Debt trading defines Goldman Sachs Group Inc.

The New York bank is known for catering to hedge funds and asset managers that maneuver in the shadowy and lucrative world of private bonds and loans. It has committed to fixed-income trading even as some of its biggest rivals withdraw from the field.

This explains Wall Street’s collective surprise Tuesday morning when Goldman reported fixed-income, currency and commodities trading revenue that missed analysts’ estimates, coming in at $1.69 billion compared with the expected $2.03 billion.

Not only was this a relatively rare disappointment in this area for the investment bank, but it was the first big U.S. bank to disappoint in first-quarter debt-trading results. Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. have all exceeded expectations. And it’s not clear that Goldman is well positioned for a quick rebound.

Lagging Behind

Goldman lagged behind peers in the first quarter with respect to debt-trading gains

Goldman shares headed for the worst earnings-day reaction since the last three months of 2010, as Lu Wang of Bloomberg News pointed out. The firm offered some vague explanations for the tepid report, namely that good revenues in interest-rate products and mortgages were offset by lower revenues in currencies, commodities and corporate credit.

In a call with analysts, Martin Chavez, Goldman’s deputy chief financial officer, said there were very low levels of volatility in the first quarter, with the lowest volatility in dollar-euro and crude in almost two years.

This doesn’t give a full sense of the picture. Corporate-credit trading was robust in the first three months of 2017, and the other big banks are also significantly exposed to currencies and commodities volumes, which didn’t plummet.

Here’s a more likely reason for Goldman’s disappointment: The firm stands to disproportionately benefit from times of widespread turmoil in which hedge funds and other active managers can swoop in and buy distressed assets at discounts. The first quarter of 2017 was rewarding for the biggest banks with corporate clients, which sold a record volume of investment-grade bonds.

It wasn’t as good for scrappier firms. Junk-bond sales didn’t hit at a record like issuance of higher-rated debt, leading to smaller gains in high-yield trading. Meanwhile, active fund managers continued to experience withdrawals, putting a strain on some of Goldman’s clients.

According to data compiled by Alison Williams of Bloomberg Intelligence, 22 percent of Goldman’s trading business comes from hedge funds. That compares with 16 percent of Citigroup’s fixed-income trading. While these figures aren’t a precise apples-to-apples comparison, it gives a sense of just how much more dominant hedge funds are to Goldman’s business, especially because fixed-income volumes account for a significant proportion of Citigroup’s overall trading revenues.

Hedge funds just suffered their first year of net withdrawals since 2009, and withdrawals likely continued into 2017. These strategies have been underperforming broad indexes, prompting investors to question why they’re paying such high fees.

Tough Spell

Hedge funds just faced the first full year of withdrawals since 2009

Goldman also implied that it had some losing wagers on its trading desk, although none of them seemed catastrophic. Still, this doesn’t bode well for its strategy of being smarter and better than other firms and their market-making units.

It’s clear that Goldman is poised to profit from a substantial dislocation in the market. It’s not so clear that it’s poised for a windfall in the current environment, which is a slow grind forward without a clear meltdown or melt-up on the horizon.



Telecommunications company Avaya filed for Chapter 11 bankruptcy protection on Thursday to reduce its debt load of about $6.3 billion but said it would not sell its call center business, which it had tried to do last year.

The bankruptcy underscores the challenges telecommunications companies face as they transition to software and services from hardware. Early last year, Avaya had planned to sell its call center business but did not reach a deal with buyout firm Clayton, Dubilier & Rice, which had been in the lead to acquire it for about $4 billion.

Avaya said it must focus on its debt and that a sale of the call center would not maximize value for its customers or creditors. It is still negotiating deals to sell parts of its business.

The company is hashing out terms of a restructuring deal with creditors. The original goal was to have one in place before bankruptcy, but an agreement was not reached.

The company said an affiliate of Citigroup Inc would provide a $725 million loan for up to a year to fund its operations during the reorganization.

Avaya said the loan was needed to reassure jittery vendors who had been shortening payment periods and reducing credit terms in recent months on fears about the company’s financial health.

“Absent additional financing, I believe the debtors could be forced to liquidate on a highly expedited basis,” said a court filing by Eric Koza, a managing director at the restructuring firm Zolfo Cooper, which has been advising Avaya.

Koza also said the money was needed to pay for administrative costs of bankruptcy, “which are expected to be significant.”

Avaya faced a deadline at the end of January in agreements with creditors to address its debt or potentially default.

The Santa Clara, California-based company has been burdened by debt stemming from an $8.2 billion buyout in 2007 by private equity firms Silver Lake Partners and TPG Capital, with $600 million coming due in October. Interest expense of more than $400 million a year has been pushing Avaya into losses.

At Sept. 30, Avaya owed its pensioners $1.7 billion.

Avaya’s revenue fell to $958 million in the fourth quarter ended on Sept. 30 from $1 billion a year earlier, according to financial results released Thursday. For the fiscal year, the company posted a net loss of $750 million.


Judge Neil Gorsuch stands with his wife Louise as President Donald Trump speaks in the East Room of the White House in Washington, Tuesday, Jan. 31, 2017, to announce Gorsuch as his nominee for the Supreme Court.(AP Photo/Carolyn Kaster)

From Mediatbankry

he only things I know about Judge (now Justice) Neil Gorsuch are from what I’ve read in two contexts:

  1. His rating by the American Bar Association’s Standing Committee on the Federal Judiciary, which voted unanimously to give its best possible rating to Judge Gorsuch as a Supreme Court nominee; and
  2. Five bankruptcy opinions he authored as a Tenth Circuit Judge.

Based on these five opinions, I can appreciate why the American Bar Association gave him their best possible rating.

By the way, I try to ignore national politics as much as possible because it seems, many days, that national politics is a vicious business, worthy of contempt on all sides of the partisan divides.

Fortunately, bankruptcy issues rarely provide fodder for partisan disputes.  It’s difficult, for example, to get conservatives, moderates or liberals rallying ‘round issues like cash collateral, credit bidding and structured dismissals.

Based on the five Gorsuch bankruptcy opinions I’ve read, here is my first reaction:

Supreme Court Justice Neil Gorsuch will be good for bankruptcy law.

Here’s why.

Six Examples from Five Opinions

First of all, Judge Gorsuch is an engaging writer—and for those of us required by profession to read lots of cases, this is a bonus!  Here’s an example — it’s a summary of an issue on whether the bankruptcy court can decide a particular dispute (from In re Renewable Energy Development Corp.):

“This case has but little to do with bankruptcy. Neither the debtor nor the creditors, not even the bankruptcy trustee, are parties to it. True, the plaintiffs claim they once enjoyed an attorney-client relationship with a former bankruptcy trustee. True, they now allege the former trustee breached professional duties due them because of conflicting obligations he owed the bankruptcy estate. But the plaintiffs seek recovery only under state law and none of their claims will be necessarily resolved in the bankruptcy claims allowance process. And to know that much is to know this case cannot be resolved in bankruptcy court.”

Second, Judge Gorsuch respects and honors the limitations on his authority.  As a Circuit Judge he is subservient to higher authority — to decisions of the U.S. Supreme Court and to enactments of Congress — despite flaws he may see in those decisions and enactments.  In the In re Woolsey case, for example, he writes:

“We do not doubt a strong argument can be made that the language and logic of § 506 permit the Woolseys to void not only Citibank’s lien but any lien to the extent it is unsupported by value in the collateral. But we fail to see any principled way we might, as lower court judges, get there from here. [The Supreme Court’s Dewsnup opinion] may be a gnarled bramble blocking what should be an open path. But it is one only the Supreme Court and Congress have the power to clear away.”

Third, Judge Gorsuch will bring clarity to jurisdiction issues that have been hounding bankruptcy courts.  The following lengthy analysis shows that he understands (and can explain with clarity) this difficult legal problem and its over-arching civic context (from In re Renewable Energy Development Corp.):

The Constitution assigns “[t]he judicial Power” to decide cases and controversies to an independent branch of government populated by judges who serve without fixed terms and whose salaries may not be diminished. U.S. Const. art. III, § 1. This constitutional design is all about ensuring “clear heads … and honest hearts,” the essential ingredients of “good judges.” . . . After all, the framers lived in an age when judges had to curry favor with the crown in order to secure their tenure and salary and their decisions not infrequently followed their interests. Indeed, the framers cited this problem as among the leading reasons for their declaration of independence. . . . And later they crafted Article III as the cure for their complaint, promising there that the federal government will never be allowed to take the people’s lives, liberties, or property without a decision maker insulated from the pressures other branches may try to bring to bear. . . . To this day, one of the surest proofs any nation enjoys an independent judiciary must be that the government can and does lose in litigation before its “own” courts like anyone else.

Despite the Constitution’s general rule, over time the Supreme Court has recognized three “narrow” situations in which persons otherwise entitled to a federal forum may wind up having their dispute resolved by someone other than an Article III judge.  . . . [One of these three situations is] public rights doctrine.

As developed to date, public rights doctrine has something of “a potluck quality” to it. . . . The original idea appears to have been that certain rights belong to individuals inalienably — things like the rights to life, liberty, and property — and they may not be deprived except by an Article III judge. Meanwhile, additional legal interests may be generated by positive law and belong to the people as a civic community and disputes about their scope and application may be resolved through other means, including legislation or executive decision. . . . But the boundary between private and public rights has proven anything but easy to draw and some say it’s become only more misshapen in recent years thanks to seesawing battles between competing structuralist and functionalist schools of thought. . . . Indeed, the Court itself has acknowledged, its treatment of the doctrine “has not been entirely consistent.” . . .

Bankruptcy courts bear the misfortune of possessing ideal terrain for testing the limits of public rights doctrine and they have provided the site for many such battles. . . . Even today, it’s pretty hard to say what the upshot is. Through it all, the Supreme Court has suggested that certain aspects of the bankruptcy process may implicate public rights and thus lawfully find resolution in Article I courts. . . . But the Court has also emphasized time and again that not every “proceeding [that] may have some bearing on a bankruptcy case” implicates a public right amenable to resolution in an Article I tribunal. . . .

That much, of course, hardly decides cases. What most everyone wants to know is which aspects of typical bankruptcy proceedings do and don’t implicate public rights. Yet even Stern, perhaps the Court’s most comprehensive tangle with the question, offered no comprehensive rule for application across all cases. Instead, it invoked a number of different factors to support the result it reached in the particular and rather unusual case at hand.

Fourth, Judge Gorsuch does much more than a grammatical parsing of statutory language.  In the In re Dawes case, Judge Gorsuch deals with farmer-tax issues under Chapter 12, on which the Eighth and Ninth Circuit Courts of Appeals had split. Judge Gorsuch sides with the Ninth Circuit, based on three separate considerations: (i) “the plain language of the statute before us,” (ii) “the larger statutory structure,” and (iii) “Congress’s expressed purposes.”  As to Congressional purposes, Judge Gorsuch says:

Our interpretation as well gives effect and respect to the congressional purpose they identify. Ordinarily, of course, taxes are not dischargeable in bankruptcy; the tax man is rarely avoidable. Yet under our interpretation of § 503(b), income taxes incurred as a result of the pre-petition disposition of certain farm assets are eligible for § 1222(a)(2)(A)’s generous rule allowing them to be treated as unsecured claims, compromised, and discharged. . . . Clearly, then, our reading gives respect to Congress’s wish to provide a substantial form of special assistance targeted to farmers. We only stop short of extending § 1222(a)(2)(A)’s treatment to income taxes incurred post-petition by the debtor rather than the estate.

The U.S. Supreme Court ended up siding with Judge Gorsuch and the Ninth Circuit on this farmer-tax issues.

Fifth, Judge Gorsuch respects and applies non-binding precedent.  In the Ardese v. DCT, Inc. case, Judge Gorsuch applies the law and rationale developed in a prior Tenth Circuit case, indicating that “there is little obvious daylight between [the prior case] and Ms. Ardese’s case.”

Finally, Judge Gorsuch shows professional humility in the TW Telecom Holdings, Inc. v Carolina Internet Ltd. case.  The Tenth Circuit had been applying a specific rule of law involving the automatic bankruptcy stay.  Judge Gorsuch notes that at least “nine other circuit courts of appeals disagree” and that the Tenth Circuit rule is based on faulty reasoning.  So, his opinion overrules the Tenth Circuit rule and declares that the Tenth Circuit will thereafter follow the same rule applied in other circuits.


From Business Standard

The Reserve Bank of India’s (RBI’s) new — revised after 15 years — prompt corrective action (PCA) plan on loans going bad at banks could restrict normal business activity for at least 15 of the stressed lenders.


And, once such a PCA plan is put in place, a bank will have to do what the RBI wishes the lender to do, putting the central bank in the driver’s seat in bad debt resolutions.


Any bank with a net non-performing assets (NPA) ratio of six per cent or more, as of March 2017, will come under the scanner of the RBI. The central bank can then direct the bank on how to go about its business.


System-wide, stressed assets (gross bad debts plus restructured assets) were estimated to be at least Rs 9.5 lakh crore.


Since all existing bad debt resolution plans have largely failed, the government is devising its own grand resolution plan.


In the 2002 plan, the threshold was set at 10 per cent. Under the new norm, 17 banks have come under the RBI lens.


As of December 2016, they had a net NPA ratio of more than six per cent.


Of these, only three banks have a net NPA ratio of more than 10 per cent, which meant they were already under the RBI lens.


These three are Indian Overseas Bank (NNPA of 14.3 per cent), Bank of Maharashtra (10.7 per cent) and United Bank of India (10.6 per cent). Of these, a PCA plan has been triggered on Indian Overseas Bank and United Bank.


The new norm will be applicable based on the results as of March 31. Even as a couple of banks marginally escape the strict RBI watch,  a sizable chunk will surely get in the net.


Apart from the NPAs, a PCA plan may be triggered if a bank slips on any of three other parameters – on capital, profitability or even how much leverage it has taken on its books. If, for example, a bank’s capital adequacy falls below a critical level or if a bank posts losses year after year, RBI can impose a PCA plan on it.


When a PCA plan is activated, RBI would impose severe restrictions on many and any of the criteria the central bank deems fit. A particularly harsh one is to limit the bank’s lending ability of the bank. In extreme cases, to restrict the compensation and fees of the management and directors.


And, if a bank continues to bleed on its capital and the core capital ratio falls below a specified level, it could be liquidated or merged. In the 2002 plan, the threshold for winding up a bank was set at three per cent of the capital adequacy ratio In the revised plan, the threshold is 3.625 per cent of core capital or the tier-1 ratio. A bank’s capital has two layers, tier-1 and tier-2. A 3.625 per cent tier-1 means the total capital adequacy ratio would be higher, definitely much more than what was prescribed in the 2002 plan.


What has changed
According to analysts, the main reason for tightening the norms is definitely the current operating environment. Where RBI is not only actively trying to stop banks bleeding capital through NPAs but the country having also moved to international, Basel, norms, not there in 2002. These require that a bank be always healthy on capital adequacy and provisioning. Therefore, whenever a situation looks shaky, RBI wants to take control of the situation, they said.
As in the previous plan, there will be three threshold levels. For breaching each level, a specified level of restriction will fall upon the bank. For example, if the first threshold is breached, the central bank will impose restrictions on dividend distribution, and ask the promoters (or parent of a foreign bank) to infuse capital. If the third threshold is breached, the bank can be wound down or forcefully merged with others.
Unlike the earlier PCA, this time the framework will be revised every three years.
When threshold two is breached, RBI can put restrictions of threshold one-plus. Meaning action such as restricting the branch expansion and to direct higher provisioning as part of the coverage regime. In threshold three, RBI mandatorily will impose restrictions on management compensation and directors’ fees.
In fact, going by the rules, there is no restriction RBI cannot impose. The central bank may, at its discretion, impose restrictions and penalties such as special supervisory interactions, actions on strategy, governance, capital, credit risk, market risk, human resource, profitability and on operations. It may review all business lines to identify scope for enhancement or contraction (restriction on lending and borrowing), restructuring of operations, devise plans for NPA reduction, or any other restrictive step that will halt the normal operation till such parameters are improved.
According to an analyst with a rating agency, the new focus is on early detection of stress signs and taking action in time to avoid further spread.
  • Banks will be monitored based on such measurable indicators as capital adequacy ratio, common equity tier-1 ratio (core capital), net NPA ratio and return on assets;
  • For Threshold-1, capital trigger will set when a bank’s minimum total regulatory capital falls 250 basis points (bps) below the indicator or the minimum tier-1 capital adequacy ratio (CAR) falls 162.50 basis points below indicator. Currently, RBI’s minimum threshold for total capital is 10.25 per cent;
  • Threshold-2 triggered when total CRAR (capital to risk-weighted assets ratio) falls more than 250 bps but less than 400 bps below indicator. Or tier-1 capital falls more than 162.5 bps, up to 312.5 bps;
  • In excess of 312.5 bps fall in tier-1 capital below the regulatory minimum, candidate for amalgamation, reconstruction or winding up;
  • In terms of asset quality, threshold-1 will trigger when the net NPA ratio is equal or greater than six per cent but less than nine per cent. For threshold-2, from nine to 12 per cent. Threshold-3 will be triggered when net NPA ratio is 12 per cent or more;
  • In terms of profitability, threshold levels will be negative return on assets for two consecutive years, three and then four consecutive years;
  • Leverage of 25 times of the tier-1 capital will come under the threshold level
  • PCA framework applies to all banks, including small and foreign ones;
  • A bank will be placed under the PCA framework based on the audited annual financial results and supervisory assessment by RBI However, RBI may also impose a PCA on any bank if circumstances so warrant, it has said on its website.


From INC

They say history repeats itself — if you wait long enough.

The year was 2008. A passenger on United Airlines, Canadian musician Dave Carroll, was sitting in Chicago awaiting takeoff when he heard a commotion. Outside the window, baggage handlers were throwing guitar cases haphazardly before loading them into the hold.

This alarmed him, as they were his guitars. He called for assistance, but flight attendants told him there was nothing they could do, and to bring it up when they land.

Upon landing, he found one guitar was broken and told to file a claim for compensation. Carroll attempted to negotiate with the airline for nine months, hitting dead end after dead end. United was unapologetic and unsympathetic.

In early 2009, he wrote the song, “United Breaks Guitars.” This became a viral video, spawning two sequels and spurring United to update its customer service training and its social media outreach policy. While they eventually compensated him $3,000 for the guitars, the PR damage had already been done.

Above and Beyond

They seemed to have learned from this.

In 2013, United was again in the news — this time for their excellent customer service.

Passenger Kerry Drake was on his way to Lubbock, Texas from San Francisco when he found his flight in Houston would be delayed. He had a 40-minute connection to the last flight of the day.

When he heard of the delay, he broke down in tears.

When flight attendants saw him crying, they brought him napkins. They asked him what was wrong only to find that his mother was on her deathbed and would likely die that night. If he didn’t make it to Texas, he’d never see her again.

The crew radioed ahead to his next flight to keep it grounded until they landed, delaying it so he could make his connection. This delay cost the airline thousands of dollars and put the airline’s on-time departure record at risk — but they felt it was the right thing to do.

He made it to the hospital that evening to say goodbye, and she passed away at 4 a.m.

The Unfriendly Skies

Fast forward four years to 2017, and the focus is once again on United. First, an incident where the airline denied boarding to three passengers over their inappropriate dress. This could have been handled better by the gate agent before it took to the internet, but their explanations were curt and misleading. By allowing the court of public opinion to go unchecked before resolving the situation, the tide quickly turned against them.

Second, a situation involving an involuntary denied boarding (IDB) spiraled out of hand when gruesome footage of a passenger being beaten and bloodied reached the internet.

From all reports, United did not clearly explain the IDB rules to the passengers on the aircraft (and in my time as an airline employee, I cannot recall anyone doing so). In the aftermath, United’s Social Media team offered the contract of carriage as proof of their permission to remove a passenger, however it took multiple tries to extract an apology from the CEO. In the time it took him to do so, their stock plummeted $1.4B USD.

This begs the question – is there something fundamentally wrong with United Airlines culture, or has this all merely been a communication problem?

When you look closely at the incidents, Mr. Carroll’s guitars were broken by employees who clearly showed a lack of care. A few years later, the United employees went above and beyond to show how much they care. The more recent incidents with United employees speak more to poor communication – the physical violence was not performed by a United employee, so it is possible that miscommunication allowed it to happen.

Coming In for a Landing

The thing about history is, those who do not learn from it are doomed to repeat it. So, what can we learn from United Airlines’ PR woes that can help us avoid their fate?

1. Say Something

Silence on the internet just begs for someone else to fill it. Get as far ahead of things as you can by acknowledging that you’re at least aware of whatever it is that people are chattering about — even if you have no information yet. This will help to stem the tide of the “@company – did you know that this is going on?” messages.

2. Take It To the Source

Wherever people are the most actively conversing about you, that’s where you need to be responding. If you’re trending on Twitter, you need to respond there. If people are on your Facebook page, answer them with Facebook Live. Be prepared for outbreaks on Reddit, Snapchat, Pinterest, even 4chan – they can and do happen.

3. Apologize – And Mean It

It should go without saying that if you’ve messed up in the public eye, you should ask for forgiveness. If you’re not sincere, people will see through the apology, and it will be even worse for you in the long run.

4. Be Tactful

Some things are simply better handled out of the court of public opinion. Getting things offline as quickly as possible can help you remove mob mentality and allow you to reasonably settle disputes.

5. Learn From It

After the PR dies down, document everything and perform a post mortem. Analyze the behavior to see what happened, what you did well, what you could have done better, and what you should not have done at all.

In the case of United, it’s obvious that they have some work to do to in both their social media response protocol and their overall communication team. However, with a culture that empowered their employees to work together in Kerry Drake’s case, I believe they’ll be able to find a way to come back from this.


From Kathryns Report

SÃO PAULO— Azul Linhas Aéreas Brasileiras SA, Brazil’s third-largest airline by passengers, said it raised $571.2 million in an initial public share offering Monday in Brazil and in the U.S., and will begin trading Tuesday morning.

Azul sold 85.4 million preferred shares for 21 reais each and ADSs for $20.06. Shares will trade on Brazil’s B3 stock exchange, until recently known as the BM&FBovespa, and on the New York Stock Exchange.

The budget airline was quickly able to reverse the sale’s suspension last Thursday by Brazil’s financial market regulator, just as banks leading the IPO were setting the price for the shares.

The market regulator, known as CVM, cited an irregular release of information related to the offering as the reason for the suspension, and asked for a correction for those problems. The CVM didn’t provide details on the released information.

Azul said on its investors relations site Friday that it took the requested measures to proceed with the equity sale, without giving specific details.

The airline, which saw three previous efforts to sell shares to the public sink due to economic and political problems in Brazil, said in regulatory filings that had  it expected to sell as many as 72 million preferred shares, for up to 23 reais ($7.32) each in Brazil and  as much $21.81 a unit in the U.S.

Founded in 2008 by businessman David Neeleman —who also created U.S. discount carrier JetBlue Airways Corp. —Azul said in the documents that it plans to use the net proceeds of the sale to repay indebtedness of approximately 315 million reais and the rest for general corporate purposes.

The company has applied for the shares to trade on the B3 stock exchange in Brazil, which recently changed its name from BM&FBovespa, under the symbol “AZUL4,” and on the New York Stock Exchange under the symbol “AZUL.”

Ralph Laurewn

From Forbes

Ralph Lauren Corporation announced Tuesday it would close its four-story Polo flagship on Manhattan’s Fifth Avenue (off 55th Street), another watershed moment for the struggling 70-year-old retailer as it looks for cost savings across the company.

The company also announced it would switch its e-commerce operations to Salesforce’s Commerce Cloud from its Demandware Platform. Combined, both moves are expected to create about $140 million in annual savings, according to a release.

The decisions come as part of a restructuring plan laid out by former CEO Stefan Larsson, who resigned in February after less than two years at Ralph Lauren. The new strategy will save the company money and allow it to develop new retail concepts and also design a new store layout. The company pointed to its Ralph’s Coffee shop, currently located at the Polo flagship set to close, as one retail concept which could expand in the future.

The company’s eponymous founder Ralph Lauren started out as a tie-maker, sewing his products out of a tiny office at the Empire State building. He became one of the country’s most successful and revered entrepreneurs, worth $8 billion at his peak in 2014. The billionaire, who stepped down as CEO in 2015 and still serves as executive chairman, is worth an estimated $5.5 billion. His publicly traded company’s stock was down nearly 4% as of Tuesday morning. In the past three months, the stock has fallen more than 13% overall.

Ralph Lauren has seven other standalone retail stores and its Polo Bar Restaurant in New York City, which will continue to operate, and it will continue to sell its brand in department stores around the country. Chief Financial Officer Jane Nielsen said in the release, “We continue to review our store footprint in each market to ensure we have the right distribution and customer experience in place. The decision will optimize our store portfolio in the New York area and allow us to focus on opportunities to pilot new and innovative customer experiences.”


From Linkedin

By Michael L. Moskowitz and Melissa A. Guseynov

On March 22, 2017, the United States Supreme Court held that bankruptcy courts lack the power to dismiss chapter 11 cases by structured dismissal if they provide for distributions that do not adhere to the Bankruptcy Code’s priority rules without the consent of the affected creditors. Czyzewski et al. v. Jevic Holding Corp. et al. (Case No. 15-649) (Sup. Ct.).

The facts are straightforward. Jevic Holding Corp. (“Jevic”) filed a chapter 11 bankruptcy petition in May 2008 in the United States Bankruptcy Court for the District of Delaware after being purchased in a leveraged buyout. Jevic’s bankruptcy prompted two lawsuits. A group of former truck-drivers (“Claimants”) obtained a judgment against Jevic for its failure to provide proper termination notices in violation of state and federal laws. Part of their judgment counted as a priority wage claim under section 507(a)(4) of the Bankruptcy Code, entitling Claimants to payment before Jevic’s general unsecured creditors.

In the second lawsuit, a committee representing Jevic’s unsecured creditors sued certain secured creditors for fraudulent conveyances in connection with the leveraged buyout. The parties ultimately reached a settlement whereby the secured creditors would set aside some money for distribution to unsecured creditors following a structured dismissal. Structured dismissals, typically agreed to after a Bankruptcy Code Section 363 sale is completed, occur when said sale fails to generate enough cash to pay priority claims in full and/or permit confirmation of a plan. In this case, the distribution under the structured dismissal did not include payment to Claimants, who were entitled to be paid before general unsecured creditors. Over Claimants’ objection, the Bankruptcy Court’s approval of the settlement was upheld in the District Court and Third Circuit Court of Appeals. The Supreme Court granted certiorari to decide the issue which has become of paramount importance to debtors and creditors alike since the bankruptcy landscape changed in October 2005. Since the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act became law in 2005, traditional reorganizations have become rare, with most chapter 11 cases ending with an asset sale under section 363, followed by a structured dismissal.

Justice Breyer, writing for the six-Justice majority, held that a bankruptcy court does not have the power to diverge from the basic priority rules set forth in the Bankruptcy Code. After reviewing the definition of structured dismissals, Justice Breyer observed they have become an “increasingly common” practice. Justice Breyer went on to further explain how the Bankruptcy Code’s priority system has “long been considered fundamental” to the successful operation of the bankruptcy system. He further noted the Bankruptcy Code doesn’t set forth specific priority rules for chapter 11 dismissals, stating the dismissal sections of the Bankruptcy Code seek to reinstate the status quo rather than distribute estate assets.

The Court clarified that the distributions at issue were similar to transactions that lower courts have rejected because they attempt to thwart the Bankruptcy Code’s “procedural safeguards.” Furthermore, distributions in a structured dismissal that violate the priority rules do not preserve the debtor as a going concern or enhance the chances for a successful reorganization. As a result, the Court held structured dismissals that violate the priority rules cannot be approved without the consent of the affected parties.

The Court also explored and rebuffed the Third Circuit’s finding that structured settlements are permissible in “rare cases” in which courts can find “sufficient reasons” to disregard established priority rules. Justice Breyer reasoned that allowing the “rare case” exception could have potentially serious consequences, including shifts in bargaining power of the various classes of creditors, risks of collusion among certain creditors as well as rendering settlements more difficult to achieve. Accordingly, the Court rejected this “departure from the protections Congress granted particular classes of creditors.”

Notably, Justice Breyer was cautious in narrowing the opinion so as not to prohibit certain common “first day” orders in chapter 11 cases, such as payment of pre-petition wages, payment of critical vendors and “roll ups,” which permit lenders who continue financing a debtor to be paid first on their pre-petition claims, clarifying that such practices have significant offsetting bankruptcy-related justifications.

Justices Thomas and Alito dissented, blaming the Claimants for reframing their arguments after the court decided to hear the case. More specifically, Justice Thomas explained that the Supreme Court granted certiorari to determine whether a bankruptcy court has the power to approve a distribution of settlement proceeds in a way that violates the Bankruptcy Code’s statutory priority rules. However, after certiorari was granted, Claimants changed the issue presented to whether a chapter 11 case may be terminated by structured dismissal if it distributes assets in violation of the Bankruptcy Code’s priority rules. As a result of this alteration, Justice Thomas concluded he would “dismiss the writ of certiorari as improvidently granted.”

The Jevic decision makes clear that priority-violating structured dismissals are no longer permitted. However, Jevic may have a far-reaching impact on certain related issues, including the feasibility of “gifting” chapter 11 plans, where creditors give part of their distribution to junior creditors while skipping over a class of creditors. Weltman & Moskowitz, LLP will monitor Jevic-related decisions and continue to keep our clients and colleagues informed of the impact to both debtors and creditors. If you, a colleague, or client have specific questions on this or any other bankruptcy related topic, please call Weltman & Moskowitz, LLP.

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About Weltman & Moskowitz, LLP, A New York and New Jersey Business, Bankruptcy, and Creditors’ Rights Law Firm:

USA,  Washington D.C., US Capitol Building

From Us Courts

Warning that federal bankruptcy courts face a “debilitating workload crisis” in Delaware and eight other districts, the U.S. Judicial Conference has urged Congress to authorize four new bankruptcy judgeships and convert 14 temporary judgeships into permanent positions.

The April 3 letter to Congressional leaders said that all 14 temporary judgeships are scheduled to lapse May 25, posing a particularly heavy impact on Delaware’s federal bankruptcy court.

“These bankruptcy courts would face a serious and, in many cases, debilitating workload crisis if these temporary judgeships were to expire,” wrote James C. Duff, as secretary of the Judicial Conference. “The U.S. Bankruptcy Court for the District of Delaware, for example, would be crippled as five of their six authorized judgeships are temporary, all with the risk of expiring in 2017.”

Other affected court districts are the Middle and Southern Districts of Florida, the Eastern District of North Carolina, the Eastern District of Virginia, and the Districts of Maryland, Michigan, Nevada and Puerto Rico.

Nationally, federal court bankruptcies have declined in recent years, but the letter noted that the affected districts have, since 2005, seen a 55 percent increase in weighted case filings, a measurement that takes into account the complexity of cases.

The recommendation of the Judicial Conference was delivered to House and Senate leadership, House and Senate Judiciary Committee chairs and ranking members, as well as to the chair and ranking member of the relevant subcommittees.

The Judicial Conference is the policy-making body for the federal court system.  It is composed of 26 judges from around the country, and the Chief Justice of the United States is the body’s presiding officer.


5 ways

From Forbes

Most business owners want to sell their company for the highest possible price — so it can be a shock to find out that their business isn’t worth as much as they think.

Often, it’s similar to selling a house — homeowners sometimes believe their abode will go for more than it does. Why? Because they are emotionally invested in their asset.

“Business owners take a lot of pride in what they’ve created, so it’s hard to ascribe market value to a lifelong project,” said Scott Cathcart, corporate finance lead for SunTrust specializing in middle market companies.

Although some business owners will accept a lower valuation, others prefer to make their company more attractive to buyers and therefore boost the sales price. 

Here are five ways to increase your businesses valuation:

  1. Diversify Your Revenues

Buyers want to see growing revenues, but they’re not just looking for a total dollar amount — they also want to see that revenues are expanding and sustaining a higher level. That’s why it’s important to diversify your revenue. The more ways you can earn money, the better — whether that’s by focusing on new customer groups or adding products.

“You want to minimize customer concentration,” Cathcart said. “Sell your product to a broader number of buyers.”

But how can you uncover a potential new audience or decide what products to launch? Meet with your customers to gain better insights into what they want, said Will Mitchell, a professor of strategic management at the Rotman School of Management. “Companies that have deep understanding of their customers, and what they’re willing to pay for, will be able to create new opportunities,” he said.

  1. Improve Your Margins

Gross margins — the difference between revenues and costs — provide an important metric when valuing a business. The bigger the gap between the sales price and the cost to make the product, the better, Cathcart said. Typically, businesses improve margins by running more efficient operations. That might involve reducing overhead, cutting unnecessary staff or investing in processes that make the company run faster.

“You want to do more with less,” Cathcart said.

Companies will also want to chart better margins over several years — it can’t just be a one-time tactic to make the business more attractive in the short term. Owners must properly manage their expenses consistently and plan for future expenditures. “Know what purchases you’ll have to make, or what improvements to your infrastructure you’ll need to do,” Cathcart said. “Having good visibility on what that looks like impacts what the valuation will be.”

  1. Improve Your Executive Team

Buyers look for a winning executive team. Even though you may be a star, you also need to have top-notch people around you. They will be key to business success after the sale.

If the team isn’t strong enough, a buyer may have to find other people to run the business. “That could create a discount to that business if there’s not someone there to immediately run it,” Cathcart said.

  1. Set Yourself Apart

You have to aim higher than your competition does. What can you do differently? Whether it’s beating their margins or generating faster growth, you will need to do your homework to stand out from your rivals, according to Mitchell.

Market research is an important part of this process. Find out as much as you can about your competitors, as well as your industry as a whole. “Look at other businesses, but also suppliers, distributors, complementary firms — what gaps do they have in their service?” Mitchell said. Then make investments to fill those gaps for potential buyers.

  1. Plan For The Long Term

Companies are more willing to pay a higher premium if there’s a clear road map to achieving higher returns down the line, according to Cathcart. Sellers need to clearly understand what bidders expect from the sale and deploy the right strategy to help achieve the buyer’s goals.

“Some buyers might expect a certain return over five years,” Cathcart said. “If you don’t have a road map to that return, then you’re not going to get paid a whole lot for your business.”

You will need to provide high-quality, substantiated, quantitative and qualitative financial forecasting that can indicate future results.

If the math doesn’t add up? Keep improving the business. “It’s like exercising — you can run a six-minute mile or a seven-minute mile,” Cathcart said. “If you want to do better, you’ve got to tighten up, time yourself lap by lap and introduce measurable metrics.”

Ultimately, if you can improve your business to a point where a buyer can see the potential for sustained growth, you’re likely to command the price you want.

“You can work more on the business,” Cathcart said. “But then you have to deliver.”