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McKinsey's Puerto Rico Ties; Russia Denies Default; Endo Urged to Shun Chapter 11
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Good day and welcome to WSJ Pro Bankruptcy's Daily Briefing. It's Tuesday, June 28. During McKinsey & Co.'s time as Puerto Rico's advisor, many of the consultant's clients won fat government contracts in the U.S. territory. Russia denied it has defaulted on foreign debt after missing payments, accusing Western sanctions. Junior bondholders at Endo International Plc plead the opioid maker not to file for bankruptcy, offering out-of-court alternatives to help the firm wade out dropping earnings and lawsuits.
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McKinsey has collected roughly $120 million for advising Puerto Rico’s financial-oversight board.
PHOTO: ARND WIEGMANN/REUTERS
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McKinsey clients won Puerto Rico contracts as firm advised government. McKinsey & Co. has been a top government consultant since 2016 in Puerto Rico, helping the U.S. territory’s financial overseers manage its spending. In that time, corporate clients of the consulting firm have won tens of billions of dollars of government business, new disclosures show.
Since McKinsey began its work for Puerto Rico’s financial-oversight board, the firm has helped the board review and evaluate contracts with companies that are also McKinsey’s consulting clients, according to disclosures it filed in federal court last month and other public documents. McKinsey clients include some of the largest fuel suppliers to Puerto Rico, an infrastructure company with a major role in operating the territory’s electrical grid and contractors that support its public-health system.
A McKinsey spokesman said that the firm served these clients on unrelated matters and that its work for them hasn’t conflicted with its work for the oversight board.
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Kremlin spokesman Dmitry Peskov in May.MAXIM SHIPENKOV/SHUTTERSTOCK
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Russia Denies Debt Default After Missed Payments. The Kremlin pushed back on claims that Russia defaulted on its foreign-currency debts on Monday, placing the country at odds with creditors.
Russia missed payments on two foreign-currency bonds as of late Sunday, the day that marked the expiration of a 30-day grace period, according to bondholders. The country was due to pay the equivalent of $100 million in dollars and euros.
Investors and lawyers say the country has defaulted because the funds didn’t reach bondholders. Russia is likely to argue that it fulfilled its obligations because it sent funds to clearinghouse Euroclear, though those weren’t forwarded on to investors because of sanctions, according to a bondholder.
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"Claims that Russia is in debt default are wrong."
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— Dmitry Peskov, a Presidential Spokesman of Russia
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The Endo creditors group said it has proposed several out-of-court transactions, including a bond swap.
PHOTO: KRISTOFFER TRIPPLAAR/SIPA PRESS/ASSOCIATED PRESS
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Endo bondholders press opioid maker not to file for bankruptcy. Endo International PLC junior bondholders have formed a group to press the drugmaker not to file for bankruptcy as it faces opioid-related lawsuits and a drop in earnings.
The group of institutional investors said on Monday that it has proposed several out-of-court transactions, including a bond swap, that would enable Endo to continue operating its business and investing in new drugs.
The bondholder group, which is advised by law firm White & Case LLP and financial adviser GLC Advisors & Co. LLC, said that “a near-term bankruptcy filing is unnecessary” due to the company’s strong liquidity and free cash flow generation.
As of March 31, Endo had cash on hand of more than $1.4 billion and $640 million of availability under its revolving credit line. There are no significant debt maturities until October 2024, the group said.
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Sears and Kmart stores have continued to close after financier Eddie Lampert acquired them out of bankruptcy in 2019.
PHOTO: MIKE SEGAR/REUTERS
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Supreme Court to review Mall of America’s challenge to Sears bankruptcy sale. The U.S. Supreme Court took up Mall of America’s attempt to take back a $10 annual lease for a now-vacant Sears department store, agreeing to weigh-in on a case that could make it easier for landlords or vendors to challenge the sale of bankrupt businesses.
The Bloomington, Minn., shopping and entertainment complex has been fighting with former Sears Holdings Corp. Chairman Eddie Lampert over the lease to a three-floor retail space he acquired when he bought the former retailer’s best assets out of chapter 11 in 2019.
The high court agreed Monday to review a bankruptcy-law provision that restricts creditors’ ability to appeal the transfer of contracts, such as retail leases, from a bankrupt company to a buyer.
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Toys ‘R’ Us racked up $600 million in bills for goods and services it ordered after filing for bankruptcy, the lawsuit says.
PHOTO: ANDREW HARRER/BLOOMBERG NEWS
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Former Toys ‘R’ Us directors to face bankruptcy trial over liquidation. A bankruptcy judge ordered former Toys “R” Us Inc. directors and officers to face trial on allegations stemming from an attempted chapter 11 restructuring that left suppliers with more than $600 million in unpaid bills.
Judge Keith Phillips with the U.S. Bankruptcy Court in Richmond, Va., declined to grant summary judgment before trial to former toy company executives in litigation alleging they misrepresented Toys “R” Us’s ability to cover the bills it was racking up while it tried to engineer a chapter 11 restructuring.
Toys “R” Us shut down its stores months into its chapter 11 case, but not before racking up $600 million in bills for goods and services it ordered after filing for bankruptcy, according to the complaint. The lawsuit, filed on behalf of creditors by a liquidating trust, argued that former executives induced vendors to continue to ship goods and provide services by concealing how badly the company’s finances had deteriorated.
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A worker at a Corsicana plant in Pinola, Ind.
PHOTO: AMANDA HAVERSTICK/ASSOCIATED PRESS
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Bedding manufacturer Corsicana preps sale to lenders in chapter 11. Corsicana Bedding LLC, one of the largest mattress manufacturers in the U.S., filed for bankruptcy on Saturday planning to sell itself to its top lenders as consumers spend less on its products.
The Dallas-based company, founded in 1971, determined it doesn’t have sufficient liquidity to make payments on $145 million in debt, according to court filings by its chief restructuring officer, Michael Juniper.
The company has proposed selling itself out of chapter 11 to Blue Torch Finance LLC, the administrative agent for term lenders owed $129.4 million, subject to higher and better bids. Blue Torch is also providing an $18 million debtor-in-possession loan to finance Corsicana’s stay in bankruptcy, court papers show.
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Media mogul Byron Allen strikes lead bid for Black News Channel. Media mogul and network executive Byron Allen has struck an $11M deal to acquire cable news network Black News Channel LLC out of bankruptcy, subject to higher offers at an upcoming auction.
Allen's Allen Media Group beat the owner of Ebony magazine which has also been vying to be the lead bidder for BNC, the network said in court papers filed Friday in the U.S. Bankruptcy Court in Tallahassee, Florida. Allen's bid will set the floor price for BNC at a proposed bankruptcy auction scheduled for July 7, court papers say. BNC said in a court filing that both Allen Media Group and Ebony Studios LLC "have been particularly active" during the sale process, the network said. – Jonathan Randles
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Gulf Coast Health Care chain gets bankruptcy liquidation plan approved. Bankrupt nursing home chain Gulf Coast Health Care LLC got a judge's approval for a chapter 11 liquidation that includes a settlement with tort plaintiffs who successfully fought an earlier plan.
In May the U.S. Bankruptcy Court in Wilmington, Del., said the Pensacola, Fla.-based company didn't meet its burden to sign away creditors' claims against third parties and couldn't justify those proposed liability releases. Earlier this month, Gulf Coast reached a proposed settlement with increased recoveries for unsecured creditors. Terms include insiders and affiliates that aren't part of the bankruptcy raising their cash contributions to $16.2 million from roughly $13.2 million. – Becky Yerak
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$145 million sale of Ector County power plant gets bankruptcy court approval. A judge approved a $144.75 million sale of a 330-megawatt power plant in western Texas owned by Invenergy's Ector County Energy Center LLC to private equity firm Rockland Capital LLC.
John Monaghan, an attorney for the bankrupt power plant owner, said in the U.S. Bankruptcy Court in Wilmington, Del., that last week's bankruptcy auction was competitive, with more than 190 rounds of bidding in the span of about three hours. Ultimately, Rockland Capital, which initially offered $91.25 million as the lead bidder, prevailed, beating LS Power Equity Advisors LLC, which submitted a $144.5 million bid. Rockland Capital is expected to pay about $141.56 million to close the deal, after applying a $3.19 million fee for setting the floor price for the auction. – Akiko Matsuda
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The Voyager Digital smartphone app. The crypto broker says it intends to recover its assets from Three Arrows.
PHOTO: GABBY JONES/BLOOMBERG NEWS
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Crypto hedge fund Three Arrows defaulted on loan, says broker Voyager Digital. Crypto broker Voyager Digital Ltd. said that hedge fund Three Arrows Capital Ltd. had defaulted, failing to make loan payments tied to large bets in the digital-currency realm.
Three Arrows had borrowed $675 million from Voyager Digital in the form of 15,250 bitcoin and $350 million in USD Coin, a stablecoin whose value is pegged to the dollar. Voyager had previously said it would issue a notice of default if the crypto hedge fund didn’t repay the loan by Monday.
Three Arrows Capital hired legal and financial advisers after suffering heavy losses from a broad market selloff in digital assets. Its troubles and those of other crypto firms have reverberated widely through the digital-assets ecosystem, revealing the interconnectedness of its largest players.
The firm had invested in Luna, a cryptocurrency that has eroded nearly all of its value, and “Lido Staked ether” tokens, a derivative of ether that has also suffered losses. The hedge fund is exploring options including asset sales and a rescue by another firm, The Journal previously reported.
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Municipal bonds increasingly held by funds instead of individuals. One factor aggravating volatility in munis this year: Asset managers’ increasing share of a $4 trillion market once dominated by buy-and-hold individual investors.
The share of outstanding municipal bonds held by U.S. households fell to 40% in the first three months of the year from 46% in 2020, according to a Municipal Securities Rulemaking Board report scheduled for release Wednesday. The board, a self-regulatory body overseeing the muni market, analyzed Federal Reserve data and determined that the market is shifting from direct ownership of bonds to investment through funds.
The true amount held outright by buy-and-hold retail investors through individual brokerage accounts is likely closer to 20% because the Fed includes some Wall Street-managed accounts in its household category. So-called separately managed accounts are run by an asset manager on behalf of a single investor. Those hold about 18% of munis, according to Citigroup.
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The Dollar's exchange rate is hurting emerging-market currencies. A strong U.S. dollar is now whacking emerging-markets currencies.
Money managers are selling the South African rand and Brazilian real, reversing a trend earlier in the year when the sharpest commodities rally in modern trading history supported emerging market currencies despite a strong dollar. The rand and the real both declined more than 7% against the dollar over the last three months. At the start of April the rand was up more than 8% year to date and the real was up more than 17%.
That’s because investors are now focusing on potential global stagflation – a phenomenon where economic growth slows while consumer prices rise. Commodity prices have also eased, with oil, soybeans and copper coming off recent highs.
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“The narrative has shifted since the end of May."
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— Steve Englander, Standard Chartered PLC
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Oaktree Capital's Howard Marks says time is ripe to snap up bargains. (Financial Times)
China Evergrande faces winding-up lawsuit in Hong Kong. (Bloomberg)
Russia default makes bondholders political stooges. (Reuters)
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