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BlockFi Is No FTX; High Debt Inflicts Pain on the Poor; AMC Announces Layoffs, CEO Exits
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Good day and welcome to WSJ Pro Bankruptcy's Daily Briefing. It's Wednesday, November 30. BlockFi Inc. said it was shocked by allegations of systemic failures at FTX, with which it has extensive business, and now the cryptocurrency lender is working hard to return customer funds after filing for bankruptcy this Monday. Cash-strapped governments are cutting spending and freezing investments so they can pay creditors, as higher interest rates drove up costs on their debts that have run up record levels over the past decade. And AMC said it plans to lay off about 20% of its U.S. workforce hours after its CEO announced she had stepped down in less than three months after taking the job.
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BlockFi filed for bankruptcy on Monday.
PHOTO: GABBY JONES/BLOOMBERG NEWS
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BlockFi stresses it is different from FTX. BlockFi Inc. was shocked by allegations of systemic failures at FTX, with which it has extensive business, and now the cryptocurrency lender is working hard to return customer funds after filing for bankruptcy this week, a BlockFi lawyer said Tuesday.
Jersey City, N.J.-based BlockFi, which secured a rescue loan from FTX in June to shore up its liquidity, reviewed unaudited FTX financial reports as part of due diligence it performed at the time of the transactions, said Joshua Sussberg, a lawyer for BlockFi, during its debut hearing in the U.S. Bankruptcy Court in Trenton, N.J. BlockFi filed for chapter 11 on Monday after the loan fell apart in the wake of FTX’s collapse earlier in November.
BlockFi, which also counts FTX as one of its largest borrowers, is an early victim brought down by FTX’s downfall in an exceptionally intertwined and lightly regulated sector. Recent victims included crypto hedge fund Three Arrows Capital, digital-assets lender Celsius Network LLC and crypto brokerage firm Voyager Digital.
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BlockFi sues for SBF's Robinhood shares. Cryptocurrency lender BlockFi, which filed for bankruptcy Monday, is suing for Sam Bankman-Fried’s Robinhood shares.
BlockFi filed a lawsuit against Emergent Fidelity Technologies on
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Monday, alleging that it is owed the shares after they were pledged to BlockFi to guarantee the payment obligations of Alameda Research. Emergent Fidelity is the entity through which Mr. Bankman-Fried, the founder of bankrupt crypto exchange FTX, purchased a 7.6% stake of Robinhood’s Class A shares earlier this year. Mr. Bankman-Fried is also a founder of the crypto trading firm Alameda.
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Crypto exchange Bitfront shuts down. Bitfront, operated by Japanese messaging app Line, is the latest cryptocurrency exchange to shut down. Bitfront, which runs on the Line blockchain that offers crypto token Link, said in a Sunday notice that its closure is unrelated to recent developments in the crypto market, including exchanges that have been accused of misconduct.
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Pakistani cities like Karachi suffered rolling power outages this summer after the government cut energy imports to preserve dollars for debt payments.
PHOTO: ASIM HAFEEZ/BLOOMBERG NEWS
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Record debt buildup leads to blackouts and healthcare cuts in developing world. Across much of the developing world, cash-strapped governments are having to cut spending and freeze investments so they can pay creditors, as the Federal Reserve’s interest-rate hikes drive up borrowing costs.
The cuts are now hitting some of the world’s poorest people at a time when many are already reeling from economic shocks brought on by Russia’s invasion of Ukraine and the coronavirus pandemic.
Aided by ultralow interest rates in the West and Chinese loans, emerging and developing economies over the past decade ran up record levels of government debt, which the International Monetary Fund expects to reach 64.5% of gross domestic product at the end of 2022. In 2008, government debt in the same economies was valued at just 33.6% of GDP.
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Hits such as ‘Mad Men,’ starring Jon Hamm, helped transform AMC Networks into a TV tastemaker.
PHOTO: JUSTINA MINTZ/AMC/EVERETT COLLECTION
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AMC to lay off 20% of U.S. workforce. AMC Networks Inc. said it is planning to lay off about 20% of its U.S. employees, a sign of further disruption at a company that earlier Tuesday announced its chief executive had stepped down less than three months after taking the reins.
The planned job cuts come as AMC, which for the past 15 years has been home to many popular TV shows including “Mad Men” and “Breaking Bad,” is struggling to generate enough money from its streaming services to make up for the continued decline of cable television, as Americans cancel their pay-TV packages in droves.
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“We have determined we need to conserve resources at this time.”
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— AMC statement
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Department stores, including Macy’s, have been losing market share for years.
PHOTO: YUKI IWAMURA/AGENCE FRANCE-PRESSE/GETTY IMAGES
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Macy’s partners with Claire’s, Toys “R” Us to diversify. Macy’s Inc. said it is bringing outposts of Claire’s, a fashion-and-accessories store, to 21 of its locations as the department-store operator bets bigger on the store-in-store concept.
Claire’s has long been popular with girls in their tween and teenage years, and Macy’s hopes that hosting these stores will bring more business from this demographic going into the holiday season.
The partnership is part of Macy’s strategy for broadening its customer base and shaking up the traditional department-store model, executives said. The move follows a rapid rollout of Toys “R” Us store-in-stores to all of the retailer’s roughly 400 locations. The company has found that they drive foot traffic, bring in new customers and encourage browsing in other categories.
Both Claire’s and Toys “R” Us recently emerged from bankruptcy, and this store-in-store strategy is particularly advantageous for companies that are in that position and wary of taking on too much debt, said Ed Coury, managing director at RCS Real Estate Advisors.
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More shoppers flocked to stores over the Thanksgiving weekend compared with last year, a sign that many consumers are returning to their prepandemic shopping behavior. Roughly 197 million Americans visited stores or shopped online in the period between Thanksgiving Day and Cyber Monday, according to an estimate released Tuesday by the National Retail Federation. Americans spent average of about $325 on holiday purchases, up 8% from 2021, according to the retail trade group.
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Celsius customers push to shorten chapter 11 deadline. A group of customers of bankrupt crypto lender Celsius Network LLC filed papers asking the judge overseeing the chapter 11 case to shorten the amount of time the company has to formulate an exit plan to two months in light of the latest events in the crypto industry.
Celsius is seeking to move a deadline to file its reorganization plan to March 31, 2023, from Nov. 11.
"Given the status of these cases and the events that are transpiring in the cryptocurrency world on a daily basis" the customers believe the additional 141 days requested should be reduced to 60 days, according to the court filing by the customer group on Monday.
An additional 60 days will be enough time to determine if Celsius's assets can be sold, the group also said. Moreover, the group urged Celsius to foster communications between retail customers and interested buyers. —Soma Biswas
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Holiday Inn in FiDi seeks chapter 11 to restructure debt. The owner of Holiday Inn in Manhattan’s Financial District filed for bankruptcy Tuesday to restructure a $137 million loan it defaulted on in the Covid-driven downturn.
Jubao Xie, the managing member of the hotel owner Golden Seahorse LLC through his ownership of Hysendal USA LLC, said in a court filing that the 50-story, 492-key hotel kept the loan current until March 2020, when the facility was forced to close doors in the pandemic.
The hotel reopened in July 2020. but its occupancy remained significantly below prepandemic levels for the rest of 2020. The Omicron variant then caused another closure of the hotel from January to April 2022, Mr. Xie said. Holders of the loan commenced a foreclosure action in March 2020, which is pending in state court. The company filed for chapter 11 with the U.S. Bankruptcy Court in Manhattan in an attempt to renegotiate the loan or to receive the court’s approval to restructure over the lender’s objection, Mr. Xie said. Judge Philip Bentley has been assigned to the case, numbered 22-11582. —Akiko Matsuda
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Investors should review crypto audits. The Public Company Accounting Oversight Board can't inspect the audits of privately held cryptocurrency companies BlockFi Inc. and FTX, which both recently filed for bankruptcy, but it encourages investors to review its reports on their auditors' work for listed businesses, Chair Erica Williams said at a conference.
The U.S. audit watchdog has the authority to inspect audits of public companies, but not private ones. Audit firms registered with the PCAOB don't have to follow the watchdog's rules when auditing private companies.
"FTX touted the use of auditors that were registered with the PCAOB.... If a firm touts itself as being PCAOB-registered, find out its track record," Mr. Williams said. "Look at our inspection reports and be cautious about drawing conclusions where the PCAOB doesn't have jurisdiction." The PCAOB prioritizes inspections of audits involving crypto, she said. —Mark Maurer
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Junk-Bond rally reflects hopes inflation has peaked. Investors are driving a modest end-of-year rally in junk bonds, erasing some of 2022’s biting losses in a bet that the economic outlook for next year has stabilized.
Yields on below-investment-grade corporate bonds tracked by ICE’s index have declined to 8.76% through Monday’s trading, down from a recent high of 9.61% on Oct. 13. Investors say they are growing more confident interest rates may peak without putting many lower-rated companies’ ability to repay debt in serious jeopardy.
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Government to backstop mortgage of more than $1M. The federal government is about to backstop mortgages of more than $1 million for the first time in high-cost markets, such as parts of California and New York.
The increase reflects the rapid appreciation in home prices over the past few years, even as the mortgage market has recently cooled.
The maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac will rise to $1,089,300 next year in a few expensive markets, from $970,800 this year, the Federal Housing Finance Agency said Tuesday.
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Labor market up for assessment. The Labor Department’s October report on job openings and turnover will gauge demand for workers in the still-tight U.S. labor market.
The job market remains on strong footing but has gradually cooled in recent months, with companies in sectors such as tech, entertainment and real estate shedding jobs. Employers added 261,000 jobs in October, a robust number but the smallest gain this year. Jobless claims have remained relatively low, but have been edging higher since record lows reached in the spring.
The overall economy has lost some steam but showed resilience amid persistently high inflation and higher interest rates. The Federal Reserve increased interest rates by 0.75-percentage-point earlier this month, the fourth consecutive rise of that size, as it attempted to combat inflation that remained high in October.
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