The extended downturn in the oilfield economy is showing up in some taxpayers inability to pay their Texas real property and personal property ad valorem taxes when those taxes become due. This note reminds taxpayers what happens when the ad valorem taxes are not timely paid. It also reminds lenders with security interests in real and personal property to monitor their borrowers financial situations and any related developments in tax liens and tax sales in order to maximize the value of collateral.
The Texas Tax Code provides that a tax lien attaches to all taxable real property and personal property located in Texas on January 1 of each tax year for that tax years ad valorem taxes due the taxing jurisdiction. The lien attaches automatically the taxing jurisdiction need do nothing further to perfect the tax lien. And here is the catch the tax lien takes priority over the lien of a secured lender who perfected its lien when the loan was made, even though the loan was made and the security interest in the collateral was perfected well before the ad valorem taxes subject to the tax lien become due.
If the taxpayer who owns the taxable property fails to pay the ad valorem tax due within the period prescribed by Texas law, the tax due becomes delinquent. Delinquent taxes incur penalties and interest, so the amount due the taxing jurisdiction quickly can increase. If the delinquent taxes, penalties and interest are not paid, the taxing jurisdiction can institute a suit to collect the amounts due and foreclose upon the tax lien. Under certain circumstances, taxing jurisdictions can have real property and personal property of the taxpayer seized under a tax warrant for the failure to timely pay the ad valorem taxes due. Once a tax foreclosure or a seizure occurs, the taxing jurisdiction then can move to have that property sold at a tax sale for payment of the ad valorem taxes, penalties and interest due.
The Texas Tax Code sets out the procedures to be followed by the taxing jurisdiction in moving forward with the tax sale. The Texas Tax Code also sets out how the proceeds of the tax sale are distributed, but because the tax lien takes priority over the lenders security interest, the taxing jurisdiction is entitled to be paid the amount due out of the proceeds before a secured lender is paid anything. And, in fact, if a purchaser knows the property to be sold at the tax sale has a lenders lien on it, the purchaser will be inclined to limit the amount of its bid to the taxes, penalties and interest due.
Purchasers of property acquired at a tax sale in Texas take title subject to a right of redemption of the taxpayer whose property was sold. The limited period during which the right of redemption must be exercised varies depending on the type and use of the property in question. But the right of redemption belongs to the taxpayer whose property was sold the lender with a security interest in the property sold at the tax sale does not have a right of redemption and cannot exercise the right on behalf of its borrower. The lenders security interest is not extinguished in the tax sale, but the lender may or may not have any business relationship with the purchaser of the property sold at the tax sale and thus may have limited control over the use to which the purchased property is put and how that property is maintained.
Taxpayers need to remember that they have a limited period of time in which to exercise their right of redemption for property sold at a tax sale, assuming that they can raise the amounts necessary to redeem. Lenders with secured interests in property need to monitor closely the financial condition of each of their borrowers, including ensuring that their ad valorem tax payments are timely made. Most importantly, lenders need to understand that if a borrowers ad valorem tax payments are not timely made, the tax jurisdiction may move to effect a tax sale of their borrowers collateral. Depending on the nature of the collateral, lenders may consider whether they can stop the tax sale by assisting their borrower in making the payment of ad valorem tax amounts due. Lenders also may consider whether they should bid at the tax sale in order to acquire the collateral and preserve its value through the lenders subsequent foreclosure sale to a credible purchaser. Alternatively, lenders may consider working with the borrower to have the borrower exercise its right of redemption, and then foreclose on the collateral. Following either of these approaches may aid the lender in maximizing the value of the collateral and enhancing the lenders chances on full repayment of the loan.
Editors Note: Our good London colleague Ed Marlow recently published this as a Bryan Cave client advisory. When we Yanks saw it, we found it fascinating, not only based on the arcane facts, but also to realize that British tribunals struggle with the same things we do here in the States whether (or how) to protect junior creditors which allege that a secured creditor did not maximize value in disposing of the collateral. Different countries, same insolvency challenges! Our sincere thanks to Ed for this analysis; for a introduction to how Bryan Cave can assist with your corporate trust matters in England, France, Germany, or other EU countries, please click here.
Summary and Holding:
Including an unsecured creditor in an agreed payments waterfall does not by itself confer on that unsecured creditor the benefit of a mortgagees usual duties on enforcement of security, or a direct claim against the sale proceeds.
Background, Facts, and Reasoning:
The English Court of Appeal in PK Airfinance v Alpstream had to address a mortgagees duties on the enforcement of security (in this case over a number of aircraft). In a reassuring case for secured lenders, the Courts judgment confirms existing English law both as to the time and manner of realisation of the secured assets and when a mortgagee might buy the secured assets. Interestingly, the Court also had to consider whether the position of an unsecured creditor as a party in the agreed payments waterfall (of the realisation proceeds of the security), resulted in an exception to the principle that a mortgagees duties on enforcement do not extend to unsecured creditors.
Overturning the judge at first instance, the Court held that a mortgagee only owes its duties on enforcement, such as the duty to take reasonable care to obtain a proper price, to persons with an interest in the value of the equity of redemption in the secured assets. Those persons are the mortgagor, a subsequent mortgagee and (because of a guarantors subrogation rights) any guarantor of the mortgage debt. This was so even though in this case the relevant unsecured creditor, Alpstream, appeared in the agreed payments waterfall (albeit at the bottom) and so had a contractual right to repayment out of the balance of the sale proceeds after the secured creditors had been repaid in full. Holding otherwise would involve a departure from established authority, which the Court did not believe to be justified. Alpstream had expressly agreed in the intercreditor arrangements that its debt would be subordinated to the mortgagee and that it would not take any security in respect of its debt.
Therefore unsecured creditors are not owed the mortgagees usual duties when the mortgagee realises the secured assets, even though it may be foreseeable that the unsecured creditors might be adversely affected by the outcome of the sale. Nor will an unsecured partys contractual right to receive payment out of the balance at the end of the payments waterfall confer a direct claim against the secured assets or their proceeds.
The Court was also concerned to give effect to the transaction documents to which the parties had agreed. Equitable duties (a mortgagees duties arise in equity) can be amended by agreement. The Courts decision was consistent with the transaction documents.
There is an increasing trend in Europe for secured financings to permit unsubordinated unsecured debt. This case is perhaps a timely reminder of exactly where unsecured creditors stand.
A final observation: the Court was satisfied that the proceeds in this case from the sale to the mortgagee were higher than anyone else would have been willing to pay in the circumstances. The mortgagor had therefore benefited (and potentially Alpstream as unsecured creditor). Would the court have taken a different view on any of the issues if this had not been the case?
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Ultrapetrol (Bahamas) Limited (Nasdaq: ULTR) announced that it had reached agreement with its secured lenders to extend its existing forbearance agreements through April 30, 2016. The secured lenders party to these agreements have agreed, for the duration of the forbearance agreements, not to accelerate their loans, take any enforcement actions, or exercise any remedies with respect to defaults resulting from the non-payment by the Company of its interest payment under the Company’s 8.875% First Preferred Ship Mortgage Notes due 2021 and to work with the Company in negotiating a sustainable financial structure.
The Company expressed its continuing confidence that a consensual financial restructuring can be achieved in order to provide Ultrapetrol with a sustainable capital structure that supports the Company’s long-term business plan and results in long-term value generation for the benefit of all stakeholders. During this period, the Company believes that it has sufficient liquidity to fully fund all aspects of its operations and to conduct business as usual, including making full and timely payments to employees, vendors, suppliers, and trading counterparties.
Washington historically has been a city tied to stable, middle-class, government jobs, and that can create a certain way of thinking about investing. But with all the wealth here now (even government employees make six figures), has that mindset changed? Yes and no, say the financial advisers we surveyed.
A number of survey respondents said, in essence: Washingtonians haven’t changed much. The cost of living makes even high earners feel middle-class–and makes them risk-averse when investing.
“I feel that Washington is still tied to secure, middle-class government jobs, and the clients I see are still generally conservative investors who like low-cost index funds or indexed ETFs,” says Ken Diehl of Cornerstone Financial Planning in Gaithersburg.
HomeAdvisor has added its instant home-improvement booking product, Instant Booking, to Amazon.com Inc.s Alexa service, letting users simply ask Alexa to find me a plumber when they need to book one.
Launching the app on Amazon’s Alexa service Thursday means Instant Booking should work on all Amazon’s voice-controlled devices, which includes Amazon Fire TV, the Echo personal assistant and the Echo Dot speakers newly out from the Seattle-based online retail giant (Nasdaq: AMZN).
Here’s your Investing Action Plan: What you need to know as an investor for the coming week.
Earnings season kicks into high gear, led by tech giants like Alphabet (GOOGL) and Microsoft (MSFT), industrial heavyweights like General Electric (GE) and General Motors (GM), and leading consumer names like McDonald’s (MCD) and Starbucks (SBUX).
Oil futures plunged after Sunday’s a long-awaited meeting of top oil producers in Doha, Qatar, ended with no agreement on an output freeze. Asian stocks retreated, with US stock futures also down somewhat.
Netflix, Alphabet, Microsoft Earnings
Top-name techs Netflix (NFLX) and Google owner Alphabet report quarterly results.
The video streaming leader is projected to see earnings drop 73% to 3 cents a share amid rising costs for its global rollout when it issues its report after the close on Monday. Revenue is seen jumping 25% to $1.97 billion. Netflix expects subscriber additions to hit 6.1 million, up from 4.9 million last year.
Netflix was able to retake the critical 200-day line on Tuesday, gaining 7.4% for the week. Shares are trading 16% below its December high and a cup-base buy point of 133.37.
Alphabet reports after the close on Thursday. Earnings are expected to climb 23% to $7.96 a share as revenue increases 18% to $20.34 billion. The Internet giant has edged above a cup-with-handle buy point of 777.41 this week, but volume has been light. Shares are now trading 3% below their all-time high reached in January.
Microsoft’s earnings are projected to rise 3% to 64 cents a share when the PC maker reports its quarterly results on Thursday. Revenue is seen rising 1.7% to $22.1 billion.
IBM (IBM) reports Monday. The consensus estimate is for earnings per share minus items to fall 28% to $2.09 and revenue to drop 6.6% to $18.26 billion.
Meanwhile, Amazon (AMZN) also broke out of a cup-with-handle base recently with a 603.34 buy point, gaining 5.3% for the week and finishing still within buying range. Amazon reports its quarterly results on April 28.
For when to buy, hold or sell Amazon and other top stocks, take a free trial of IBD Leaderboard
Crude Market Reaction After Doha Failure
After weeks of anticipation, the Doha oil freeze meeting of top OPEC and non-OPEC producers ended with no agreement Sunday as Saudi Arabia objected to Iran declining to take part.
US oil futures fell 4.5% to $38.50 a barrel, with Dow futures down nearly 100 points. Oil prices, energy-related stocks and financial markets generally had rallied significantly from January’s longtime lows for crude, in large part on output freeze hopes. However, Kuwaiti oil production has plunged due to a strike, providing some near-term support oil prices.
The US Energy Information Administration will release weekly US crude stockpile and production numbers Wednesday. The American Petroleum Institute, an industry group, will give inventory estimates late Tuesday. Baker Hughes (BHI) will release the weekly US rig count on Friday.
Yahoo Bids Are Due Day Before Q1 Report
First-round bids for flailing Web portal Yahoo (YHOO) are reportedly due Monday. Among those rumored to be considering bids are the UK’s Daily Mail, Alphabet’s Google and Verizon Communications (VZ).
Yahoo will report quarterly earnings after the close Tuesday. Analysts expect revenue to fall 12% to $1.07 billion while earnings plunge 53% to 7 cents.
GM, GE Lead Industrial Earnings
General Motors is on tap for April 21 and Wall Street expects a 17.4% hike in EPS to $1.01 and revenue of $35.75 billion revenue, flat with a year ago. With reports indicating that US sales are peaking or leveling off, watch for comments about future sales.
General Electric reports Friday, and consensus is for a 5% decline in earnings per share to 19 cents and a 5.4% drop in revenue to $27.78 billion. Investors will look for an estimate from GE of future order-book rates.
Oilfield services company Schlumberger (SLB) reports Thursday and will hold a news conference the following morning. Construction and mining equipment giant Caterpillar (CAT) will announce Q1 earnings Friday. Both are projected to report big earnings declines.
McDonald’s, Starbucks On The Menu
McDonald’s is seen growing its per-share profit by 15% to $1.16 a share, with revenue expected to fall 3% to $5.8 billion, when it reports Friday. Analysts are looking for continued momentum stateside. Shares remain in buy range after breaking out of a cup-shaped base late last month.
When it reports Thursday, Starbucks’ fiscal Q2 earnings are anticipated to rise 18% to 39 cents a share, on 10% sales growth to $5.03 billion. Shares have been consolidating above their 50-day and 200-day lines. Given investors’ high expectations, the stock could face pressure even if results look good, said Deutsche Bank’s Brett Levy in a Friday note.
Yum Brands (YUM) is slated to release results on Wednesday. Dunkin Brands (DNKN) reports on April 28.
In the hot fitness sector, Under Armour’s (UA) Q1 earnings are expected to decline to 2 cents a share on revenue growth of 29% to $1.03 billion when the maker of athletic apparel and footwear reports Thursday. The stock has been forming a monthslong cup-shaped base, with shares currently below their 200-day but above the 50-day line. Skechers (SKX) also reports Q1 on Thursday.
First Look At Casino Earnings
The world’s largest casino company, Las Vegas Sands (LVS), will release Q1 results Wednesday. Analysts expect Sands to report a 6% drop in Q1 EPS to 62 cents. Revenue is seen shrinking 4.3% to $2.88 billion.
Las Vegas continues to grow at a slow, steady pace and analysts point to signs that Macau, the globe’s No. 1 gambling destination, may be near the end of a nearly two-year recession.
Earlier this month, rival Wynn Resorts (WYNN) pre-announced Q1 combined Macau-Las Vegas casinos revenue of $987 million-$1.007 billion. The midpoint missed Wall Street’s $998.22 million target. Wynn blamed Macau.
The National Association of Broadcasters holds its show in Las Vegas from Saturday to Thursday. Executives from media giants 21st Century Fox (FOXA), Disney (DIS) and Discovery Communications (DISCA) are scheduled to speak. Cablevision (CVC) Chief Operating Officer Kristin Dolan will also address attendees.
Underscoring the tech sector’s growing role in media, Daniel Alegre, who oversees all of Google’s strategic partnerships worldwide, will speak as well. Workshops on filming with drones will be held. And on the show floor, showcases on virtual reality and augmented reality will be on display.
The event comes as TV broadcasters are looking at a next-generation TV standard (ATSC 3.0) that will enable stations to broadcast in 4K and offer IP services. FCC regulations and trends in cable cord-cutting will be hot topics, as well as the just-started “incentive auction” of radio spectrum owned by local broadcasters. Live content is still king as broadcasters eye online-streaming agreements.
UnitedHealth First Among Insurers
Top US health insurer UnitedHealth (UNH), which has had scant participation in ObamaCare, says it’s not expecting to make any announcement regarding the health program when it reports Q1 earnings before the open on Tuesday.
Analysts see UnitedHealth reporting $1.72 in earnings per share, an 11% increase. Revenue is expected to reach $43.96 billion. UnitedHealth has reported slight upside surprises for the last two quarters.
Spokesman Tyler Mason confirms that it is pulling out of exchange markets in Georgia and Arkansas in 2017, adding that ObamaCare accounts for less than 1% of UnitedHealth’s business. Late Friday, Michigan regulators said UnitedHealth would exit that state as well.
Airlines Profits Ready For Liftoff
Delta’s stock surged on Thursday after the carrier reported Q1 results and forecast $3 billion in 2016 fuel savings, benefiting from low oil prices that could lift many airlines to record profits this year. However, questions loom over whether the good times for the bottom line might be fleeting.
Wall Street will likely be on the lookout for such signals from the slew of airlines reporting results. United Airlines (UAL) reports quarterly results on Wednesday, while Southwest (LUV), Alaska Air Group (ALK) and Hawaiian Holdings (HA) report on Thursday. American Airlines (AAL) reports on Friday.
Is Housing Building Momentum?
A stack of economic data and earnings reports will show whether housing activity is picking up steam. On Monday, NAHB releases its housing market index of homebuilder sentiment. On Tuesday, the Commerce Department releases March figures for housing starts and building permits. On Wednesday, March existing-home sales data are due from the National Association of Realtors. On Thursday, homebuilders DR Horton (DHI) and Pulte Group (PHM) report quarterly earnings, with investors interested in orders and any other clues to future activity. Paint-seller Sherwin-Williams (SHW) also reports Thursday.
Sherwin-Williams stock hit a record high in the latest week. DR Horton is within 5% of a 10-year high set on Dec. 1. Pulte Group is well off highs, but is trying to move back above its 200-day line for the first time since Sept. 17.
Canada-based flash sale e-retailer Beyond the Rack has changed its name, laid off two-thirds of its staff and filed for creditor protection in Quebec Superior Court, citing more than C$44.2 million (US$34.0 million) in debt.
Beyond the Rack, No. 189 in the Internet Retailer 2015 Top 500 Guide, has legally changed its name to 7098961 Canada Inc. to preserve the value of the companys brand and reduce the potential negative impact of the filing, according to papers filed March 23 in Quebec Superior Court and obtained from Montreal-based financial advisory firm Richter, which is working with Beyond the Rack to find a buyer. The web merchant continues to operate online and on social media as Beyond the Rack, however.
According to the filing, the company thought it had found a buyer in early March, but the deal fell through. Beyond the Rack vice president of marketing Richard Cohene declined to comment.
In its filing, Beyond the Rack traces its woes to early 2014, citing a failed expansion into the US as one of several reasons for its current predicament.
Within the past few years, the general economic and market conditions in Canada and the United States has deteriorated and as a result has adversely affected access to and the cost of capital, the company writes. Despite significant efforts, the company has failed to secure new sources of capital and has relied upon its existing investor base and secured lenders to continue to fund the operations under increasingly onerous terms.
Benoit Gingues, a partner with Richter who is working on the Beyond the Rack case, says the filing is similar in nature to a Chapter 11 bankruptcy filing in the United States. In order to find a buyer, Gingues says Richter has sent solicitations to more than 400 companies worldwide. Gingues expects offers to come in by April 18 and in the meantime, he says its mostly business as usual for Beyond the Rack.
The site is live, he says. The company is still operating. We were able to secure interim financing that was put in place by the court to allow the company to maintain its operations while we do the sale process.
In its filing, Beyond the Rack says it posted a loss of $17.1 million for the fiscal year ended Jan. 31. The company also says it had 211 employees d throughout North America, with 190 in Montreal, before cutting more than two-thirds of its staff two days before filing for protection, going to 62 employees from 211.
According to CrunchBase, Beyond the Rack has raised $78.6 million over five rounds of funding since launching in 2009. Its debt includes:
- C$13.0 million (US$10.0 million) to Silicon Valley Bank, which includes a C$9.1 million (US$7.0 million) term loan, a C$2.6 million (US$2.0 million) revolving line of credit and C$626,482 (US$482,299) in letters of credit.
- C$6.8 million (US$5.2 million) in open customer orders.
- C$4.4 million (US$3.4 million) in credit notes.
As part of its restructuring efforts, Beyond the Rack has cut its marketing spend to $8.9 million from $23 million, according to the filing, cut staff and discontinued product lines that werent selling well.
Lancet study says effective treatment of patients suffering from depression led to a 50% rise in the proportion of such patients starting work.
Factor-based investing has become quite popular these days. Factors are characteristics of a group of stocks, the most famous being value and small cap, that are used to sort the overall universe of stocks. For quite some time, certain factors have been shown to outperform the overall market over extended periods of time. The finance industry has jumped all over this, and now offers many off-the-shelf funds and ETFs that aim to invest in these factors and outperform the market. There are about 400 Smart Beta funds now, totaling about $400 billion in assets. No need to do the work yourself. Just buy these simple off-the-shelf products and outperform the market. If only it were that simple. Today, I want to briefly touch on a fundamental issue with smart beta funds, how it impacts returns, and compare smart beta to doing factor investing yourself through quant strategies.
The big issue with smart beta ETFs is the structuring of the product for scale. Patrick OShaughnessy at The Investors Field Guide has a must-read post on this topic. Basically, in order to make money off smart beta products, especially in the trend of lower fees across the industry, the finance industry needs to be able to scale these products to manage large amounts of dollars. The problem is that reduces returns. How much? Heres the key chart from the post.
Click to enlarge
Basically, the more stocks in the portfolio, the more cap weighting in the portfolio, the lower the returns. So much so that pretty soon, the fund is just a closet index fund. There are lot more gems in the post, but this is the main point. If youve read my blog for a bit, you know that there is a better way – doing your own factor investing through the quant strategies that I talk about here often. All of the strategies Ive posted on are just ways to get exposure to the main factors that lead to market-beating returns. Lets see how one of those strategies does with various numbers of stocks and versus smart beta.