eNews February 9, 2012

February 9, 2012

News Briefs

  1. Issues in Big Chapter 9 Cases Showing a Red Flag to Would-Be Municipal Bankruptcy Filers?
  2. Commercial Filings Plummet in Latest Bankruptcy Numbers
  3. Bernanke Holding Line on Low Rates
  4. Unemployment Hits Lowest Rate in Three Years
  5. Credit Bidding Gets Day in High Court in April
  6. Trio of Bills Introduced to Expand Small Business Contracting


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Issues in Big Chapter 9 Cases Showing a Red Flag to Would-Be Municipal Bankruptcy Filers?

Providence, RI has become the latest city to get press for flirting with the brink of insolvency and, thus, is starting to generate increasing debate over whether it will file for Chapter 9, municipal bankruptcy, protection. Meanwhile, Detroit—which unlike Providence is in a state that does not permit such a filing without the state's prior consent, continues to be stuck in a debt mire that has led to speculation that Chapter 9 would be its best option eventually.

However, continued problems with two of the most notable municipal bankruptcy proceedings in recent memory could be giving those considering the path cold feet.

In Harrisburg, PA, attorneys representing the Harrisburg City Council saw their appeals to the 2011 filing disallowed by U.S. Bankruptcy Judge Mary France struck down at the federal level early this month. Judge France originally struck down the Harrisburg filing in December on grounds that the city council, which did not have the support of the mayor or the state, was not authorized to file it. Supporters said it would give the city leverage to renegotiate debt largely tied to its massive trash incinerator project debt.

Meanwhile, state-appointed receiver David Unkovic has issued an official recovery proposal that, like the state's earlier plans prior to the defiant council vote to file the eventually disallowed Chapter 9, includes selling the incinerator operation and parking structure as well as raising various taxes and fees. The plan would also require union concessions, similar to the somewhat successful Central Falls, RI bankruptcy case.

But here's the bombshell: Despite the state and the mayor's vitriolic fight to prevent the council's Chapter 9 filing, Unkovic has said publicly that bankruptcy by July may be the only choice for the city if stakeholders don't make concessions and warring city government factions don't agree to work together.

Meanwhile, in Jefferson County, AL, lawsuits from stakeholders tied to the sewer renovation project that eventually sunk the local government's finances are starting to stack up. The new suits come amid reports that bondholders have not been getting even reduced payments since the state-appointed receiver was banished about one month ago—which came shortly after a bankruptcy judge stripped the receiver of his power to raise sewer rates in addition to other decision-making authority—as well as allegations that the county charged improper attorneys' fees. Among the suits that came during the chaotic post-receiver fallout is one from Bank of New York Mellon Corp., a major creditor on the botched sewer venture, demanding all revenue generated by the sewer system.

Bruce Nathan, Esq. of Lowenstein Sandler PC told NACM that each case, especially Jefferson County, was starting to prove very expensive for all parties involved. Nathan called the cases an "eye-opener" to just how convoluted and costly a Chapter 9 can be for stakeholders. As such, the issue will likely vary greatly depending on state laws.

"Chapter 9 is very tough—especially in Jefferson County, you have to wonder at the end of the day if there was a cheaper solution," Nathan said. "The receiver is using it as a threat in Harrisburg. It's going to be around as an option for a while, but it's going to be a state-driven situation. States like Michigan will probably find another way," like appointing a receiver in the case of Detroit.

Brian Shappell, NACM staff writer

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Commercial Filings Plummet in Latest Bankruptcy Numbers

While bankruptcies are declining nationwide, they don't seem to be falling anywhere faster than in the commercial world.

Total business filings for January 2012 fell by 20% when compared to January 2011, from 6,203 to 4,967, according to the American Bankruptcy Institute (ABI). Overall, filings in the U.S. decreased by 14%, totaling 87,946 last month, as compared to 102,175 the year prior.

"The continued decline in bankruptcies reflects the effort of consumers and businesses to shore up their debt loads in order to navigate through an uncertain economy," said ABI Executive Director Samuel Gerdano. "We expect overall bankruptcy levels in 2012 to continue to trend downward until consumers increase household spending."

Month to month, the January overall readings represented a 9% decrease from the 96,264 filings in December 2011, and a 10% drop from the 5,496 commercial filings in December 2011. ABI cautioned, however, that Chapter 11 filings in the busiest bankruptcy jurisdictions have been up significantly over the last year, increasing by 40% in the District of Delaware and by 25% in the Southern District of New York. Two major Chapter 11 cases—Eastman Kodak and Ener1, Inc.—were filed in New York last month, while three major cases—Evergreen Energy, Inc., Buffets Restaurants Holdings and Trident Microsystems, Inc.—were filed in Delaware.

Jacob Barron, CICP, NACM staff writer

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Bernanke Holding Line on Low Rates

Federal Reserve Chairman Ben Bernanke was back in the usual hot seat before Congressional lawmakers itching to garner TV coverage in an election year. And though news has been mostly positive about the U.S. economy, the Fed appears ready to continue on its path, no matter how popular or unpopular it may be with members of the U.S. House and Senate.

Bernanke presented the semi-annual Economic Outlook and the Federal Budget Situation over two days on Capitol Hill, with his most recent appearance coming Tuesday. The report indicated the economy continued to grow, albeit at not an exceedingly robust pace, on strength in sectors such as manufacturing. Additionally, the gains more than offset ongoing construction/real estate woes and concerns from economic problems abroad, primarily in the European Union and should continue to do so. Of keen interest to U.S. businesses are predictions of spending on capital improvements and hope for continued improvement in credit conditions.

"More recently, the pace of growth in business investment has slowed, likely reflecting concerns about both the domestic outlook and developments in Europe. However, there are signs that these concerns are abating somewhat," Bernanke said. "If business confidence continues to improve, U.S. firms should be well positioned to increase both capital spending and hiring: larger businesses are still able to obtain credit at historically low interest rates, and corporate balance sheets are strong. And, though many smaller businesses continue to face difficulties in obtaining credit, surveys indicate that credit conditions have begun to improve modestly for those firms as well."

Another key topic of conversation was the positive January unemployment numbers that shocked market-watchers by falling to 8.3%. Still, the chairman reaffirmed the Fed would keep the target for the federal funds rate near zero into 2014. He also warned that unemployment numbers for one month do not paint a complete, reliable picture about a U.S. labor market that still faces some problems or the fact that unemployment numbers do not track the many who have simply given up looking for a job as certain industry sectors and regions have seen an anemic rebound or stagnation to date.

Ken Goldstein of the Conference Board said the hot question right now is whether the "near bombshell" January employment numbers represent more of a temporary window or a real trend.

"Since I didn't expect the gain to be that high, I kind of side with the former," Goldstein told NACM. "It's comforting to think I'm on same side as Bernanke. It's a little like being in same huddle with Eli [Manning]." For those under a proverbial rock earlier this week, Manning led the New York Giants National Football League franchise to a victory in Super Bowl XLVI, which set a U.S. television-viewing record.

For more on the newest unemployment numbers, see story #4.

Brian Shappell, NACM staff writer

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Unemployment Hits Lowest Rate in Three Years

The U.S. economy added 243,000 jobs in January, an unexpectedly high number that dropped the nation's unemployment rate to a three-year low.

"Today's employment report provides further evidence that the economy is continuing to heal from the worst economic downturn since the Great Depression. It is critical that we continue the economic policies that are helping us to dig our way out of the deep hole that was caused by the recession that began at the end of 2007," said Alan Krueger, chairman of the White House Council of Economic Advisers. "Most importantly, we need to extend the payroll tax cut and continue to provide emergency unemployment benefits through the end of this year, and take the additional steps that President Obama proposed in his State of the Union address to create an economy built to last."

Analysts originally expected a gain of only 150,000 jobs. Instead, last month employers created the most jobs since April, dropping the unemployment rate to 8.3%, down from 8.5% the month prior. Since August, the joblessness rate has fallen by 0.8%.

According to NACM Economist Chris Kuehl, PhD, although job growth is a very difficult figure to track, other figures from the private sector mirror the optimism of the government's latest report. "Here is the good news according to the latest survey from ADP," said Kuehl, referring to ADP, Inc.'s most recent National Employment Report. "They are seeing gains in the private sector as far as hiring is concerned, and the majority of these new hires are with smaller companies. This is critical as small and medium-sized companies with employee numbers between 50 and 500 are the primary employers in the U.S."

Kuehl cautioned, however, that the unemployment numbers should be kept in perspective. "The fact is that gains of this nature are nothing to be ignored, but neither is this the sign of a full economic recovery," he noted. "There are some 14 million people out of work and maybe another 10 million who could be classified as under employed. Addressing that population will require growth of between 200,000 and 300,000 jobs a month for several years, and this is really the first month for these numbers to appear."

Republicans in Congress reacted to the report positively, although uniformly noting that the positive numbers are nowhere near good enough. "Today's jobs report is certainly good news, but so much more could be done to revive the economy and get Americans back on the job faster," said House Small Business Committee Chairman Sam Graves (R-MO). "According to the non-partisan Congressional Budget Office report released this week, unless we change course, economic growth will remain sluggish and unemployment will continue to hover near an unacceptable 8%."

Jacob Barron, CICP, NACM staff writer

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Credit Bidding Gets Day in High Court in April

The Supreme Court of the United States has set an April date to consider the topic of credit bidding in bankruptcy auctions.

Supreme Court justices will hear arguments involving a Seventh Circuit Court of Appeals ruling in the Chicago case RadLAX Gateway Hotel LLC v. Amalgamated Bank on April 23. In that case, a lower court judge allowed a secured creditor to bid its claim in lieu of a cash bid. That directly conflicts with a pair of other cases including, most notably, the Third Circuit decision in Delaware in Philadelphia Newspapers LLC. In the latter, a creditor group was ruled against by a three-judge Third Circuit panel after it tried to use credit bidding in the auction of the company, which as operator of the Philadelphia Inquirer and Philadelphia Daily News owed the bidders a significant amount of money. The group eventually did gain control, but only after it pledged its own cash during a new auction set by the judge.

Credit bidding—the use of what is owed to a creditor instead of cash in the bidding process for said creditor to purchase/own assets at auction in a Chapter 11-based assets sale—has established two strongly opinionated camps. One alleges the process is often unfair and freezes out some lower-level credit-granters, effectively setting a ceiling for how much the auction can raise. Meanwhile, those in support find it can be helpful when applied in the proper context to get bids started in an asset sale that could otherwise generate low interest and poor returns for secured and unsecured creditors alike.

"I think it will be very helpful. We have a split decision, and we need to put this to rest," said Wanda Borges, Esq. of Borges & Associates LLC.

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Brian Shappell, NACM staff writer

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Trio of Bills Introduced to Expand Small Business Contracting

Three bills with bipartisan support were introduced this week, each of them designed to expand and protect the small business contracting process.

Lawmakers from both sides of the aisle proposed the Small Business Opportunity Act, Small Business Protection Act and Building Better Business Partnerships Act, aiming directly at the bureaucratic and administrative impediments keeping small businesses from providing their services to the federal government. All of the bills sprung from the House Small Business Committee, which has recently attempted to address contracting fraud while empowering advocates who fight for small businesses with a bigger role in the contracting process.

"The small business owners I meet across southwest Washington hope to grow and hire more people, and these solutions will allow them to do both," said Rep. Jaime Herrera Beutler (R-WA), cosponsor of the Small Business Opportunity Act. "I'm proud to help expand opportunities for small businesses to compete. Our committee will keep looking for ways to empower these job creators any way we can so that folks can get back to work."

Specifically, the Small Business Opportunity Act would provide more opportunities for small business contractors by requiring that small business advocates be a part of federal procurement and acquisition planning processes. The Small Business Protection Act would create new group size standards that define which businesses qualify as "small," and the Building Better Business Partnerships Act would partner small businesses with established mentors in order to improve small business' ability to win and perform on contracts or subcontracts.

"I hear over and over from small businesses that the one thing they need in these tough times is customers. With average annual spending at $500 billion, there is no bigger customer than the federal government. Unfortunately, only 20% of that spending is going to small businesses right now," said bill sponsor Judy Chu (D-CA). "The Building Better Businesses Partnership Act of 2012 will help small firms break into federal contracting by making it easier for them to join mentor-protégé programs. Helping small businesses win contracts will help put Americans back to work, and with two out of every three jobs coming from small businesses, this bill will help the true driving force behind America's economy."

Jacob Barron, CICP, NACM staff writer

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