The process to restructure $32 billion in third-party asset-backed commercial paper began last September, as a pan-Canadian committee of investors, chaired by Osler Hoskin & Harcourt LLP lawyer Purdy Crawford was formed to oversee the process, retaining Goodmans LLP as its law firm. Indeed, the difficulties for conduits or trusts that issued non-bank ABCP (short-term debt instruments backed by portfolios of assets like mortgage loans and car loans) began a month prior, when fears emerged over how much of the asset may be tied to the
U.S. subprime mortgage market.
As a result, the third-party ABCP market froze as buyers disappeared, affecting approximately 22 trusts and $32 billion in notes. A number of financial institutions soon met to work out a solution to the liquidity problem affecting the market, agreeing to a long-term proposition known as the Montreal Proposal. Agreeing to a 60-day standstill period during which each party would continue to roll its ABCP and where outstanding third-party ABCP would be converted into floating rate notes maturing no earlier than the underlying assets.
The pan-Canadian committee’s “plan of compromise and arrangement,” covering 20 of the 22 trusts in the Montreal Proposal (the Skeena Capital Trust was restructured last December, and the Devonshire Trust is under discussion to undergo a separate restructuring) was submitted to the court in mid-March. The plan calls for the original 30- and 60-day notes to be restructured into long-term plan notes set to mature in as many as nine years. The matter has since been subject to a CCAA process before Ontario Superior Court Justice Colin Campbell in Toronto after the trusts were granted protection under the CCAA in March.
In addition to the legal negotiations around the standstill agreement, one of the main business issues initially was identifying the noteholders, a difficulty because of confidentiality provisions, says Marc Duchesne of Borden Ladner Gervais LLP in Montreal, lawyers for monitor Ernst & Young LLP.
In preparation for the implementation of the plan, which would mean issuing new notes and converting the existing notes into new plan notes, Duchesne says he and his colleagues are confirming information on hundreds of issues, making sure the new custodian has enough information to issue the notes and reviewing the applications for one of the three new master asset vehicle issues, the MAV 1.
Alfred Apps, an insolvency lawyer with Fasken Martineau DuMoulin LLP in Toronto, who is representing 15 of the 21 issuer trusts that are the debtors in the application, says Canada’s largest restructuring proceeding was creative in a number of respects. One of the initial issues lawyers dealt with was the conversion of the issuer trustees from federally regulated trust companies into numbered Canadian corporations, which took place immediately prior to the CCAA filing and was approved by the judge as part of the initial order. “That was the first hurdle to overcome: how do you qualify for CCAA protection?” he says.
As there were so many trusts and series of notes, lawyers also had to deal with establishing relatedness in order to file a “consolidating plan,” combining the trusts into two new vehicles, as well as ensuring that in so doing, they could have simply one class of creditors, rather than separate classes by each trust.
Then came the issue of the numerous retail creditors — those with less than $1 million in ABCP — and how their treatment could be differentiated. Although most of the third-party ABCP was held by institutional investors and corporations, each investor was given one vote in the restructuring and there were reportedly as many as 1,800 retail investors holding the asset. “This is critical, because under the Companies’ Creditors Arrangement Act, you not only have to have two-thirds of the debt voting in favour of the plan, you have to have a simple majority in absolute numbers. And since there were so many retail creditors, if they were not going to support the plan, it would not succeed,” says Apps.
The arrangements entered into to let these retail creditors get special recovery were critical to getting the satisfactory vote on the plan, says Apps.
Back in April, Canaccord Capital Inc. announced its “Canaccord Relief Program” to repurchase up to $138 million of restructured third-party ABCP at par value from its clients that hold $1 million or less — potentially as many as 1,430 clients. Credential Securities Inc. has also announced a similar program. The relief programs are contingent on the successful restructuring of the third-party ABCP market.
One of the main points of contention in the restructuring plan, and which remained throughout, was a clause that exempts those involved from past, present, and future claims, actions, damages, and liabilities relating to the third-party ABCP market in Canada and the affected ABCP. Corporate ABCP investors took issue with this aspect of the plan, as it prevents them from retaining their right to sue, and contended the clause could be broad enough to include fraud claims.
The main outcry from the opponents of the plan has concerned the releases, says Duchesne, which has been by less than two per cent of noteholders. Releases broader than to the debtors have been granted in some other instances, says Duchesne, where parties have said they need to be released of everything otherwise they will still have massive litigation claims against them. However, the fraud element that has been brought to light is not a question of the clause releasing parties from fraud, but from everything, which the opponents say includes fraud, he says. “Certainly, I’m sure there is a concern in everybody’s mind that will this now be the standard in every CCAA. I doubt that it will, because it’s very peculiar to this case,” he says.
In an April 24 endorsement that gave the go-ahead to a shareholder vote on the plan the following day, Justice Campbell addressed the issue of the clause, saying: “The plan has been carefully and painstakingly negotiated over a number of months and I have no doubt that if the result of the fairness process were to open up the right of every noteholder to sue whomsoever they wished for any reason related to their purchase of notes, the plan will likely be withdrawn.”
At a meeting in late April, approximately 96 per cent of noteholders endorsed the restructuring plan, sending the issue to a final sanction hearing before Campbell. The release issue was front and centre at the two-day sanction hearing in May, as the investors committee and banks argued in favour of approving the plan, while the corporate parties noted that granting immunity to fraud claims is outside of the court’s jurisdiction, according to Reuters reports.
Those eagerly awaiting the ruling following the two-day May hearing were met with a setback, as Campbell released an endorsement, noting that he was not satisfied that “the release proposed as part of the plan, which is broad enough to encompass release from fraud, is in the circumstances of this case at this time properly authorized by the CCAA, or is necessarily fair and reasonable.”
At the time, Campbell directed parties to return no later than May 30 to make submissions for whether there could be a process for dealing with potential fraud claims. “If the parties can agree on a dispute resolution process within the ambit of the CCAA to deal with serious claims of fraud, the plan can go forward immediately,” he noted.
In late May, Ernst & Young announced in a report on its web site that a proposed amendment to the plan, which would allow for claims in situations where there has been “express fraudulent misrepresentation” relating to the affected ABCP was put forward.
On June 5, Campbell approved the plan, saying that it represents “a reasonable balance between benefit to all noteholders and enhanced recovery for those who can make out specific claims in fraud.”
At the end of the day, in so many ways, the restructuring plan — which Apps notes is a creditors’ plan rather than a debtors’ plan — “tests the limits of judicial discretion under the Companies Creditors Arrangement Act. “For example, how far can third-party releases go? How far can you go in consolidating voting classes of creditors? How much can you impose judicial control on third parties to the proceedings? These are all issues that have been really tested. Of course, the most important test of all being how creative can you get in positioning yourself to claim the benefits of the act.
“A way to look at this one is, it’s a kind of uniquely creative Canadian solution,” he says.
