December 8, 2011
The Lehman Brothers bankruptcy plan has been approved—finally—more than three years in the making. But could the end merely be the beginning, attorneys ponder?
Judge James Peck of the U.S. Bankruptcy Court for the Southern District of New York appeared almost relieved as he approved the latest plan by Lehman Brothers, which filed the largest Chapter 11 bankruptcy filing in U.S. history nearly three-and-a-half years ago. Marked by its size, drastically different plans and legal wrangling between creditors, Peck characterized the bankruptcy proceeding as the most difficult ever seen in U.S. courts. Lowenstein Sandler PC attorneys Bruce Nathan, Esq. and Scott Cargill, Esq. agreed.
The plan includes a three-year schedule of liquidating assets, with much of the $23 billion currently available in cash to be distributed within months. Additionally, creditors are likely to get back significantly more than anyone predicted, as the process unfolded at a snail's pace. Granted, most of them are still taking a pretty sizable hit.
Nathan told NACM the case represented "Chapter 11 at its best." "Bankruptcy is at its best not when there is litigation, but when there is resolution, and this case was very difficult," he said. However, he also noted that just because the plan has been approved and stakeholders have stopped fighting, it doesn't mean the Lehman situation is coming to a neat and tidy end in 2011. He and Cargill noted there are still significant amounts of assets that need to be liquidated over a three-year period, which is being drawn out to maximize value as opposed to most of the rapid-fire liquidations that occur as well as partnerships/ventures Lehman needs to get out of and a two-year window for stakeholders to file objections to claims.
"This is the end of the beginning, but there's really a lot more to go here," Nathan explained. "What they've done is extrordinary, but there's a lot of bull work to do to finish this case out."
That said, there has been an active claims trading market for Lehman creditors to consider. The questions are how many creditors sold their claims, and who should consider doing so at this point. "Selling might make sense given how much longer there is to go," said Nathan. "This is a two-year-plus process from this point. One of the advantages of doing so is that you get something up front. You get everything and then you're done." Nathan noted that creditors also have to consider if the liquidation process doesn't get Lehman's assets up to the predicted $65 billion.
Perhaps the upshot of the lengthy case is that the Chapter 11 system showed itself able to handle cases of varying sizes and scopes, even ones with massive political pressure and media spotlight on them.
"One of the lessons is that the Chapter 11 system is able to adapt itself and do something like a multibillion dollar sale of assets done in three days [to Barclays]—not necessarily get it right, but get it done and on its way," Cargill said. "To process the claims and have some sense of order to the liquidation going forward was quite an achievement. In 2008, there were a lot of fears about whether our restructuring system could even handle something like this."
Brian Shappell, NACM staff writer
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Standard and Poor's (S&P) put 15 European Union members on its negative watch list this week just as markets were starting to have faith in the German- and French-led measure to clean up the EU's ongoing debt and monetary problems. S&P swooped in to undo much of the positive by putting the long-term sovereign credit ratings on its negative watch list. Among those receiving the dubious distinction were Austria, Belgium, Finland, France, Germany, Luxembourg and the Netherlands. The following nations were noted as negative both in the long and short terms: Estonia, Ireland, Italy, Malta, Portugal, Slovak Republic, Slovenia and Spain.
Despite image problems from shaky predications in the run-up to the recession, perceived conflicts of interest and a U.S. rating downgrade widely regarded as premature, the ratings agency simply has not shied away from controversy with its moves and warnings. S&P's now maligned release explaining its position included the following:
"Today's CreditWatch placements are prompted by our belief that systemic stresses in the euro zone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole. We believe that these systemic stresses stem from five interrelated factors:
- Tightening credit conditions across the euro zone;
- Markedly higher risk premiums on a growing number of euro zone sovereigns, including some that are currently rated 'AAA';
- Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial and fiscal convergence among euro zone members;
- High levels of government and household indebtedness across a large area of the euro zone; and
- The rising risk of economic recession in the euro zone as a whole in 2012. Currently, we expect output to decline next year in countries such as Spain, Portugal and Greece, but we now assign a 40% probability of a fall in output for the euro zone as a whole."
S&P noted that it's waiting to make any decisions on rating moves until after the Dec. 8-9 EU Summit, but intimates that some downgrades could occur very soon after.
So what is the actual impact of all this? Not much, for now, Hans Belsák, president of S.J. Rundt & Associates, told NACM, explaining that it merely recognizes what the markets and investors are well aware of. "But it does highlight the importance of this week's European summit meeting and of the ongoing efforts by both Germany and France to move Europe toward greater fiscal integration," he said. "If they fail, and if the nervousness in the markets gets worse, the consequences could be calamitous. Dissolution [should that worst-case scenario arrive in the near future] of the euro zone would be an incredible mess in which the U.S. would suffer extensive collateral damage, given the exposure of many U.S. financial firms. There would be a run into U.S. Treasuries as a 'safe bet,' but even so, U.S. financial firms would be forced to scramble for liquidity as European markets freeze up."
Brian Shappell, NACM staff writer
Do You Know Someone Worthy of Recognition?
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Find out more on NACM's Honors and Awards Program web page. Deadline for nominations is January 20, 2012.
Read the profile of a 2011 award recipient in the November/December issue of Business Credit, which features the first O.D. Glaus Credit Executive of Distinction. If your copy has not yet arrived, as an NACM member, you can login here to view the online version of this article and the entire November/December issue now!
The world remains unclear on the U.S. Securities and Exchange Commission's (SEC's) approach to adopting international accounting standards. In a recent speech, the global head of the International Accounting Standards Board (IASB), which serves as the custodian of international financial reporting standards (IFRS), urged the SEC to make a commitment to a single standard, despite the potential challenges of its implementation.
"The emergence of interconnected financial markets explains the momentum gathering behind the move to global accounting standards. Investors need comparable, reliable financial reporting around the world. For global investor protection, we need a global accounting language," said Hans Hoogervorst, IASB Chairman, in his address to the American Institute of Certified Public Accountants (AICPA) earlier this week. "That is why it is appropriate for the SEC to be asking, as it now is, whether the system in the United States should evolve to reflect the new dynamics of capital markets."
Hoogervorst name-dropped a number of U.S. companies, like Bank of New York Mellon, Kellogg, Chrysler and Ford Motor Co., which have called on the SEC to honor financial statements filed according to IFRS, rather than only those organized according to U.S. generally accepted accounting principles (GAAP). "Companies like these have been leading the way in terms of consolidating and coordinating their international financial reporting," he added. "I think providing a limited number of such U.S. companies with the option to use IFRS for their U.S. consolidated financial reporting would offer a good test of IFRS."
"From a global perspective, such a limited and early option to use IFRS would provide a clear signal of a U.S. commitment to IFRS," said Hoogervorst.
So far the SEC has offered only vague hints at how it plans to adopt, or ignore, the establishment of a global set of accounting standards. Over the course of the year, the agency has waivered between openly advocating for the use of IFRS and wringing its hands over the potentially harmful effects such a switch could have on smaller companies and auditors. Still, Hoogervorst argued that the benefits of adopting IFRS would eventually outweigh the disadvantages. "I recognize the challenges and significant pressures facing the SEC in making its decision. The U.S. is the largest and most liquid national capital market in the world. So, transitional concerns have to be carefully considered," he said. "The SEC must believe that this is the right decision for the U.S. From an investor protection and capital formation standpoint, I believe it is."
Jacob Barron, CICP, NACM staff writer
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The House of Representatives passed a regulatory reform bill last week, aiming to reduce the burdensome weight of agency-issued rules on small businesses. H.R. 527, the Regulatory Flexibility Improvements Act of 2011, forces federal agencies to analyze and understand the effect a certain rule or regulation will have on small companies before it's officially issued. It also requires them to suggest less onerous alternatives to any proposed rule that is found to have a potentially negative economic impact on smaller firms.
"According to an October Gallup poll, small business owners cited compliance with government regulations as the most important problem facing them today and, according to a 2010 Small Business Administration (SBA) study, small firms bear a regulatory cost that is 36% higher than the cost of regulatory compliance for large businesses," said Rep. Sam Graves (R-MO), chairman of the House Small Business Committee and a cosponsor of the original bill. "Economic recovery begins with our small businesses, but this will not happen unless we rein in the mass of regulations coming from Washington."
Opponents argue that the bill, in a way, stops agencies from issuing regulations altogether. Supporters, however, are quick note that the bill simply codifies what rulemaking agencies should have been doing all along. "In my district, the Missouri River can overflow its banks. Before the Army Corps of Engineers can build a flood control project, the agency has to study the consequences of building a flood control project. Understanding the consequences of a flood control project before it is built certainly makes sense," said Graves. "If the government needs to understand the effects of a flood control project, should not that same government also understand the consequences of its regulations? Of course it should. By doing so, the government may arrive at a more efficient and less costly way to regulate. In a nutshell that is what H.R. 527 does."
Senate support for the bill is being driven by Sen. Olympia Snowe (R-ME), ranking member on the Committee on Small Business and Entrepreneurship and a sponsor of the Freedom from Restrictive Excessive Executive Demands and Onerous Mandates Act, or FREEDOM Act for short. H.R. 527 and the FREEDOM Act share many of the same provisions, and Snowe applauded the House's approval while calling on the Senate to swiftly enact the legislation.
"If the Senate majority is serious about helping to create an environment conducive to job creation, it will bring up and approve this bill, as soon as possible," she noted. "The failure of agencies to regularly review regulations with an eye toward reducing needless burden stifles small businesses' ability to grow, plan for the future and create jobs."
Jacob Barron, CICP, NACM staff writer
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Though conditions seemed to be deteriorating through much of the summer, the latest six-week snapshot of economic activity in the Federal Reserve's 12 regions showed growth in most areas, even if it is characterized as "slow to moderate."
The Fed's latest Beige Book economic roundup found that conditions improved in 11 of the 12 regions, with only St. Louis reporting an overall slowdown in activity. Some of the best news came out of the manufacturing sector, which isn't a surprise based on its performance at this time last year and through early 2011, prior to an unexpected summer slip. The only exception for the sector was St. Louis. Manufacturing was seen as growing at a steady pace, notably in the Chicago (metals and auto production), Philadelphia (primary metals and energy-related products) and Dallas (electronics and tech products) regions. A surge in motor vehicle sales during much of the year continues to be helping to drive activity in several key regions.
Consumer spending also was on the rise though not because of the holiday spending bump, which will likely be seen in the next study, as was the case in NACM's most recent Credit Managers' Index. Bank lending is on the rise again somewhat, though credit standards varied greatly depending on the region. Philadelphia and Kansas were among those noting solid improvement, while Boston and Atlanta were backsliding, the Fed noted.
Sectors continuing to struggle almost unilaterally are commercial and residential real estate. Business service activity was seen as largely flat, Fed contacts reported. Agriculture sector conditions improved, though the industry is digging out from proverbial holes created by massively uncooperative and unpredictable weather patterns in districts including Dallas and Minneapolis earlier this year.
Brian Shappell, NACM staff writer
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