Cirque du Soleil used the stalking-horse approach when it filed for creditor protection in late June. File photo shows Mathieu Guerin, director of operations at Cirque de Soleil checking the lights in the big top at the Old Port in Montreal on May 13, 2020.Christinne Muschi/The Globe and Mail
With insolvency filings piling up in sectors hit hard by the pandemic, restructuring experts say cash-strapped businesses are turning to strategies they hope will keep the legal process under control and stave off a messy bankruptcy process.
New data from the Office of the Superintendent of Bankruptcy Canada reveal 68 companies filed for court protection under the Companies' Creditors Arrangement Act in the first three quarters of 2020, up 39 per cent from the same period last year. Insolvent companies that owe more than $5-million can use the CCAA process to restructure their businesses, and the new numbers, published last week, show 13 filings in the mining and energy sector, 12 in manufacturing and 11 in retail.
Some companies, out of time and options, are resorting to liquidating their businesses. Those include Le Château, which said last month it will close all of its clothing stores and liquidate its inventory after more than 60 years in business. Other retailers, such as DavidsTea, Reitmans and Groupe Dynamite Inc., have also filed for court protection under the CCAA to downsize through layoffs, store closings and attempts to negotiate with landlords and suppliers.
But businesses facing less immediate pressure are taking steps to limit uncertainty and avoid a drawn-out insolvency process, along with the sky-high professional costs that come with it. Those moves can include lining up a formal sale or stalking-horse bid for a distressed company before filing for court protection, or striking deals with major lenders in advance of a formal debt restructuring.
“I definitely think one of the trends that we’re seeing is to have more structured and disciplined CCAA filings and trying to avoid a free-fall filing,” said Linc Rogers, a partner at Toronto-based Blakes who advises companies on restructurings and distressed acquisitions. “The idea is to limit the time, the cost and stigma.”
Cirque du Soleil used the stalking-horse approach when it filed for creditor protection in late June. The live entertainment company’s senior creditors, including Toronto-based Catalyst Capital Inc., set a floor with their US$1.2-billion bid and other suitors were given a mid-August deadline to trump that offer. More than two dozen potential bidders kicked the tires but none ultimately emerged to outbid the company’s major lenders.
Outdoor retailer MEC, on the other hand, conducted a full marketing process and lined up a final buyer before filing for creditor protection in September. The $150-million deal to sell to California-based private equity firm Kingswood Capital Management LP faced public opposition from a group of MEC’s co-op members, but a B.C. court approved the deal in early October.
The use of restructuring support agreements, or RSAs, which are prenegotiated with creditors, is also on the rise, according to lawyers from Torys and Norton Rose, who spoke about insolvency issues in recent informational webinars. RSAs are often used to lock in advance agreement from a majority of bondholders for a court-approved debt restructuring.
With the energy industry under pressure from the global collapse in oil prices followed by the effects of COVID-19, several oil patch companies have used this tactic, including Bonavista Energy Corp., which slashed its debt through a recapitalization transaction under the Canada Business Corporations Act in the summer.
With RSAs, lenders often receive a premium for agreeing in advance to an arrangement that could see them swap bond debt for shares in a company. Experts say this trend has recently expanded even further into negotiating debt swaps with banks, which aren’t usually interested in owning equity in distressed businesses.
The use of RSAs as well as prearranged deals before making formal court filings has been on the rise in the United States over the past decade, according to Andrew Rosenblatt, a partner with Norton Rose Fulbright in New York City. His Toronto-based colleague, restructuring partner Jennifer Stam, said Canada has followed that pattern in part because of the level of U.S. investment in Canadian companies.
“Our trends are generally influenced by their trends. So it’s not surprising that you see the same thing happening in both countries.”
Deals negotiated in advance of a court filing are not always possible, Ms. Stam said, pointing to cases where a significant operational overhaul is needed or where a company wants to sell off one line of its business while focusing on another.
But in other situations, she said, there is “increasing tolerance” for prenegotiated arrangements. “As with everything, once it’s been done a couple of times, the courts become more comfortable with it, the stakeholder groups understand what’s going to be tolerated, what will be seen as reasonable negotiation in advance and what’s not. It has been tested and tried more and more in the last 10 years.”
The 2008 financial crisis played a part in the preference for many companies to do advance work to control the outcome before entering the formal restructuring process, says Fasken partner Stuart Brotman, who pointed to the infamous example of Lehman Brothers Holdings Inc., where bankruptcy fees soared to more than US$2-billion.
“Lenders don’t want to fund into a free fall,” he said, adding, “You need enough liquidity as a debtor company to be able to buy yourself prefiling time to have these negotiations. But the objective is to do as much as you can in advance to save money and also lock up support.”
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