March 25, 2009
Since the 1990s, Companies' Creditors Arrangement Act (CCAA) filings have been the preferred legal avenue by which companies bought time necessary to continue operations while they restructured. But this is changing.
Debtor-in-possession financing (DIP)—the backbone of formal restructuring proceedings under the CCAA—is now difficult to obtain, partly because financial institutions accustomed to providing such facilities are facing their own financial troubles.
"In 2008, we saw at least two major Canadian restructurings—Ainsworth Lumber and Tembec—implemented under the Canada Business Corporations Act (CBCA)," says Tony DeMarinis. "There were others that were informally negotiated and more are likely to come as both debtors and creditors try to avoid costly and protracted proceedings or are pushed to alternatives by the drying up of DIP funding."
However, insolvent companies cannot restructure under the CBCA, so that companies anticipating cash flow problems must act proactively. Many are doing so.
"The severity of the economic problems we face is forcing all businesses to review their financial condition to determine whether they can weather the storm," says Tony. "We're going to see more pre-emptive steps than we have in the past, and less of the unhealthy states of denial that characterized previous recessions and resulted in companies failing to act until their backs were to the wall."
The Ainsworth and Tembec restructurings were successful, notes Tony. "They were very fast and much more manageable than CCAA proceedings."
The CBCA also works from a reputational standpoint: "You're not acknowledging insolvency, so there isn't any of the stigma or real damage, like contractual default, that's associated with it." says Tony. "There are no court-ordered restrictions on operations, you don't have creditors and monitors watching every move, and the company remains in much greater control than it would under the CCAA."
Moreover, if the process fails, the company has not taken backward steps other than incurring relatively small costs. "By contrast, if you don't come up with a plan under the CCAA, it's game over," says Tony.
Increasingly, lenders and borrowers are recognizing that the issues they face come down to cash flow. CCAA filings mean high costs. One way to keep a handle on CCAA cost is by resorting to the "prepackaged proceeding," where a company has a deal in place before filing. "They're used in the United States much more frequently than they've been used in Canada. Everyone wants to manage the proceedings closely and keep them short, and the prepackaged approach is a good way to do it, so I think we'll see more of these."