Restructuring Industry in Trump Era – Key Policy Shifts to Watch
After nearly 100 days in office, the Trump Administration and Republicans in Congress appear poised to have a significant impact on the restructuring industry. Although it is too early to tell exactly what the future holds in the Trump Era – even the so-called “Trump Bump” in the stock market appears to be pulling back – events taking place in Washington warrant close attention. On Capitol Hill, Republican efforts to enact a game-changing comprehensive tax reform plan, in addition to turning to financial services regulatory reform down the line, could mean significant changes are coming to the industry. This post briefly examines the policy implications of these potential changes and how they relate to restructuring practitioners, including: (1) tax reform; (2) financial services regulatory reform; and even (3) President Trump’s budget outline.
As the Trump Administration and Congress march towards their pledge to enact comprehensive structural reforms to the U.S. federal income tax system, some of the provisions may have significant consequences for the restructuring industry. By way of background, Republicans introduced a blueprint for tax reform last June that has received much attention, but no provision has garnered as much interest as the controversial Border Adjustment Tax (BAT).
The BAT would make the U.S. corporate tax border adjustable so that export receipts would be exempt from tax, but business importers would not be allowed to deduct the cost of those imports, effectively equating to a 20% tax on imports. House Republicans estimate that this provision could raise anywhere from $1 trillion to $1.2 trillion and is the primary pay-for that would allow the corporate tax rate to be reduced from 35% to 20%. While the BAT could help simplify the tax code and eliminate the incentive for profit shifting, it could also drive numerous businesses (i.e., net importers) into financial distress, such as retailers reliant on overseas manufacturing or oil refineries dependent on imported crude oil. As the tax reform debate ramps up in Washington, the BAT’s propensity to create winners and losers is definitely something for the restructuring industry to monitor going forward.
Financial Services Regulatory Reform
In Congress, the leading Republican effort to replace the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) proposes a dramatic shake-up to the restructuring industry. The Financial CHOICE Act, an acronym standing for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs, is set to soon be re-introduced by House Financial Services Committee Chairman Jeb Hensarling (R-TX) (a discussion draft is available here). Of significance, the bill replaces Dodd-Frank’s orderly liquidation authority (OLA) with a new bankruptcy process that would, among other provisions: (1) involve a bankruptcy judge to oversee liquidation proceedings for structurally important financial firms (SIFIs); (2) create a bridge company for failing SIFIs; and (3) appoint a special trustee to hold the SIFIs’ securities.
While the CHOICE Act is likely to serve as the starting point for financial reform efforts, at least in the House, Republicans appear to be split on repealing OLA. Some trade groups representing the financial industry, such as The Clearing House, support keeping OLA in place. On the other hand, Chairman Hensarling and Senator Pat Toomey (R-PA), who serves as Chairman of Senate Banking Subcommittee on Financial Institutions and Consumer Protection, strongly oppose it. In particular, Chairman Hensarling has said OLA “erodes market discipline and risks further bailouts” while helping make firms “bigger and riskier” in the process.
The Trump Administration also appears to be giving mixed signals on OLA. In his confirmation hearing, Treasury Secretary Steven Mnuchin agreed with Senator Toomey’s concerns on OLA, noting that the Bankruptcy Code needs to be “looked at” and should potentially be replaced with an alternative proposal. However, in response to questioning from Senator Mark Warner (D-VA), Secretary Mnuchin clarified that he was not suggesting that OLA be removed “tomorrow without having the appropriate bankruptcy solution.” Relatedly, Gary Cohn, head of the National Economic Council, has said that “no one can prove that orderly liquidation works” and confirmed that the White House “is exploring the different options out there,” adding that he is confident the Administration can come up with a suitable solution.
With the CHOICE Act set to serve as the baseline for financial services regulatory reform, key Republicans in Congress and advisers in the White House appear ready to undertake a significant re-write of the Bankruptcy Code; although how that process will end up remains to be seen.
President Trump’s Budget Outline
Last month, the White House released its “skinny budget,” a wish list of spending requests for Congress and some basic economic projections. The budget outline proposes sharp decreases in funding for several government agencies, which could lead to economic uncertainty for government contractors servicing these agencies and, conversely, opportunities for the restructuring industry. For example, the Departments of Health and Human Services, State, Agriculture, and the Environmental Protection Agency would face the steepest cuts in the budget, which could, in turn, spark a dramatic reevaluation of the government contracting industry.
Separately, but relevant to bankruptcy professionals, the budget outline called for the United States Trustee Program, which oversees the administration of bankruptcy cases, to increase bankruptcy-filing fees. In an effort to “ensure that those [who] use the bankruptcy system pay for its oversight,” the proposal seeks to produce an additional $150 million in 2017 and then reach a total of $289 million in 2018. Note that the budget outline does not specify exactly which filing fees will increase. Looking ahead, the White House has indicated that it will release a more complete budget proposal next month; although it will likely undergo significant changes in Congress.
As the new Administration continues to find its footing, these issues will no doubt be important to watch for any restructuring practitioner. Although many of the details have yet to be filled in, significant changes could be coming to the restructuring industry as the Trump Era continues in earnest.
Patrick Kirby is co-author of this article.