bankruptcy


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Get ready to step over some landmines, investors. The number of companies defaulting on their debt is hitting levels not seen since the financial crisis, and it’s not just a problem for bondholders.

So far this year, 46 companies have defaulted on their debt, the highest level since 2009, according to S&P Ratings Services. Five companies defaulted this week, based on the latest data available from S&P Ratings Services. That includes New Jersey-based specialty chemical company Vertellus Specialties and Ohio-based iron ore producer Cliffs Natural. Of the world’s defaults this year, 37 are of companies based in the U.S.

Meanwhile, coal producer Peabody Energy (BTU) and surfwear seller Pacific Sunwear (PSUN) this week filed plans for bankruptcy protection. Shares of Peabody have dropped 97% over the past year to $2 a share and Pacific Sunwear stock is off 98% to 4 cents a share.

The implosion of oil prices is the top reason for the rise in defaults as it makes it harder for energy companies to repay debt. The Federal Reserve’s decision to hike short-term interest rates last year along with slowing global growth are also putting pressure on companies’ ability to service their debt.

Defaults are clearly an issue for bondholders, since these events mean they no longer receive payments on money lent to these companies. But the situations can be brutal for stock investors, too, as restructuring after a default can leave shares essentially worthless as the bondholders often become the new owners of the company. The rise of defaults hold several lessons for stock investors, including:

* Beware speculating on energy stocks. Brave investors have been trying to call a bottom in energy companies’ profits for several quarters now. But the sector’s pain continues as interest payments get all that more onerous given the massive drop in energy prices. Of the 46 global defaults this year, 13 are in the oil and gas sector, says Diane Vazza, head of global fixed income research at S&P Ratings Services. The surge in defaults is largely “fallout from multi-year lows in commodity prices,” she says. Energy profits keep falling. Energy sector profits are expected to drop another 107% in the first quarter of 2016 – even worse than the 55% drop in the first quarter of 2015, says S&P Global Market Intelligence.

* Cut losses. “It will come back” are famous last words for investors. When investing in individual stocks, especially some that could be even remotely flirting with default, it’s best to cut losses short. Investors in coal producer Peabody Energy defaulted on March 18, leading to the company to file for bankruptcy protection in April. Don’t think it’s just a problem for investors holding the company’s debt. Stock investors watched $1.3 billion in shareholder wealth burn up in just a year as the stock dropped from $73 a share to roughly $2 a share now. Had investors cut their losses at 10% of what they paid, they could have avoided this catastrophe.

* Mind companies on the bubble. Companies don’t usually just default without warning. Ratings agencies routinely rate companies’ credit worthiness and sound an alarm when the financials deteriorate. S&P Ratings keeps a list of the companies with the very lowest credit ratings at risk of a downgrade. The number of such “Weakest Links” jumped to 242 in March from 235 in February.

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Shares in Slater and Gordon, the law firm now talking with its banks about reorganising its debt, took another beating today.

At the close, they had lost more than 45% to $0.315. At that price, the market capitalisation is about $110 million, down about $90 million on yesterday’s close of 58 cents.

Last year the shares hit a high of $8.07, valuing the company at $2.8 billion, but have been on steep slide because of its underperforming business in the UK and the British’s government plans to limit compensation for road accidents.

Slater and Gordon on Monday marked down the value of that UK business and reported a $958.3 million loss for the six months to December.

The company is reorganising and cutting costs, meaning likely redundancies in the UK where it has 3950 of its 5350 staff.

The other priority is to bring down debt. Net debt was $741.4 million at the end of December, up 18.9% or $118 million since June.

The company has agreed to deliver an operating plan and restructure proposal to its banking syndicate and its financial advisers this month.

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Covers a number of issues and topics that we are currently studying.

A report by administrators FTI Consulting into the solvency of Clive Palmer’s Queensland Nickel refinery near Townsville has recommended the company be liquidated, ahead of a creditors meeting next Friday.

The creditors will meet on April 22 to decide whether to place the company into liquidation with debts in excess of $100 million, including more than $73 million owed to around 800 employees who lost their jobs last month.

The FTI report says the business does not have enough cash to pay the workers.

With unsecured creditors likely to receive no more than 50 cents in the dollar, responsibility for some of the unpaid redundancy entitlements of workers will fall to taxpayers under a federal government scheme.

The refinery’s owner, federal MP Clive Palmer, who is already being investigated by the Australian Securities and Investments Commission (ASIC) over his role in the business, which he bought in 2009.

Palmer said he “retired” from the business in 2013, when he entered federal politics, but last night the ABC’s “Four Corners” aired allegations that Palmer acted as a “shadow director”approving all expenditure at the refinery, using a pseudonymous email account under the name “Terry Smith”.

If Palmer is found to have acted in that capacity, he becomes legally liable in the same manner as an actual director.

Palmer has denied he approved spending at the refinery as a shadow director prior to it being placed in voluntary administration in January.

One the ABC’s “Lateline” program, shortly after the “Four Corners” story, Palmer attempted to explain that he was not responsible for the current state of Queensland Nickel, which during 2014-15, donated $5.9 million to the Palmer United Party.

Queensland Nickel donated another $288,516 to the PUP in the six months to December 2015.

Four weeks ago, Palmer created a joint venture using two of his companies to take control of Queensland Nickel while it was under administration. The refinery shut and workers lost their jobs just a few days later, contrary to claims by the MP that he had “saved” the refinery for a second time.

On “Lateline” he said any expenditure he oversaw was for the joint venture.

“My role was set out in the joint venture agreement as a member of the joint venture committee to direct Queensland Nickel to make sure they complied with the terms of the agreement as a manager,” he said.

The administrator’s report also identifies potential breaches of the Corporations Act by Palmer and his nephew, Queensland Nickel managing director Clive Mensink.

“Our investigations indicate certain persons appointed as a director, or who may have acted in the capacity of a director may have contravened [several sections of the Corporations Act] as well as their fiduciary and common law duties,” the report says.

“Our observations indicate Mr Palmer, a former director of the company, appears to have acted as a shadow/de facto director of QN at all material times from February 2012 up to the date of our appointment on 18 January 2016.”

The administrators have also honed in on payments made to Palmer-related entities, saying: “We have identified significant transactions in value and quantum entered into by QN that appear to be both uncommercial and director-related transactions. These transactions could be recovered in a liquidation scenario.”

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There are likely to be more banking issues through emerging markets, which will roil US financial markets, increasing volatility.

Some are calling for another crash, similar to 2008.

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Financial markets have been restructuring debt for many centuries, and they’ve gotten pretty good at it. From the discussion regarding T-bills, you’d think no one had ever heard of default-risk premiums before. (Interestingly, this seems to be a case of American exceptionalism: people aren’t particularly happy about Greek, Irish, and Portuguese defaults, but no one thinks the world will end because of them.)

A T-bill is a bond just like any other bond. Corporations, municipalities, and other issuers default on bonds all the time, and the results are hardly catastrophic.

While the first statement is true, it does not follow as a matter of logic that the second will also be true. The former were for a couple of billions of dollars. The US economy is $15 Trillion. A default of that size, while it may be absorbed in time [quite some time] the immediate effect however could be quite nasty for financial markets.

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President Barack Obama says he absolutely won’t forfeit anything in return for an increased borrowing limit. House Speaker John Boehner (R-Ohio) says he won’t permit an increased borrowing limit unless spending is sliced by the same amount. Republicans won’t raise taxes any further, even as the president insists that any package is divided equally between cuts and revenue. And congressional Democrats are still hoping Obama acts unilaterally to resolve the debt standoff

When all else fails, Washington opts for short-term fixes.
So it’s not surprising that Boehner’s chief of staff told a gathering last week at the Republican National Committee headquarters that Congress may end up raising the debt ceiling every month or every three months.
The idea is gaining ground among Republicans as a tactic to wear down Obama and force him to cut spending, repeatedly and deeply.

But Democrats won’t go for it, unless they are convinced Republicans are ready to throw the country into default. The West Wing truly believes that Boehner and Senate Minority Leader Mitch McConnell (R-Ky.) will never allow that to happen, so Republicans have no leverage, according to a source familiar with White House thinking.

If Congress doesn’t raise the debt ceiling, Obama would have to prioritize who gets paid first. The debt would jump ahead of other obligations, which is why some Republicans argue that the country wouldn’t technically go into default if borrowing authority isn’t extended.

Enough money would be left over to fund about 60 percent of the government’s functions. Social Security payments, military salaries and Medicare may continue while other services — tax refunds, air traffic control, road construction, federal courts, defense contracts — are suspended. There wouldn’t be enough money coming in each day to fund everything.
Republicans despondent over the $16 trillion debt say that isn’t a bad thing.

In private meetings and conversations over the past week, Republican leadership officials warned that the White House, much less the broader public, doesn’t understand how hard it will be to persuade conservatives to retreat. Many House Republicans believe it’s far riskier to pile up new debt than it is to risk default or shuttering the government.

So prepare yourself for more endless nonsense to come. The question is this: when it really boils down to it do the politicians really have the bollocks to cut funding to themselves?

The answer is of course…no.

They will ultimately see that a debt default, would ultimately curtail their power. As politicians only hold office for a period of time, the time that they can get voted in and re-elected, that is the time limit that they have to steal as much wealth from others [producers] for themselves [parasites] and they won’t allow the default.

Their shenanigans however promises increased volatility ahead, which ultimately is a profit opportunity for us in trading the market.

These two links both refer to looming financial stresses within the system. Both are “shadow” in that they are simply not in the forefront of people when they look for problems that can blow-up in their faces. Part of the problem of course is that they are not immediate, they are potential problems down the road, that, might [one hopes] never actually eventuate. Well, they will, at some point, that unfortunately is the dangerous truth.

Pensions.
China and their banking system

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