Daily Archives: May 18, 2017

Here's an idea of the out-of-control big-government policies that have brought about financial ruin in Puerto Rico: Public employees get 30 vacation days a year, the minimum wage is 77% of the median wage, and bondholders suffer for the benefit of big labor. Puerto Rico's Democratic delegate Pedro Pierluisi admitted to Congress that, "Part of this overspending is definitely the result of mismanagement. I admit it. And it's embarrassing." Keep in mind, Puerto Rico is a US territory, and if this debt-fueled nightmare can happen there, it can happen in any state across the country.

Ultimately, the commonwealth needs economic growth. However, to have access to the credit it needs to rebuild, Puerto Rico needs a comprehensive, common sense, and transparent restructuring and repayment plan that is best achieved through negotiations with creditors. Title III proceedings could last for years and will delay any chance at economic recovery Puerto Rico can have. The best outcome is a court-driven restructuring process to protect creditors' rights and maintain essential services for residents.

Rosello found himself not only facing economic collapse, but also facing lawsuits from creditors. Instead of taking responsibility and finding a viable solution to pay off the debt, the governor sought Title III bankruptcy protection.

What happened in Puerto Rico is what happens when leaders make and defend poor policy decisions for decades; eventually you have to pay the tab for unchecked borrowing and spending. In addition, the bloated government workforce has been a disaster for the economy of Puerto Rico and investors are left holding the bag.

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The biggest lesson of Puerto Rico's bankruptcy - CNN

SAN FRANCISCO A South Bay entrepreneur was sentenced Wednesday to more than 4 years in prison after pleading guilty to concealing a bank account during a 2010 bankruptcy proceeding, authorities said.

In 2010, the 68-year-old Morgan Hill resident sought relief for $1.5 million in debts through U.S. Bankruptcy Court.

However, prosecutors said McVay knowingly signed documents concealing two bank accounts, including one in his wifes name but under his exclusive control, totaling more than $45,000.

A federal grand jury indicted McVay in April 2016 and charged him with two counts of concealing assets in bankruptcy and one count of presenting false testimony in bankruptcy proceedings.

In exchange for him pleading guilty to the first count of concealment, the rest of the charges were dismissed.

U.S. District Judge Lucy H. Koh sentenced McVay to 56 months in prison and three years of supervised release. A restitution hearing also was set for June 14. He is scheduled to begin serving his sentence June 28.

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South Bay man sentenced to 56 months for bankruptcy fraud - The Mercury News

On Tuesday,GulfMark Offshore Inc. announced that it had signed an agreementon a financial restructuring that will be implemented through a voluntary Chapter 11 bankruptcy filing.

The Houston-based offshore service vessel operator said the restructuring will strengthen the companys competitive and financial position. Holders of approximately 47% of GulfMarks unsecured 6.375% senior notes due 2022 have signed a restructuring support agreement (RSA).

Under the terms of the RSA, GulfMark will convert its outstanding senior notes to 35.65% of the equity in a reorganized GulfMark, resulting in the elimination of approximately $430 million in outstanding debt and approximately $27 million in annual interest payments. The company will also launch a $125 million rights offering to holders of its senior notes for an additional 60% of the equity in a reorganized GulfMark, providing liquidity to fund its operations. The $125 million rights offering will be backstopped by certain holders of the senior notes. Existing shareholders will receive 0.75% of the equity as well as warrants for an additional 7.5% of the equity in the reorganized GulfMark. The warrants will have a seven-year term and an exercise price based on a reorganized overall equity value of $1 billion.

The restructuring will be implemented through thebankruptcy filing on or before May 21, 2017. GulfMarkwill continue its operations throughout the process. The company has entered into a commitment letter, subject to certain conditions including execution of definitive documentation, for financing to support its operations during the process.

The restructuring will enhance our competitive position when contracting with customers and vendors, and it will substantially strengthen our capital structure and liquidity, Quintin Kneen, president and CEO, said in a statement.While the industry conditions remain challenging, this debt reduction and rights offering will significantly enhance GulfMarks financial position.

Kneen stated that therestructuring enables the company to continue to meet its ongoing obligations to all customers, employees, and vendors. We are confident that this step will position GulfMark to seize opportunities as the downturn continues and in the eventual market recovery, he said.

GulfMark has retained Weil, Gotshal & Manges LLP as legal counsel and Alvarez & Marsal North America LLC and Evercore Group LLC as financial advisors.

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GulfMark Offshore to file for bankruptcy - WorkBoat (blog)

Last Tuesday, the Mayor of Hartford, Conn., Luke Bronin, announced that he has had initial conversations with attorneys who specialize in Chapter 9, municipal bankruptcy. The move was a surprise to the municipal bond market as well as other members of the Hartford city board who were unaware of the mayor's intentions, and many called the move premature.

For quite some time, it has been publicly known that Hartford is facing financial troubles. In October 2016, Moody's downgraded Hartford's general obligation debt to Ba2 in citing the city's inability to run a balanced budget, tax increase constraints as well as limited likelihood that the state of Connecticut will step in to assist them, given the state's in fiscal straits. In fiscal year 2017, they are facing a $14 million deficit and expect to face an even greater $65 million deficit in fiscal year 2018. With all this news, and in an effort to be transparent, as recently as April of this year the mayor has said that bankruptcy was not off the table.

Transparency was not the mayor's misstep. The wrong move he made was jumping to a last resort while skipping other meaningful steps along the way. In these seemingly bankruptcy-happy times that we are living in, Hartford appears to have jumped the gun. Bankruptcy should be the final play for a struggling municipality after all other options have been exhausted. This was something that the Mayor of Hartford understood back in June 2016 when he said bankruptcy was on the bottom of a list of solutions the city is pursuing. As other Hartford council members have expressed, Hartford has not exhausted all of the options - they have not even attempted to implement all of their available options. So by doing what the Mayor believes is prudent, the city has essentially poisoned their own well.

Bankruptcy is a very drastic measure that cannot and should not be entered into easily. In the state of Connecticut, if a city wishes to file for Chapter 9, they must first prove to the state that they are truly insolvent. This is something that Bridgeport, Conn., was unable to do when they sought protection in 1991. Since there are many steps between now and a potential use of bankruptcy protection, the mayor has created many problems for the city by having initial conversations with council at such an early stage in their predicament. The effects will ripple across the Hartford economy in ways many people wouldn't realize.

The cloud of bankruptcy casts such negative publicity that people will immediately associate the city with notable distressed municipalities such as Detroit and Atlantic City. Readers should note that Detroit filed for Chapter 9 bankruptcy in 2013, while Atlantic City was taken over by the State of New Jersey. This, in turn, discourages development and further investment in a city until it can be proven that meaningful corrections have been made.

Another, less publicized effect is the increase in borrowing cost. Borrowing costs are defined by Business Dictionary as "the total charge for taking on a debt obligation." When a city borrows public funds for an infrastructure project or to build a school, there is a borrowing cost associated with those funds in terms of an interest rate paid to borrow the money. Simply mentioning bankruptcy seriously affects a city's borrowing costs, and we can use Hartford as a real-time example of how this works.

On Monday, May 8, Hartford general obligation bonds with an approximate maturity of 15 years out were changing hands at well below a 5% yield. What that translates to is that the city could borrow pubic money at below 5%. The very next day, after the mayor said he had initial conversations with bankruptcy specialists, Hartford G.O. bonds were trading at a yield around 7%. Checking the market trades on EMMA shows the dramatic move.

So, what does that mean? The yield level that Hartford's outstanding debt trades at in the secondary market reflects where they would/should be able to borrow more money at that time.

You see, by mentioning Chapter 9 in such a serious way, Hartford's cost of capital went up 40%. By jumping to bankruptcy prematurely, the mayor could cost the people of Hartford a lot of money, should they need to borrow money in the near term. Bondholders have already suffered a price decrease in their bond holdings, and if a bankruptcy is announced, it would be quite likely that the bonds' value could suffer further.

Maybe Hartford and Connecticut will work out of this problem. Maybe they will not and seeking bankruptcy will be their only option - only time will tell. One thing is for certain: By bringing up bankruptcy before it is absolutely necessary, Hartford has dramatically increased their borrowing costs, and it will take a long time to build back the public trust necessary to lower those costs again.

Disclaimer: NatAlliance Securities LLC may hold a position in Hartford Connecticut GO bonds, and in the future may be a buyer or a seller of the securities. This is not a recommendation to buy, sell, or hold the securities. Las Olas Wealth Management is a wealth management group within NatAlliance Securities LLC.

Disclosure: I am/we are long HARTFORD, CT, BONDS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Bankruptcy Should Be A Last Resort For Struggling Hartford, Conn ... - Seeking Alpha

This year, Frontier Communications (FTR) stock has lost 62% of its value. The decline is attributed to the companys huge debt, its acquisition of the CTF assets from Verizon (VZ), its dividend issues, and growth prospects in its operating segments.

In the past two months, I have written about the company and its need to cut or eliminate its dividend. Early this month, the company announced a 62% dividend cut that will see it save $300 million this year and $400 million in 2018.

In this article, I will explain the reasons I believe that Frontier will declare bankruptcy in either 2020 or 2021.

In the past five years, Frontier invested $24.2 billion in capital expenditure. The company used this money for acquisitions and infrastructure upgrade. In 2014, it paid $2.2 billion for wireline assets from AT&T (T). The following year, it spent $11 billion to acquire Verizons (VZ) operations in California, Florida, and Texas (CTF).

In that period, it issued debts of about $12.5 billion. This money was used to pay existing debts, pay dividends, and fund the acquisitions. Unfortunately, these acquisitions are not working. In some cases, it has lost customers as a result of the acquisitions.

In total, Frontier has more than $17.5 billion in debt and $371 million in cash at hand. As I will explain below, the company will not be able to honor its covenants past 2020.

To better explain this, I will first look at how the company makes money. Its source of income are data and internet services, voice, and video services. In voice, the company provides data-based VoIP, long distance and voice messaging services, to residential and business customers. This segment has been declining as more people and businesses turned to wireless communications. In the video segment, the company provides television services through its Vantage brand and its partnership with DISH (DISH). This segment has also been declining as more people move to newer forms of watching TV. In the past two decades, the data and internet services segment has grown as more people started using the internet. However, this segment will not provide much growth in future since most people and businesses are already connected to the internet.

Back to the debt. The companys long-term debt maturities are shown in the chart below.

Source: FTR

In 2018 and 2019, the company will be required to pay more than $1.5 billion. The company can comfortably pay this amount as the management said in the recent earnings call:

We have relatively low debt maturities over the next two years, with $733 million due 2018, the majority of which is in Q4 2018 and $818 million due 2019. We intend to issue secured debt in the second quarter of 2017, subject to market conditions, and we will use the proceeds, existing liquidity, ongoing cash flow from operations, and the increased cash on hand from the reduction of the dividend to accelerate deleveraging, reduce interest expense, and increase free cash flow.

The company will hit a wall in 2020 when it will be expected to pay $2.4 billion. In 2021 and 2022, it will be required to pay $2.5 billion and $2.6 billion respectively. The figures are much higher when you include the interest and other obligations which are shown below.

Source: FTR 10-K

In 2016, the company had revenues of $8.86 billion and a net loss of $262 million. This means that even if it manages to increase its revenues and reducing its expenses, it will not have enough runway to generate cash to service the debt past 2020.

At that time, it will either issue debt or sell assets. The first option will be difficult because of its current debt and the weakness of its operating segments. In November last year, Moodys downgraded FTR to B1 rating. In March, it reaffirmed this rating. This means that it will be difficult for FTR to raise more debt. Asset sales will not be a viable option either. In 2020, it will be difficult for the company to sell its wireline business which will be obsolete within a short period.

Early this month, the company announced that it would reduce its dividend. This is an action I have called for in my past articles. The company expects to save about $1.5 billion. However, this action will not be enough in the long-term.

Bottom-line

Frontier operates in an industry that is changing very fast. Its video services are being disrupted by streaming services offered by Netflix, Hulu, and YouTube. Its voice services have been overtaken by wireless mediums while its data and internet services have limited room for growth. The company can afford to pay its near-term debt maturities. However, in 2020, 2021, and 2022, the company will be required to pay more than $7.5 billion an amount it might not manage to raise. At that time, I believe the company might be forced to file for bankruptcy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Frontier Communications: Bankruptcy Looms In 2020 - Seeking Alpha

Charlotte Observer

N.C. questions Duke Energy's plans following Westinghouse bankruptcy Charlotte Observer Add Duke Energy Corp. to the list of U.S. utility owners affected by the bankruptcy of nuclear contractor Westinghouse Electric Co. The North Carolina Utilities Commission ordered Charlotte-based Duke this week to report on the financial status of ... Westinghouse inches closer to rejecting construction contracts in ...Pittsburgh Post-Gazette all 15 news articles »

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N.C. questions Duke Energy's plans following Westinghouse bankruptcy - Charlotte Observer