulted in losses to Chinese companies of as much as $1 for every $3 in sales last year.

The huge loans and extremely low prices prompted SolarWorld, a German company, and its American subsidiary to file antidumping and antisubsidy cases in the United States and the European Union against solar panel exports from China. The United States has responded with tariffs of about 40 percent on solar cells and solar panels from China, and the European Union is concluding its deliberations and is expected to deliver an initial verdict this summer.

Yotam Ariel, the managing director of Bennu Solar, a consulting firm in Shanghai, said that the closing of the Arizona factory was “yet another indication of a tough struggle.”

This article has been revised to reflect the following correction:

Correction: March 13, 2013

An earlier version of this article referred incorrectly to a transfer of Zhu Kejiang, Wuxi’s longtime mayor. He was sent this winter to be municipal party secretary in another city, not another province.

Article source: http://www.nytimes.com/2013/03/14/business/energy-environment/suntech-power-on-financial-brink.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Suntech Power on Financial Brink

March 13, 2013 by Leave a Comment

A woman answering the phone in the executive offices of the group headquarters of Wuxi Guolian, the holding company, said that a deal had already been reached for the acquisition of Suntech, which is traded on the New York Stock Exchange. The woman declined to identify herself.

Rory Macpherson, Suntech’s director of investor relations, declined to address a question about Wuxi Guolian, saying in an e-mail only, “It’s our policy not to comment on market rumors.”

Suntech has been driven to the financial brink by an obligation to pay more than $541 million to holders of convertible bonds at the end of this week. It stopped releasing financial reports last year after disclosing in July that it had invested in €530 million, or $690 million, worth of German bonds that might prove fraudulent. The company’s cash reserves have been dwindling, according to analysts, and Chinese state-owned banks have become reluctant in recent months to keep extending further loans.

The company said it reached a deal with three-fifths of the bondholders early this week to give it a two-month reprieve to find an answer to its financial troubles, but some bondholders have questioned the announcement, saying that they were not even approached about a reprieve. Suntech’s convertible bonds have been trading this week for as little as 30 cents on the dollar. Its shares closed at $1.09 on Tuesday, down 5.2 percent for the day and down 63.2 percent in the past 12 months.

It was unclear late Wednesday in Asia what terms might be offered to Suntech’s bondholders or long-suffering shareholders. The latter might have to approve a merger, particularly if a merger were to take place without an initial bankruptcy filing to erase debt.

Suntech announced Tuesday that it was closing its factory in Goodyear, Arizona, at the cost of 43 jobs there. The factory put aluminum frames and electrical junction boxes on solar cells imported from China, so that the fully assembled solar panels would qualify for “Buy American” programs.

The collapse of Suntech is a milestone in the precipitous decline of China’s green energy industry over the past four years. More than any other country, China had bet heavily on renewable energy as the answer to its interlinked problems of severe air pollution and heavy dependence on energy imports from politically unstable countries in the Middle East and Africa.

China is also very exposed to global warming along its low-lying, densely populated coastline, which the Energy Department in Washington has estimated to have more people vulnerable to displacement from rising sea levels than anywhere else on earth.

But China’s approach to renewable energy has proved ruinous, both financially and in terms of trade relations with the United States and the European Union.

State-owned banks have provided $18 billion in loans on easy terms to Chinese solar panel manufacturers, financing an increase of more than tenfold in production capacity from 2008 to 2012. This set off a 75 percent drop in panel prices over the same period, which resulted in Chinese companies’ losing as much as $1 for every $3 in sales last year.

The huge loans and very low prices prompted SolarWorld, a German company, and its American subsidiary to file anti-dumping and anti-subsidy cases in the United States and the European Union against solar panel exports from China. The United States has responded with tariffs of about 40 percent on solar cells and solar panels from China, and the European Union is concluding its deliberations and is expected to deliver an initial verdict this summer.

Yotam Ariel, the managing director of Bennu Solar, a consulting firm in Shanghai, said that the closing of the Arizona factory was “yet another indication of a tough struggle.”

Article source: http://www.nytimes.com/2013/03/14/business/energy-environment/suntech-power-on-financial-brink.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Fitch Downgrades Italian Debt, Citing Political Turmoil

March 8, 2013 by Leave a Comment

ROME — The Fitch ratings agency cut its assessment of Italy’s sovereign credit by a notch on Friday, citing the abrupt emergence of fresh political turmoil that could push one of the euro zone’s most pivotal economies, already in a deep slump, into a further slowdown.

The lower rating of BBB+, down from A- before, was still within Fitch’s scale of debt considered to be of investment grade for bondholders. But the agency gave Italy’s debt a “negative” outlook.

An inconclusive national election late last month has thrown the government into gridlock, and Fitch said it was “unlikely that a stable new government can be formed in the next few weeks.” As a result, reforms needed to reverse an economic recession that Fitch described as one of the deepest in Europe seemed unlikely to be enacted any time soon.

The downgrade comes after Moody’s, a rival ratings agency, late last month warned that the risk of prolonged political uncertainty in Rome could have implications “well beyond Italy itself,” and could threaten the ratings of other members of the union.

The Italian economy is one of the hardest-hit in the euro currency union. It contracted 2.4 percent in 2012, compared with a 1.3 percent decline in Spain. Only Portugal, which shrank 3.2 percent last year, and Greece, whose economy contracted by 6.4 percent, fared worse.

Without growth, Italy will have a harder time paying down a €2 trillion, or $2.6 trillion, mountain of public debt, which Fitch forecast would rise this year to 130 percent of gross domestic product. That would be its highest level since World War I and one of the highest in the euro zone.

Last year, more than 360,000 Italian businesses closed their doors as banks refused to lend money and austerity measures, in the form of tax increases and spending cuts imposed by the former prime minister, Mario Monti, took a toll.

Italy’s unemployment rate hit a record high of 11.7 percent in January, the government reported Monday, while youth unemployment surged to 38.7 percent. Fitch warned it could downgrade Italy’s sovereign rating further if the recession ran deeper and longer than expected, or if the euro crisis heated up again.

Italy is effectively without a functioning government after the anti-establishment Five Star movement, led by the comedian-turned-activist Beppe Grillo, made stunning electoral gains in both houses of Parliament in last month’s elections. Mr. Grillo’s party has rejected an appeal by the Democratic Party leader Pier Luigi Bersani to work together to lead the country.

Without an alliance, the Italian government could limp along for as long as a year, political analysts say, before a likely collapse would force new elections. President Giorgio Napolitano is scheduled to meet next week with Mr. Grillo, Mr. Bersani and Silvio Berlusconi, the former prime minister who sought a return to power, to determine whether a new government can be formed.

A vote of confidence would then be held, probably later in March.

Italian media have speculated that a new caretaker government could be installed, in a manner similar to the move that put Mr. Monti in power in late 2011. But analysts say such a stop-gap government could not rule for long, nor would it be in a position to carry out painful economic reforms.

Both Mr. Bersani and Mr. Grillo have mostly ruled out joining with Mr. Berlusconi, meaning that an alliance between adversaries could be the main solution. But Mr. Grillo, who rode to victory on a wave of anger against what supporters see as a corrupt government, has instead heaped insults upon his rivals, and talked of razing the current system and replacing it with a more participatory democracy.

This article has been revised to reflect the following correction:

Correction: March 8, 2013

An earlier version of this article misstated the amount of Italy’s public debt. It is 2 trillion euros, or $2.6 trillion, not 2 billion euros, or $2.6 billion.

Article source: http://www.nytimes.com/2013/03/09/business/global/09iht-fitch09.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,
Next Page »