Law Times

PAGE 10 FOCUS augusT 10/17, 2009 • Law Times Prepackaged insolvency is increasingly popular BY GLENN KAUTH Law Times protection this spring, the parties had already worked out many of the details of a fi nal arrangement. Both automakers were well on W their way to securing government fi nancing to keep them afl oat, hen General Motors and Chrysler fi nally landed in bankruptcy while negotiations with unions had concluded with substantial cuts to their labour costs. In Chrysler's case, the company had already hammered out an equity deal with Italy's Fiat SPA. For the most part, what remained was the task of re- ducing their debts through talks with their lenders, something they proceeded to undertake through the bankruptcy process before they fi nally emerged from court protection in recent weeks. Th e result was a relatively quick end to Chapter 11 pro- ceedings that threatened — and, of course, may yet be having a negative impact on — the auto- makers' sales and bottom lines. But for Kevin McElcheran, a partner in the bankruptcy and restructuring group at McCarthy Tétrault LLP, it's a scenario that's becoming increasingly common. "Having a company for a long time in some kind of in- solvency process . . . has a very serious negative impact on the long-term relationship [with customers]," he says. In the case of Air Canada, for MEET JUDY example, its time in protection under the Companies' Creditors Arrangement Act dragged on for months as it tried to renegotiate almost every aspect of its business, according to McElcheran. "It seemed like an interminable pro- cess," he says, adding that Stelco Inc., too, suff ered when GM an- nounced it wouldn't renew its con- tracts with the steelmaker during its 26-month-long bid to emerge from bankruptcy protection. As an alternative, companies are turning to what McElcheran calls a prepackaged insolvency. "It's happening pretty frequently and it's keeping me pretty busy these days," he says. Prepackaged scenarios typically come into play where the compa- ny has an otherwise viable business that fi nds itself saddled by debt. While that might not have been the case with GM and Chrysler, in most instances the issue comes down to a need — often triggered by the breach of a loan condition or obligation — to get some relief from interest payments or get new fi nancing. In some scenarios, the problem might be that the com- pany took on additional debt dur- ing a leveraged buyout. In others, the issue might simply be that the company borrowed too much during the good times fi guring it could handle its debts. "In that sense, it's easier to do a prepack if you've only got the creditors to deal with," says McElcheran, noting the negotiations get much more complicated when issues such as labour contracts surface. Often, companies will work to © bargain new terms with their lend- ers before fi ling. Th ey can include options such as a debt-for-equity swap allowing the company to re- duce its interest payments. At the same time, it will typically seek new fi nancing in order to remain afl oat. Th en, once it has what ap- pears to be a workable plan that has agreement from enough of the company's creditors, it will fi le for CCAA in court in order to fi nal- ize the deal. In the Chrysler case in the United States, for example, the court had the authority to make a ruling approving the terms despite Untitled-3 1 8/4/09 2:47:34 PM August Specials Visit our web site and save 20% The Corporate Counsel Guide to Employment Law, Second Edition Peter Wilson and Allison Taylor Debt Collection: A Step-by-Step Legal Guide Marcia J. Fraser North American Relocation Law Benjamin A. Kranc Ontario Pension Law Handbook, Second Edition Susan G. Seller the fact that some parties disagreed with them. As a result, the auto- maker was able to emerge from Chapter 11 and conclude its part- nership with Fiat. Key to making a prepackaged insolvency work is having a man- ageable group of shareholders who can deliver the votes necessary to get a plan approved, McElcheran notes. He distinguishes between prepackaged cases in which a solid group of creditors is already behind a plan of arrangement and pre- negotiated ones where many, but perhaps not enough, of them are in agreement before fi ling. In the recent Chapter 11 fi ling by auto parts maker Lear Corp., for example, the company went into protection last month with signifi cant support from credi- tors and bondholders for its re- organization plans but without clear backing to get them off the ground. As a result, Lear is seeking court approval of its pre- negotiated plan. But in an earlier case, that of Meridian Technolo- gies Inc., initial agreement by an overwhelming majority of its secured lenders allowed it to leave CCAA protection within 11 days. Th ere, new fi nancing as well as the lenders' willingness to exchange debt for equity, al- lowed a new company, Meridian Lightweight Technologies Inc., to emerge very quickly. Of course, there are still high- profi le exceptions to the prefer- ence by some companies for a speedy, pre-arranged bankruptcy process. In the case of Quebecor World Inc., the printing company sat in bankruptcy protection for more than a year until it fi nally exited last month. And, of course, Nortel Networks has remained in what has become a messy predic- ament since its fi ling in January. In that instance, McElcheran says the company needed to fi le early in order to bring its stakehold- ers together. At the same time, because the outcome wasn't clear — especially given that options included selling the telecommu- nications giant — a prepackaged process wouldn't have been ap- propriate, he notes. But given the benefi ts in pre- serving a company's viability and image, McElcheran says a prepackaged option can be the way to go. "For those that have the opportunity to do it, it is the thing to do." LT www.lawtimesnews.com Web Discount (LT 1-4x5).indd 1 8/5/09 10:52:42 AM 3883.SR.LawTimes 06/2009

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