The Jack and Rick Show:  Point and Counterpoint

I’m a great admirer of Jack Cohen and his periodic market commentary.  I answered his last one and then after the two of us talked, we decided we’d publish them together as a duet.  So here you go.

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Beany & CECL

Beany & Cecil was a cartoon.  The Current Expected Credit Loss accounting rules, better known as CECL, which the FASB is insisting will go into effect at the beginning of next year for publicly traded banks and lenders and a year later for all other GAAP reporting entities is not.  Now, heaven forfend that I suggest that the work of the Financial Accounting Standards Board is cartoonish, but there’s a parallel in this pairing of harmless and obscured menace worth noting.  Continue Reading

A Survival Guide for Winning Default Rate Interest in Courtroom Battles

Last year, a California Bankruptcy Court wiped out $10.2 million in default interest (“DRI”) when it ruled that a 5% DRI was an unenforceable penalty in a Chapter 11 bankruptcy case where the construction lender fully recovered principal, interest, and other costs of collection. In acting as the borrower’s fairy godmother, the Court noted that the 5% DRI, an industry standard for construction loans, was unreasonable because it was not negotiated in detail at origination and because it did not adequately forecast the lender’s anticipated costs and damages. So much for considering prevailing practices when gauging reasonableness! The court’s decision also hinged on the fact that the lender was able to collect exit fees, late fees, and loan extension fees while the loan was in forbearance. In the court’s opinion, such fees already compensated the lender for the costs associated with the default.  Now that’s novel!  We sort of thought that lenders collected exit fees, late fees and loan extension fees in consideration of other things the lender did or forbore from doing.  Silly us.

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Pending Sub-Prime Lawsuit Questions Securitization’s “Debt” Classification for ERISA Purposes

A new OnPoint from Dechert’s Employee Benefits and Executive Compensation team discusses a recent ruling from a federal court in the Southern District of New York. There, a pension plan that had acquired notes issued by a vehicle invested in a pool of sub-prime residential mortgage-backed securities is arguing that the vehicle’s assets are “plan assets” that are subject to ERISA. Essentially, the plan’s argument is that the notes should be considered equity for ERISA purposes under ERISA’s so-called 25% test, notwithstanding that the notes were the subject of a “will” level legal opinion that the notes are debt for tax purposes. The plan further asserts, among other things, that the vehicle’s servicers are therefore ERISA fiduciaries with potential ERISA liability. On March 15, the court, although expressing skepticism regarding the plan’s claim, allowed the litigation to proceed to the discovery stage. We will be keeping an eye on this case, and please come back to Crunched Credit if and as the case develops. For more information on this topic or other ERISA matters, contact Andrew L. Oringer or Steven W. Rabitz.

Commercial Real Estate and Climate Change

God help me, I’m finally writing about climate change.  This commentary assiduously avoids the obviously political (we take the view that complaining about and belittling our elected representatives and the permanent bureaucracy for doing boneheaded things is entirely apolitical).  And while even the phrase “climate change” carries with it a certain frisson of a capital “P” political debate, this is not that.  So, please, don’t ball this missive up, toss it away and cancel your subscription to Crunched Credit if you’re (A) not a fully-enrolled initiate in the Green Revolution, or indeed, even, if you are someone who thinks that the threat of climate change is somewhat… overblown (I’m not even going to think about using the term “climate denier”) or (B) someone who thinks climate change is real but simply throws your arms up in frustration over the possibility of finding a possibly affordable fix.

In either of those cases, I expect your default response to climate change talk is simply to move on to something more actionable in your professional life and I’m going to suggest here why you shouldn’t do that.  We need to start paying more attention than I have paid to date.

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Dechert OnPoint: Japanese Risk Retention: JFSA Favors Diligence Over Disruption

On March 15, the day the Japanese Financial Services Agency (the “JFSA”) published its final risk retention rules, Dechert’s CLO team published an OnPoint discussing the new final Japanese risk retention rules and their impact on the CLO market. 

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LIBOR, Again (Sorry!)

We are all going to be heartedly sick of discussing LIBOR and LIBOR transition long before it becomes a thing at the end of 2021, but we really need to get this done. I can’t make this at all funny. We have a problem…but not a solution. Fixing it is going to be a heavy lift. Like a colonoscopy, demonstrably necessary, but in no way fun. (Actually, I really should say, that my doctor is a lovely person, but one simply can’t make wonderful really matter when discussing all things proctologic.)

Okay, we are indeed doing stuff. I appreciate and certainly don’t want to diminish the efforts of our trade organizations, major banking institutions or the Alternate Reference Rate Committee of the Fed (ARRC), but I fear we are not doing enough and not doing it quickly enough. Even as one who got a merit badge during an undistinguished boy scout career for procrastination (I never got around to picking it up), I know that to elide this from the immediate to do list, hoping someone rides in on a white horse to make all this better, is really a bad idea.

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SFIG Vegas 2019

As we return to our desks after last week’s whirlwind in Las Vegas for the Structured Finance Industry Group (SFIG) Conference, we find ourselves reflecting on how this conference was at once business as usual while also showing evidence of an evolving industry looking to the future. Approximately 8,050 attendees, including a sizable Dechert team, gathered last week at the Aria to discuss past, present and future and to put our heads together to ask “where do we go from here?” Continue Reading

Sticks and Stones May Break My Bones, But Words Really Matter

After an evening checking out my various high school and college yearbooks for any troublesome content, and checking Mom’s photo albums (I’m good on the yearbooks, but there were a couple cowboy and Indian pics from when I was about 7, that could be troublesome), it got me thinking hard about the power of words, images and narratives. Words will hurt you. Images will hurt you. Narratives will hurt you.

Our industry has to pay attention to the power of words, images and narratives; and particularly right now as the 2020 election cycle gets into high gear.

High school tweets, Texas bar admission applications, and college papers apparently can now ruin careers. Now some may say that’s a good thing and some may say it’s terrible, but let’s face it, it is a thing. In this world of hyper-connectivity, words and images take flight instantaneously and can spread around the market, around a polity, a community or around the globe in a heartbeat. And they never go away. Moreover, there seems to be a view in currency that forgiveness is not possible and balance is no longer relevant and that people are defined by their worst. A sort of the lowest common denominator. Well, heaven forbid that I take sides here, but think, if you will, for a moment on Winston Churchill: Gallipoli, Edward VIII, resistance to Indian independence and certainly some racism towards the people of the Indian subcontinent, but still the savior of the West. Bad outcome? Could happen today? Continue Reading

Opportunity Zones: Monetary Musical Chairs, Anyone?

The new Opportunity Zones program that came to us in 2017’s major tax reform offers investors the chance to roll the capital gains from the sale of any appreciated property into new investments, located within specially designated areas known as Opportunity Zones, and defer—and potentially partially eliminate— capital gains taxes on such sale. The program is similar to a 1031 Exchange, but with a socially conscious geographic focus, that applies broadly to investments across asset classes – not just to real estate. The tax benefits of the program will begin stepping down for investments made after December 31, 2019, so the clock is ticking on the chance to pull capital out of appreciated assets and invest it in a Qualified Opportunity Fund (QOF). The time is now to start thinking about where all this capital will be sitting when the music stops.

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