Tag Archives: Bankruptcy

Shunned from bond market, U.S. Virgin Islands faces cash crisis

Doctor Michelle Berkely (L) and Chief Financial Officer Tim Lessing of the Juan F. Luis Hospital and Medical Center, talk to Reuters in Christiansted, on the outskirts of St Croix, U.S. Virgin Islands June 29, 2017. Picture taken June 29, 2017. REUTERS/Alvin Baez

By Robin Respaut

ST. CROIX, V.I. (Reuters) – For a glimpse at the precarious financial health of this Caribbean island, visit its public hospital.

Pipes underneath the emergency room collapsed in May, causing waste water to back up through the drains. Now workers and visitors – even patients – use portable toilets set up on the sidewalk. The hospital doesn’t have the cash for new plumbing.

For years the U.S. Virgin Islands funded essential public services with help from Wall Street. Investors lined up to purchase its triple-tax-exempt bonds, a form of debt free from municipal, state and federal taxes.

Now the borrowing window has slammed shut. Trouble in neighboring Puerto Rico, which recently filed for a form of bankruptcy after a string of debt defaults, has investors worried that the U.S. Virgin Islands might be next.

With just over 100,000 inhabitants, the protectorate now owes north of $2 billion to bondholders and creditors. That’s the biggest per capita debt load of any U.S. territory or state – more than $19,000 for every man, woman and child scattered across the island chain of St. Croix, St. Thomas and St. John. The territory is on the hook for billions more in unfunded pension and healthcare obligations.

“We have a government that we can’t afford, and now all of it is converging,” said Holland Redfield, a former six-term U.S. Virgin Islands senator who hosts a radio talk show about politics in the territory. “We’re getting to the point where we may have a potential meltdown.”

Ratings agencies have downgraded the islands’ credit ratings deep into junk territory. With the U.S. Virgin Islands shut out of the credit markets after a failed January bond issue, officials are scrambling to stabilize its finances after years of taking on debt to plug yawning budget holes.

The government proposes to slash public spending by 10 percent. It recently hiked taxes on liquor, cigarettes, sugary drinks and vacation timeshares. And it has threatened to auction homes and businesses of property-tax deadbeats.

Governor Kenneth Mapp is quick to reassure bondholders that they get first crack at one of the territory’s largest funding sources: rum taxes. The money pays debt service before heading to government coffers, a protection called a lockbox.

The U.S. Virgin Islands has “never been late on a payment, much less defaulted on a bond or loan agreement,” Mapp said during his State of the Territory address in January.

But how these islands will recover from years of budget deficits and a severe liquidity crisis remains to be seen. The territory lost its single-largest private employer five years ago when a refinery shut down. Gross domestic product has declined by almost one-third since 2008. At times this year the government was operating with just two days’ cash on hand.

Locals live with pitted roads, crumbling schools, electricity outages and deteriorating medical care.

At the Juan F. Luis Hospital and Medical Center, plumbing troubles are just the beginning. Doctors have stopped performing some vital procedures, including implanting pacemakers and heart defibrillators, because the facility can’t pay suppliers for the devices, officials say.

“We have gone from bad to worse, and the patients are the ones who are suffering,” said Dr. Kendall Griffith, an interventional cardiologist who recently left the island to take a job in a Georgia hospital. “It’s forcing physicians to make hard decisions.”

FORGOTTEN ISLANDS

Before Puerto Rico imploded under $70 billion in debt and $50 billion of unfunded pension liabilities, few in Washington noticed troubles brewing in the other inhabited U.S. territories of American Samoa, Guam, the Northern Mariana Islands and the U.S. Virgin Islands.

Residents of these places are U.S. citizens, but they can’t vote in presidential elections and their Washington delegates are non-voting figureheads. Despite high poverty rates and joblessness, the territories receive just a fraction of the federal funding allocated to U.S. states for entitlements such as Medicare and Medicaid.

To bridge the gap, some have turned to the bond market. Bond issues typically fund infrastructure and capital projects. But in the case of Puerto Rico and the U.S. Virgin Islands, officials increasingly relied on borrowed money to fund government operations.

Debt loads for both territories have grown to staggering proportions, now surpassing 50 percent of their respective GDPs. That’s higher than anywhere in the nation and sharply above the state median of 2.2 percent, Moody’s Investors Service found.

(For a graphic on U.S. territory debt, see: http://tmsnrt.rs/2h8TGIo)

Bond buyers for years whistled past the territories’ shaky finances, comforted in the knowledge that these governments couldn’t seek bankruptcy protections available to many municipalities.

“There was an idea that because of the lockbox structure and the fact that the territories did not have a path to bankruptcy, they had to pay you,” said Curtis Erickson, San Francisco-based managing director of Preston Hollow Capital, a municipal specialty finance company.

That all changed in 2016 when Congress passed legislation known as PROMESA giving Puerto Rico its first access to debt restructuring. The move sparked a ferocious battle among creditors to see who would shoulder the largest losses.

Investors quickly surmised the U.S. Virgin Islands might pursue the same strategy. In December, S&P Global Ratings downgraded the territory by a stunning seven notches to B from BBB+, putting it well below investment grade.

The U.S. Virgin Islands is adamant that S&P and other ratings agencies overreacted. The territory has been unfairly “tainted by Puerto Rico’s pending bankruptcy,” and has no intention of pursuing debt restructuring, said Lonnie Soury, a government spokesman.

In addition to tax hikes and budget cuts, he said the current administration is looking to do more with its tourism and horse racing industries to boost development.

BIG DEBTS, FEW OPTIONS

In the meantime, the U.S. Virgin Islands is trapped in a circle of hock that’s making it tough to maneuver.

The government and its two public hospitals, for example, owe a combined $28 million to the territory’s water and power authority, known as WAPA. In turn, WAPA owes about $44 million to two former fuel vendors.

Then there’s the $3.4 billion of unfunded liabilities for public pensions and retiree healthcare. The pension fund is 19.6 percent funded and projected to run out of money by 2023.

Pensioners can wait months before their annuities start, because the government is behind on its contributions. St. Croix resident Stephen Cohen, 67, said it took almost a year after he retired as a high school biology teacher before he received his first check in 2016.

“A lot of people are financially stressed,” Cohen said. “They didn’t realize how bad things would get.”

Territory officials can’t say how they will close a projected $100 million budget shortfall for this fiscal year. That’s on top of an accumulated net deficit of $4.4 billion, according to government financial records.

Back at Juan F. Luis Hospital, officials hope to move the emergency room into the cardiac wing so repairs can begin on the collapsed pipes.

The government has pledged $3 million for the job, but Tim Lessing, the facility’s chief financial officer, wonders if he’ll see it.

“The territory is in a tough position,” Lessing said. “Nobody’s buying the paper.”

(Editing by Marla Dickerson)

Puerto Ricans skeptical of change after vote for statehood

A man holds a U.S. flag after the economically struggling U.S. island territory of Puerto Rico voted overwhelmingly on Sunday in favour of becoming the 51st state, in San Juan, Puerto Rico June 11, 2017

By Tracy Rucinski

SAN JUAN (Reuters) – Puerto Ricans are skeptical that the struggling U.S. territory’s political status will change any time soon, even after a vote on Sunday asking the U.S. Congress to make the island the 51st state of the union.

Although Puerto Rico voted overwhelmingly in favor of statehood, low voter turnout may weaken Governor Ricardo Rossello’s case for statehood in Washington, where Puerto Rico is seen as a low priority.

Puerto Rico’s two main opposition parties boycotted Sunday’s vote.

The mainly Spanish speaking island has $70 billion in debt, a 45 percent poverty rate, woefully underperforming schools and near-insolvent pension and health systems. Last month, the territory filed for the biggest municipal bankruptcy in U.S. history.

Rossello, who became governor in January, had campaigned for statehood as the best path out of the island’s financial troubles.

Yet eight out of 10 Puerto Ricans did not cast a vote in Sunday’s plebiscite, many because they did not believe the non-binding referendum would sway Congress.

“We’re bankrupt and 85 percent of us don’t speak English. Why would the U.S. government want to take on a problem like Puerto Rico?” said Carolina Santos, a single working mother struggling to make her mortgage payment and cover other bills.

“This is the fifth time there’s been a referendum on statehood. Nothing’s going to change. Maybe we should focus more on fixing our financial problems and our schools,” said Santos.

(Reporting by Tracy Rucinski; Editing by Daniel Bases, Bernard Orr)

Puerto Rico requests bankruptcy protection for public debt

Puerto Rico's Governor Ricardo Rossello addresses the audience during a meeting of the Financial Oversight and Management Board for Puerto Rico at the Convention Center in San Juan, Puerto Rico March 31, 2017. REUTERS/Alvin Baez

By Nick Brown

(Reuters) – Puerto Rico’s financial oversight board on Wednesday filed for a form of bankruptcy protection under last year’s federal rescue law known as PROMESA, touching off the biggest bankruptcy in the history of the U.S. municipal debt market.

The move comes a day after several major creditors sued the U.S. territory and its Governor Ricardo Rossello over defaults on the island’s $70 billion in bonds.

The request came under Title III of the PROMESA law is an in-court debt restructuring process akin to U.S. bankruptcy protection, as Puerto Rico is barred from traditional bankruptcy because it is a U.S. territory. The case was filed in U.S. District Court in Puerto Rico.

The process will give Puerto Rico the legal ability to impose drastic discounts on creditor recoveries, but could also spook investors and prolong the island’s lack of access to debt markets.

“The governor needed to show that his primary allegiance lies with the citizens of Puerto Rico, and that was the justification for the filing,” said David Tawil, whose fund, Maglan Capital, held Puerto Rico GO debt but has since sold it. “I’m not sure whether bondholders are going to get any better treatment or recovery under this course of action.”

The legal proceeding does not mean negotiations toward a consensual restructuring agreement must stop, the governor said in a statement on Wednesday.

“It is my hope that the Government’s Title III proceedings will accelerate the negotiation process,” the governor said in the statement.

Rossello’s fiscal plan for the island, approved by the oversight board in March, forecasts Puerto Rico having only $800 million a year to pay debt, less than a quarter of what it owes. The low figure alienated creditors, and negotiations toward a restructuring deal have foundered.

In addition to its debt, Puerto Rico is facing a 45 percent poverty rate, a shrinking population and unemployment more than twice the U.S. average.

Puerto Rico and its general obligation bondholders, whose $18 billion of debt is backed by the island’s constitution, were negotiating until the last minute.

GO holders offered to accept cuts of 10 cents on the dollar, Elias Sanchez, Rossello’s liaison to the oversight board, told Reuters on Wednesday.

The government responded with an offer to repay 70 percent of claims through new bonds, and another 20 cents through a “growth” bond, payable only if Puerto Rico surpassed fiscal projections.

The sides could not reach a deal, and GO creditors sued the island on Tuesday.

(Writing by Nick Brown; Additional reporting by Jonathan Stempel; editing by Clive McKeef)

U.S. Oil industry bankruptcy wave nears size of telecom bust

Dead sunflowers stand in a field near dormant oil drilling rigs which have been stacked in Dickinson, North Dakota

By Ernest Scheyder and Terry Wade

HOUSTON (Reuters) – The rout in crude prices is snowballing into one of the biggest avalanches in the history of corporate America, with 59 oil and gas companies now bankrupt after this week’s filings for creditor protection by Midstates Petroleum and Ultra Petroleum.

The number of U.S. energy bankruptcies is closing in on the staggering 68 filings seen during the depths of the telecom bust of 2002 and 2003, according to Reuters data, the law firm Haynes & Boone and bankruptcydata.com.

Charles Gibbs, a restructuring partner at Akin Gump in Texas, said the U.S. oil industry is not even halfway through its wave of bankruptcies.

“I think we’ll see more filings in the second quarter than in the first quarter,” he said. Fifteen oil and gas companies filed for bankruptcy in the first quarter.

Some oil producers appear to be holding on, hoping the price of crude stabilizes at a higher level. In February, oil slumped as low as $27 a barrel from peaks above $100 a barrel nearly two years ago. U.S. crude has recovered somewhat, and on Tuesday was trading a little below $44 a barrel. [O/R]

Until recently, banks had been willing to offer leeway to borrowers in the shale sector, but lately some lenders have tightened their purse strings.

A widely predicted wave of mergers in the shale space has yet to materialize as oil price volatility makes valuations difficult, and buyers balk at taking on debt loads until target companies exit bankruptcy.

The telecom and energy boom-and-bust cycles have notable parallels. Pioneering technology brought an influx of investment to each industry, a plethora of new, small companies issued high levels of debt, and a subsequent supply glut sapped pricing just as demand fell sharply.

Neither this crash nor the telecom crack-up in the early 2000s rival the housing and financial bust in 2007-2009 in terms of magnitude and economic impact. But losses for energy investors in the stock and bond markets in the last two years are significant. It remains unclear how long it will take to get through the worst of the declines, and who will be left standing when it is over.

A 60 percent slide in oil prices since mid-2014 erased as much as $1.02 trillion from the valuations of U.S. energy companies, according to the Dow Jones U.S. Oil and Gas Index <.DJUSEN>, which tracks about 80 stocks. This has already surpassed the $882.5 billion peak-to-trough loss in market capitalization from the Dow Jones U.S. Telecommunications Sector Index in the early 2000s.

In the debt market, there are also signs that lots of money could be lost this time around, especially in high-yield bonds.

During its boom, U.S. oil and gas companies issued twice as much in bonds as telecom companies did in the latter part of the 1990s through the early 2000s.

Between 1998 and 2002, about $177.1 billion in new bonds were sold in the U.S. telecommunications sector; less than 10 percent were junk bonds. U.S. oil and gas companies sold about $350.7 billion in debt between 2010 and 2014, the peak years of the oil-and-gas boom, with junk bonds making up more than 50 percent of all issuance, according to Thomson Reuters data.

(Reporting by Ernest Scheyder and Terry Wade; Editing by David Gaffen and David Gregorio)

Family Christian Stores Will Stay Open If Bidder Is Approved

The nation’s largest Christian-focused retailer will likely stay open if a bid at a private auction for their assets is approved in bankruptcy court.

FC Acquisition, controlled by an Atlanta businessman who also controls the non-profit company that owns Family Christian Stores, submitted the highest bid and will pay up to $43.6 million dollars for the company’s assets.

Other bidders had planned to liquidate the company and close the stores.

The second-highest bidder plans to challenge the FC Acquisitions bid, claiming their bid was at least $15 million higher than the FC bid.

Richard Jackson, operator of FC Acquisition, explained to the Christian Post in March why he was taking this step.

“We are gonna lose millions of dollars ourselves, all we did was loan money to the parent and its out,” said Jackson to CP. “It’s gone, and we don’t get interest. So we can either quit, [file a] Chapter 7, which means all stores go out of business immediately, or [do] a reorganization called a 363 sell, which is where Family Christian Ministries forms a new entity to buy assets and it cleans out any other debts and so forth, positioning to be successful going forth.”

Family Christian Stores filed for bankruptcy in February.

Family Christian Stores Cancels Bankruptcy Plans

Family Christian Stores, the largest Christian bookstore in the U.S., announced they are withdrawing their bankruptcy plans and will keep stores open.

The move was done to save the jobs of their 4,000 employees.

“The stewards of the ministry have done this out of love for the mission of Family Christian,” Chuck Bengochea, president and CEO of FCS, said in a press release. “We believe that this will help to satisfy certain objections of the Creditors Committee and the U.S. Trustees. This action will lead more quickly to a successful outcome in which we can continue to serve our customers and glorify God. Day-to-day operations at Family Christian Stores will continue as usual.”

The company had filed for bankruptcy in February because of $97 million owed to banks.

Rick Jackson, owner of FCS, says that it was previous owners who brought in the debt.  Jackson bought the stores in 2012 and turned them into a non-profit.

“The previous owners had so much debt that when the stores went down, they had enough to take care of themselves, but they couldn’t pay for the debt,” Jackson told The Christian Post last month while on the set of Giving Films’ first project, “90 Minutes in Heaven.”

“So we took it on; we were too positive thinking, and tectonic trends — people going online not going to brick and mortar stores — brought sales down 10 to 20 percent, just like Borders,” he added.

Family Christian Stores Files Bankruptcy

The nation’s largest Christian bookstore chain specializing in Bibles, books, music and church supplies has filed for Chapter 11 bankruptcy.

Family Christian Stores, the Grand Rapids, Michigan based non-profit company has 266 stores across 36 states.  FCS employs around 4,000 employees.  Corporate officials say that they don’t anticipate closing stores or laying off employees.

“We strive to serve God in all that we do and trust His guidance in all our decisions, especially this very important one,” stated FCS president and CEO Chuck Bengochea. “We have carefully and prayerfully considered every option. This action allows us to stay in business and continue to serve our customers, our associates, our vendors and charities around the world.”

FCS had bought itself back from private equity owners in 2012 with a pledge to donate 100 percent of profits to “widows and orphans.”

FCS released a statement regarding the restructuring:

Through a newly formed subsidiary, Family Christian Ministries will serve as the lead bidder for the Section 363 sale process, putting forward a plan that acquires the streamlined organization’s assets and maintains operation of the chain’s 267 stores in 36 states, as well as its e-commerce site www.familychristian.com. Family Christian Stores is asking the court for a schedule to complete the sale process in about 60 days.

After the judge approves the sale, we’ll be immediately cash-flow positive and profitable. This process is similar to the one taken by the automobile and airline industries in recent years. We see this as the start of a fresh new day for Family Christian Stores and look forward to delighting our customers for many years to come.

Among our next steps are to make various capital improvements to our stores, as well as invest in an expanded product line and implement a new retail strategy that will enable us to better serve our customers.

Detroit’s Historic Bankruptcy Moves Forward

A federal bankruptcy judge ruled Tuesday that Detroit’s historic bankruptcy will be able to continue and that the city is eligible to shed billions of dollars in debt.

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

While the bankruptcy plan has not been submitted to the judge, today’s hearing cleared the way for the city to make the submission. The ruling today addressed issues regarding whether or not Detroit was eligible to stay in bankruptcy court.

The decision could have impact nationwide as Judge Rhodes ruled that municipal pensions are like any other contract and can be cut in a federal bankruptcy filing.

Opponents of the bankruptcy plan filed an appeal only minutes after the ruling.

Another California Town Considering Bankruptcy

A major California resort town is threatening to enter bankruptcy due to salary and pension costs.

Desert Hot Springs, California, a city of 26,000 east of Los Angeles, could be the third major city to file for bankruptcy after San Bernardino and Stockton.

The city’s problems came to light last week when a new finance director discovered a $3 million shortfall in the city’s $13.5 million budget during a routine record check. The interim director of finance could not explain the reason for the shortfall but said it was likely due to higher than expected pension and salary costs.

If the city ends up filing, it will be the second time since 2001 that the city has filed for bankruptcy proection.

Amy Aguer, the city’s interim director of finance, said that 70 percent of the budget was consumed by police costs between salaries and pension payments.