Philly Newspapers Auction Held Without Credit Bids in Play, Creditors Win Anyway

Creditors to Philadelphia Newspapers LLC fumed that courts disallowed their plan to use a credit bid tactic to buy the publishing group's assets. They did so again when another judge opted against delaying the bankrupt company's auction while it appealed the original ruling.
But, despite the setbacks, the group won out without any controversial tactics.

A creditors group including Angelo, Gordon & Co. and a division of Credit Suisse purchased assets of the publisher, which operates the Philadelphia Inquirer and Philadelphia Daily News, at a total of nearly $139 million, $105 million of which was in cash, on April 28. The auction winners beat out at least two other groups, including one spearheaded by real estate mogul Bruce Toll, of Toll Brothers.

Though the sale likely will lead to a quick emergence from its bankruptcy status -Philadelphia Newspapers' next bankruptcy court hearing is slated for late May-the creditor group still faces some rough sledding. Among problems awaiting Angelo, Gordon & Co. are unions threats of strikes over potential newsroom cuts, a newspaper industry continuing to hemorrhage money for several years and a combative relationship with standing chief executive, Brian Tierney, who publicly alleged the creditors' request to delay the auction was an attempt to sabotage and financially cripple Philadelphia Newspapers.

Angelo, Gordon & Co. originally planned to use debt owed to it by Philadelphia Newspapers in large part as its offer, instead of cash, to buy the newspaper publisher in a process called credit bidding. The method has become increasingly common in the present era of fast-paced and/or pre-negotiated bankruptcies. However, credit bidding has created controversy because some attorneys and experts, such as Standard & Poor's, believe the practice can be used to force an owing party to sell quicker and for a lower price than desired because of leveraged threats by creditors. S&P claims the process essentially "sets a floor price to an auction" and discourages a "robust auction process."

Angelo, Gordon & Co. was forced instead to put up a majority of their offer in cash after being rebuffed by judges in the U.S. Court of Appeals Third Circuit. Analysts said the rulings helped promote fair, even-ground status for all parties that bid on the Philadelphia Newspaper assets in the late April auction.

Brian Shappell, NACM staff writer

Business Bankruptcies Already Far Beyond Pre-BAPCPA Figures

While consumer bankruptcy figures get the most news coverage, from a percentage perspective, they don't hold a candle to the meteoric increase that struck business filings between 2005 and 2009.

For example, a total of 1,402,816 bankruptcy petitions were filed in the federal courts in 2009. Of those, 1,344,095 were filings that involved predominantly non-business debts, or consumer filings. This marked a notable 34% increase over the same figure in 2008.

However, flash back to fiscal year 2005, the last full year before the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) took effect. In that year, a record 1,782,643 bankruptcy petitions were filed, nearly all of which (1,748,421) were consumer filings. Indeed, monthly consumer filings have been steadily increasing ever since 2005 and eagerly recovering to pre-BAPCPA numbers, but for all the doom and gloom surrounding consumer bankruptcies in the recession, filings still remained 23% below 2005 levels in fiscal year 2009.

On the other hand, business filings in fiscal year 2009 have already gone above and beyond their 2005 numbers: business filings in 2005 were at 34,222, whereas in 2009, the number hit 58,721-a 52% increase over the same figure in 2008 and 72% higher than business filings at pre-BAPCPA levels. While consumer filings are slowly creeping back to their pre-BAPCPA numbers, business filings have already mightily surpassed that threshold.

During 2009, Chapter 11 filings experienced the biggest surge, growing 69% over 2008 levels. Chapter 7 liquidation filings comprised the largest percentage of business filings and also increased 51%. Additionally, through 2009, monthly business filings reached roughly twice what they were before the implementation of BAPCPA.

Jacob Barron, NACM staff writer

Fed Rate Left Unchanged...Again

The Federal Reserve's somewhat transparent and predictable stance on monetary policy continued Wednesday (April 28) as its Federal Open Market Committee left the federal funds rate unchanged at a range between 0% and 0.25%. Voting members are encouraged by economic improvements, but appeared more concerned about negatives in the areas of credit availability and commercial real estate.

The Fed's full statement reads as follows:

"Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee's flexibility to begin raising rates modestly."

Controversial Mechanic's Lien Ruling Overturned

A Virginia case in which a judge shockingly allowed removable items to be included in a mechanic's lien has been reversed and remanded after being considered by another District Court judge.

In the U.S. District Court for the Western District of Virginia: Harrisonburg Division, Judge Glen Conrad has reversed a November decision that allowed a variety of non-attached items to be included in a mechanic's lien in the case of Summit Community Bank v. Blue Ridge Shadows Hotel & Conference Center LLC, et al. The case was featured in the May edition of Business Credit Magazine.

In the suit (Blue Ridge Shadows), Bankruptcy Court Judge Ross Krumm upheld the lien filing rights of Corporate & Franchise Interiors (CFI) and Executive Protection Systems (EPS) in a case involving the development of a Virginia hotel. CFI's claims totaled $228,761.33 for items including sleeper sofas, chairs, desk lamps, pillows, game tables, desks, artwork and lamps. EPS' claims totaled $56,034.43 for items including flat panel LCD monitors, coaxial cable, microphones, projectors, speakers and amplifiers. Such items generally would not have been considered lienable based on a wealth of mechanic's lien case law.

In the original ruling, Krumm noted that existing Virginia statutes did not include "an exhaustive or exclusive list" of materials qualifying for a mechanic's liens and that some unattached materials were critical in creating improvements to a building without being permanently annexed. The ruling surprised several attorneys contacted by NACM and a line of experts, including NACM Mechanic's Lien & Bond Services Director (MLBS) Greg Powelson. The prevailing opinion was that the judge's ruling went against the essence of a mechanic's lien, not to mention a couple centuries of case law, and was inherently flawed.

Conrad essentially rendered the same opinion in April in reversing the previous decision. The judge chalked up the Krumm decision to a failure to recognize that a significant connection, which typically must be physical and permanent, is needed between materials and a structure to qualify as improvement:

"It is not sufficient for materials to simply add value to a building by their mere presence without any further connection to the building."

Conrad also reviewed the previous court's reliance on a 1997 case involving cabinets that had been delivered, accepted and installed in a building, but later removed after a dispute (Moore & Moore General Contractors Inc. v. Basepoint Inc.), in justification of the November ruling. Conrad ruled the lower court erred in focusing solely on the "removability of materials, as opposed to their connection to the encumbered property."

The November decision did raise concern that a host of vendors who previously wouldn't have tried to include their claims in a mechanic's lien would begin to do so. Additionally, attorneys worried the original decision could be used as a persuasive, though not binding, argument in states where mechanic's lien law language was similar to that of Virginia. Conrad's ruling now largely renders such concerns moot and keeps Pandora's Box shut for all intents and purposes.

Brian Shappell, NACM staff writer

Bankruptcy Credit Bids Put to Test in Courts

A powerful investment group seeking a delay in a company bankruptcy auction was rebuffed by a Third Circuit three-judge panel, and the auction remains set for April 27. The investors were planning to use the increasingly common, but controversial, credit bid method in an attempt to buy assets of Philadelphia Newspapers LLC and may be unable to do using debts owed to them because of seperate appeal working its way through the court system.

The U.S. Court of Appeals Third Circuit panel rejected a request from a group that includes Angelo, Gordon & Co. and Credit Suisse to delay the company auction until at least May. The investor group's intentions to use a credit bid, in which it would use debt owed to them by the company to then buy its assets largely without cash, were also denied in a previous court proceeding to use such a strategy in the Philadelphia News situation. The credit bid appeal remains in limbo in the Third Circuit, as well. For its part, Philadelphia Newspapers officials alleged the move was a blatant attempt to impair the organization's ability to emerge from bankruptcy restructuring before slipping into financial ruin.

The rise in credit bidding is partly attributable to the spike in pre-negotiated bankruptcies, which are less settled than a pre-pack filing plan. In essence, some non-traditional lenders such as hedge funds can buy into more second-lien debt-which is more speculative and thus cheaper than first-lien debt-and use it to position themselves to emerge as buyers of the filing company through a quick sale. In essence, the new creditor can use its newfound leverage by threatening to stop lending to the reorganizing company unless the filing company capitulates.

A recent Standard & Poor's study raised significant concerns over the fairness of the practice. S&P, among others, believes the practice often leaves out some of the lower level creditors and pays off some handsomely at the expense of others. Credit bids essentially allow the creditor "to seize the collateral being sold if the auction does not result in an offer above the amount of allowed claims, effectively setting a floor price to the auction," said S&P.

"It can present a challenge for a debtor to conduct a robust auction process with full due diligence processes when the time frame that DIP lenders set is very short," the S&P report argued.
This topic is also discussed in the last section of a Business Credit Magazine story focused on the risk associated with the newfound trend of rapid bankruptcy proceedings. The story is featured in the upcoming May Business Credit issue, due out later this month.

Brian Shappell, NACM staff writer

House Passes Gramm-Leach-Bliley Paperwork Reform

The U.S. House of Representatives recently passed a bill that would eliminate unnecessary paperwork requirements under the Gramm-Leach-Bliley Act (GLBA).

House Bill 3506, the Eliminate Privacy Notice Confusion Act, would, as its title indicates, waive the requirement to file an annual privacy notice for companies that are either prohibited from sharing customer information due to other federal laws or don't change their privacy notice year to year. The legislation is expected to help companies who purchase debt and collect it who will no longer have to send privacy notices, as the Fair Debt Collection Practices Act (FDCPA) prevents them from sharing information with third parties.

ACA International, an association of credit and collection professionals, supported the bill and cheered its common sense reforms to overlapping legislation.

"ACA is very grateful the House saw the unnecessary wasteful burden caused by this requirement and moved in a bipartisan fashion to make needed changes to the law," said ACA Federal Government Affairs Director Adam Peterman. "It made no sense to require companies subject to both GLBA and the FDCPA to send consumers notices telling them they weren't sharing their information when they were prohibited from doing so anyhow."

The legislation was originally introduced by Rep. Erik Paulsen (R-MN) and Rep. Dennis Moore (D-KS). It now moves to the Senate where it has been read and referred to the Committee on Banking, Housing and Urban Affairs.

Jacob Barron, NACM staff writer

Long-Term Change Unlikely Amid Emerging Events in Greece, Russia

With an inevitable bailout for Greece and unrest near Russia coming to fruition, both have dominated international news of late. Still, experts don't these developments to move the needle much within the international business credit game.

After a lengthy feet-dragging display, Greece finally received an aid program from other European Union nations to the tune of $40 billion (USD). The package will come in the form of a three-year loan at a rate of 5%, which Moody's Analytics Associate Economist Andrea Appeddu personally believes is far from "gift" terms.

The euro zone loan program/temporary credit facility should help the Greek government stabilize its massive budgetary and international business borrowing problems significantly in the short-term. However, Greece has dug itself into such a large economic hole that $40 billion in loans unlikely will generate any real long-term financial stability for the perennially free-spending nation. It is expected Greece will receive assistance from the International Monetary Fund (IMF) in the coming weeks to bolster a recovery that is far from guaranteed.

"The effect on the back-end of the yield curve will be less sharp than the front-end," said Appeddu. "Long-term, the euro zone and potential IMF back-up gives a very limited relief of Greece. Its fiscal adjustment is on Greek taxpayers' shoulders. It was so on Friday; it is today as well."

Some analysts went farther publicly, predicting the $40 billion only will help Greece avoid insolvency and default through the end of 2010, but not far beyond.

And though it's no guarantee that the euro zone assistance to Greece will inspire moral hazard on the part of other struggling nations like Portugal or Ireland, Gordon Miller, general credit manager for ISP Technologies Inc., said he worries about a "snowball effect."

"Bailing out Greece is really not a whole lot of money to nations like Germany and France," said Miller. "But, perhaps one of the other big nations comes back and says, ‘we want the same thing.'" He added that all of this could significantly weaken the Euro.

Meanwhile, to the East, safety and security issues in Russia have again surged to the forefront of international news in the wake of a recent reprisal of terrorist attacks there. After relative calm for a couple of years, activity from radical Islamic militants from the Northern Caucuses provinces (Chechnya, Dagestan, etc.) has returned to the forefront in the form of subway bombings that killed 40 and injured more than 100 others in Moscow and a series of suicide bombings aimed at police in the provinces, which are located in the southeastern portion of Russia. While tragic and unsettling, growing unrest in Russia is unlikely to put a dent in the flow of business credit in any significant way.

"Anybody who is in business in Russia had to expect this and, if they didn't, shame on them," said Miller. "It's not a consistent place to do business. There will be a short time where the biz environment will be good and, all of the sudden, it's gone. People doing business there know who they're playing with and know it's a constant thing."

Still, Russia, in its relative infancy of post-Soviet Union consumerism, represents "big economic potential" for international businesses.

"There have been a lot more market capabilities and money there than they've had in the past, and I think the Russian population is looking for foreign goods," said Miller.

Brian Shappell, NACM staff writer

(UPDATED) Fed Beige Book: Tepid Gains in Economy Through Early April

Just hours after Federal Reserve Chairman Ben Bernanke testified before Capitol Hill lawmakers saying the economic recovery continues to appear on track, albeit at a slow pace, and that there are still some forces threatening ongoing growth, a separate Fed report indicates good news in most industry segments. However, commercial real estate and business credit availability still are far from leading the charge of an economic resurgence.

The Fed's Beige Book study, which tracks economic conditions typically over an approximate six-week period, found there was increased economic activity in 11 or 12 districts through the first week of April. However, loan volume and credit quality largely decreased amid very mixed conditions in the banking/finance sector. Meanwhile, Fed contacts reported that commercial real estate activity remained slow in most of the nation, though some reason for optimism emerged in the Richmond and Dallas areas.

District 1 -- Boston
Fed contacts reported commercial real estate fundamentals as "roughly stable." Commercial property operators trying to obtain loans for improvements, being demanded by renters with increasingly strong bargaining positions, experienced problems in securing financing. Concern over defaults continues to increase despite recent stability.

District 2 -- New York
Commercial loan demand reports were mixed in the greater New York City area. Commercial real estate credit availability was the tightest of all industry categories. Meanwhile, commercial real estate markets bounced between steady and soft in recent weeks. Office vacancies continued to rise and a developer in Buffalo called new development "increasingly sparse."

District 3 -- Philadelphia
Credit quality held stable in recent months, and Fed contacts predicted gains in business lending during the summer. Granted, such credit likely only will be available to business borrowers "with a sound income stream." Commercial real estate should remain weak in the district for the foreseeable future because businesses simply aren't willing to expand at present.

District 4 -- Cleveland
Demand for business loans weakened in March. Commercial real estate credit especially received closer scrutiny. Credit quality of business applicants was a mixed bag, though delinquency levels largely stabilized. And, despite tight credit conditions, commercial construction began to show signs of a rebound in the district.

District 5 -- Richmond
Though commercial and industrial loan demand remained weak, some bankers reported "modest" improvements in both areas. Perhaps surprisingly, commercial real estate activity increased in recent weeks, more so than any region in the nation. Meanwhile, businesses tied to the automotive industry found more difficulties in obtaining financing.

District 6 -- Atlanta
The word for the flow of business credit is District 6 is "subdued." However, bankers noted there is ample credit availability, but very low demand from small businesses. Commercial real estate remained flat, on aggregate. Expectations for the sector are not optimistic for the rest of 2010.

District 7 -- Chicago
Credit availability improved in the district, but Fed contacts said most firms are delaying projects that require borrowing money. It is expected that many middle- and upper-market firms will seek more credit during the second half of 2010. Meanwhile, the overhang of vacant facilities put a damper on demand for new commercial real estate starts.

District 8 -- St. Louis
Commercial and industrial borrowing declined by nearly 5% from mid-February through early-April. Widespread commercial property foreclosures are expected in the near future. The region is the only of 12 Fed districts that reported worsening across-the-board economic conditions for the current Beige Book tracking period.

District 9 -- Minneapolis
Most portions of the district experienced weak commercial construction conditions, and another dip in demand is expected. One positive area, at least for hotel and medical development, was an uptick in projects in Great Falls, MT. The finance industry reported little of note about the present period.

District 10 -- Kansas City
Bankers noted demand for business loans fell. However, the outlook for loan quality is essentially unchanged as concerns over credit quality continue to abate. Commercial real estate remains well behind last year's already low activity levels.

District 11 -- Dallas
Loan demand in and around Texas is seen as soft, but stabilizing. More commercial and industrial loans were in the pipeline than in previous months. However, amid high above-normal vacancy rates, a full-on rebound for commercial borrowing focused on new projects remains far off, said Fed contacts.

District 12 -- San Francisco
Business borrowing was stable in most parts of the district and up in others. Still, reports of increased commercial and industrial borrowing largely are tied to replacements and rebuilds rather than new projects. Contacts do not expect a spike in commercial real estate demand in the district through mid-summer, at least.

Brian Shappell, NACM staff writer

Fed’s Duke Predicts More Lending in 2010, Pushes for Increased Community Banking Activity

At the Western Independent Bankers Annual Conference in Arizona, Federal Reserve Governor Elizabeth Duke predicted an increase in bank lending to domestic small businesses. She notes, "Economic conditions, the most important determinant of the demand for and availability of small business lending, have improved considerably since the early and middle part of last year."

However, Duke's speech seemed to double as a call to action, or even a cry for help, to inspire community banks to pick up the pace in the area of business credit lending.

"Even though the environment is challenging and some community banks face significant stress, most community banks are fundamentally sound and will remain so," said Duke. "It is encouraging to see in your conference agenda that you are looking forward to returning to a more stable model of community banking..."

See below for Duke's prepared speech in its entirety by clicking the following link: http://tinyurl.com/yjlku66.