Law Times

www.lawtimesnews.com Law TiMes / March 31, 2008 Page 11 A s the ABCP crisis in Canada demonstrates, restructuring is not what it used to be. To begin with, the nature of the stakeholders has changed. Until the turn of the century, banks were the primary players in restructuring proceedings — rightly so, because for the most part they had priority claims on the insolvent company's as- sets. Bondholders were usually right behind them, siphon- ing off what was left after the banks were done. Things are hardly this neat nowadays. To begin with, banks have moved to securitizing loans and selling them to institutions in order to free up capital with which they can make more loans, which they securitize yet again. "Entities who originally lent money or invested in a compa- ny's bonds may, for a variety of reasons, including debt trad- ing or credit-default swaps, not be one and the same at the time of the restructuring," says Toronto-based Sheryl Seigel, chair of Lang Michener LLP's restructuring and insolvency group. "And they may even change during the course of the restructuring." The presence of institutional investors other than banks, such as hedge funds, has soared. Stan- dard & Poor has estimated that institutional investors' share of non-investment-grade loans in the United States rose from 42 per cent in 1999 to 82 per cent in 2007. European growth was even more dramatic in that pe- riod, with institutional inves- tors' share rising from four per cent to 55 per cent. So restructurings, which used to feature a traditional grouping of secured credi- tors, unsecured creditors, and shareholders, now in- clude a much larger array of claimants. These include second-lien creditors, who have secured claims over a company's assets, which are, however, subordinate to the the claims of traditional se- cured, or first-lien, creditors. There are also mezzanine creditors, senior subordinat- ed debt-holders, and subor- dinated debt-holders. Share- holders remain the bottom feeders. Further complicating mat- ters are the "cross-dressers," hedge funds, or other parties who buy into various classes of debt. "In some cases, how- ever, their exposure to differ- ent classes of debt means that parties may be more willing to compromise," says Derrick Tay of Ogilvy Renault LLP's Toronto office. In other times, companies could to some extent depend on their longtime bankers to protect them and provide debtor-in-pos- session financing that allowed the company to operate during the course of the restructuring. "But banks and bank syndi- cates can behave differently now- adays, especially in big restruc- turings," Tay says. "Once they've shed their risk to the credit mar- ket or through credit swaps, they may have no interest in playing their traditional role." Indeed, the terms of their credit-default insurance may mean that some banks have more to gain from a failed restructur- ing than a successful one. "It's like, 'Go ahead and file for bankruptcy,'" Tay says. "'Make my day.'" Simply put, there are new rules to the game. "The change in the character of primary creditors has changed the dynamics of refinancing and restructuring," Seigel says. Debt instruments have also become far more complex. "There has been increasing use and diversification of struc- tured financial products, and fre- quently it's difficult to see what kind of debt is buried in them," Seigel says. So diversified that the risks might even be offloaded to par- ties who are not at the restructur- ing table. "That throws a wrench into the negotiating dynamics," says Tony DeMarinis of Toronto, the managing partner of Torys LLP's restructuring & insol- vency group. Otherwise, the "covenant- light" lending mentality of the past few years, including terms allowing shareholders to repair payment defaults by in- fusing money into companies, means that a company may be in serious financial difficulty well before it breaches its cov- enants. Such a situation makes agreement on a restructuring even more difficult. Then there are the inter- jurisdictional considerations. "Multinational compa- nies are so spread out, it's sometimes very hard to find a common set of laws that al- lows for efficient restructur- ings," Tay says. According to Tay, the key to giving good legal advice today is understanding the changed environment and the complexities of the instru- ments involved. "You have to provide people with comfort by providing infor- mation and charting a path to a solution," he tells Law Times. "If you don't do that, the stakehold- ers will expect the worst and act accordingly." The public, for the most part, sees restructurings in the context of a courtroom process. "But the process really shouldn't be a courtroom affair," Tay says. "The court's main func- tion should be to scrutinize and approve consent orders. If you do it right, everything should be resolved before you go to court. If you end up with ferocious liti- gation, you've failed somewhere along the way." Murray McDonald, the To- ronto-based president of Ernst & Young Inc., is of similar mind. "You don't want to treat a re- structuring as a battleground," he says. "Rather, it's about anticipat- ing the reasonable needs of credi- tors and providing those, while maintaining enough flexibility to protect the business." Corporate dealmakers, then, should be de rigueur in the restructuring process. But critics say that the vast major- ity of insolvency lawyers don't fit that bill. "So often you're dealing with very adversarial people who take forever to reach agreement," one lawyer says. Indeed, recent restructurings have involved ever more protract- ed court hearings on a multitude of issues. The result has been a steady increase in their duration and cost. "Look at the Stelco and Air Canada restructurings, where the costs were very dramatically high," DeMarinis says. Overly accommodating judg- es may be contributing to the dilemma. "It wasn't long ago that Ca- nadian court put significant pressure on parties to wind up CCAA [Companies' Creditors Arrangement Act] proceedings in less than a year," DeMarinis observes. "But in recent years, judges have become more and more lax — some might say to the point of indulgence — in letting a company pursue mul- tiple restructuring strategies and allowing them to change their minds along the way." DeMarinis says this may lead to "alternative" forms of restruc- turing, including "liquidating CCAAs" in which companies are sold to private-equity, pension, and other long-term investment funds. Nature of the stakeholders has changed FOCUS 'If you do it right, everything should be resolved before you go to court. If you end up with ferocious litigation, you've failed somewhere along the way,' says Derrick Tay. We carry a complete line of employee incentive gifts from our Corporate Promotional Products dyedurham.ca • Phone: 1-888-393-3874 • Fax: 1-800-263-2772 your ONE source supplier for Office & Furniture Products • Corporate Promotional Products Printing & Graphic Services • Law Office Essentials Corporate Supplies • Search & Registration Services OFFICE & FURNITURE PRODUCTS W e ' r e a C a n a d i a n C o m p a n y D Y E & D U R H A M S I N C E 1 9 9 8 PREFERRED SUPPLIER G LF IDEAS CORPORATE PROMOTIONAL PRODUCTS PRIZES, AWARDS & CORPORATE GIFTS FEATURING YOUR LOGO There are over 1,000 golf accessories available, let us find the ideal item for you. Contact us to receive your copy. NOW AVAILABLE 2008 G LF IDEAS B R O C H U R E DD LT RXQTHZC-06 Promo ad 3/20/08 10:07 AM Page 1 BY JULIUS MELNITZER For Law Times LT

• Cover