Canada: Court Approval of Cross-Border DIP Financing Guarantees

Last Updated: May 20 2010
Article by Alison Rehner

InterTAN Canada Ltd. ("InterTAN") is a wholly owned subsidiary of U.S. based Circuit City Store, Inc. ("Circuit City"), a consumer electronics retailer. In Canada, InterTAN operates retail stores under the trade name "The Source by Circuit City". Prior to Circuit City's filing under Chapter 11 of the United States Bankruptcy Code, InterTAN was a borrower under a syndicated credit facility between Circuit City, certain U.S. affiliates, InterTAN, Bank of America NA, as agent, and certain other loan parties (the "Secured Credit Facility"). Under the Secured Credit Facility, InterTAN was not a guarantor and was not liable for the borrowings of the U.S. debtors.

The Chapter 11 filing by Circuit City terminated the Secured Credit Facility. This in turn prevented any further borrowings by InterTAN under the Secured Credit Facility, even though at the time of Circuit City's filing the value of InterTAN's combined assets greatly exceeded its borrowings. Since InterTAN could no longer access financing, and therefore purchase inventory and fulfill its financial obligations in the ordinary course of business, on November 10, 2008, InterTAN sought protection from its creditors under the Companies Creditors Arrangement Act ("CCAA").

The parties to the then cancelled Secured Credit Facility sought to enter into a DIP facility (the "DIP Facility"). The issue before Morawetz J. at the Ontario Superior Court (Commercial List) was whether a cross-border guarantee in connection with the DIP Facility was appropriate because Circuit City's access to replacement financing was conditional upon, among other things, the lenders under the DIP Facility having security over all of InterTAN's assets, as well as a guarantee by InterTAN in connection with the obligations of U.S. borrowers under the DIP Facility.

Morawetz J. assessed the impact approving the guarantee would have on the various stakeholders. If the restructuring failed, Canadian unsecured creditors would have received less meaningful recovery than they might otherwise have received in an immediate liquidation. In approving the guarantee, he reasoned that the benefits of a going-concern restructuring under the DIP Facility, which included continued employment of over 3,000 employees and maintaining stakeholders in the business, ultimately outweighed the benefits of an immediate liquidation.

The Indalex Principles

Following InterTAN, on April 8, 2009, Indalex Ltd. ("Indalex") brought a motion for approval of certain DIP financing, as well as approval of a secured guarantee granted by the Canadian arm of Indalex in favour of the DIP lenders guaranteeing the obligations of Indalex's U.S.-based affiliates under a DIP loan facility. Morawetz J. approved the guarantee and, further to his ruling in InterTAN and other similar cases, set out a list of factors relevant to determining the appropriateness of authorizing a guarantee in connection with a crossborder DIP loan facility.

These factors are referred to in the restructuring community as the Indalex principles and are as follows:

  1. the need for additional financing by the Canadian debtor to support a goingconcern restructuring;
  2. the benefit of the breathing space afforded by CCAA protection;
  3. the availability (or lack thereof) of any financing alternatives, including the availability of alternative terms to those proposed by the DIP lender;
  4. the practicality of establishing a standalone solution for the Canadian debtors;
  5. the contingent nature of the liability of the proposed guarantee and the likelihood that it will be called on;
  6. any potential prejudice to the creditors of the entity if the request is approved, including whether unsecured creditors are put in any worse position by the provision of a cross-guarantee of a foreign affiliate than as existed prior to the filing, apart from the impact of the super-priority status of new advances to the debtor under the DIP financing;
  7. the benefits that may accrue to the stakeholders if the request is approved and the prejudice to those stakeholders if the request is denied; and
  8. a balancing of the benefits accruing to stakeholders generally against any potential prejudice to creditors.

DIP financing is often a critical lifeline for a debtor entering creditor protection under any regime. In crossborder proceedings, stakeholders whose rights and interests are affected can look to these cases for useful guidance to assess the circumstances under which the courts will approve cross-border DIP financing guarantees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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