Copyright 2010, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Restructuring & Insolvency, November 2010
While credit bidding has an established history in Canada, there is little case law on the topic. The Companies' Creditors Arrangement Act (CCAA) proceedings of the Canwest Publishing Group (Canwest) provide the best and most recent example of the considerations in a credit bid, including the establishment of a fair process for the stakeholders, no matter how unique.
In this case, all three motivations for credit bidding were at play. The senior lenders (owed approximately C$950-million) were prepared to put forward a credit bid as a stalking horse in order to encourage a higher offer in an auction process. If that offer did not materialize, the senior lenders were prepared to own, hold, and sell in the future, to avoid an immediate loss on their investment. The unsecured noteholders (owed approximately US$400‑million) were prepared to buy, not only to protect their position, but to give effect to a "loan to own" strategy for many of them, particularly those that bought notes at a discount.
Canwest was the largest publisher of English-language daily newspapers in Canada, as measured by paid circulation and revenue. A subsidiary of Canwest owned the National Post, one of only two Canadian national newspapers. Prior to filing for CCAA protection before the Ontario Superior Court of Justice, Canwest had defaulted on its senior secured credit facilities and its senior subordinated notes. In the months leading up to the filing, Canwest and its senior lenders negotiated the terms of a comprehensive, pre-packaged restructuring transaction, pursuant to which the senior lenders would put forward a stalking horse credit bid and whereby the senior lenders would acquire the businesses of Canwest in substantial satisfaction of their outstanding secured claims (the Credit Bid). The terms of such transaction were set out in a Support Agreement which provided, among other things, that Canwest would file for protection under the CCAA, take steps to implement the transaction and immediately conduct a Sales and Investor Solicitation Process (the SISP) for the purpose of identifying if there was an offer for the acquisition or recapitalization of the businesses of Canwest that would result in a cash distribution to the senior lenders on closing of the total amount of their claims minus a discount (a Superior Cash Offer).
Canwest and the senior lenders agreed that if a Superior Cash Offer was identified in the SISP, Canwest would pursue the transaction contemplated by the Superior Cash Offer, subject to a timeline for completion set out in the Support Agreement. In the meantime, the Credit Bid provided stability to Canwest as it demonstrated, from the outset of the CCAA filing, that Canwest had the support of its senior lenders and would carry on business with such senior lenders as owner, unless a better offer came forward. In any event, there would be a going-concern solution to the insolvency of Canwest.
The process started in full gear. The Initial Order:
- authorized the SISP;
- approved the Support Agreement that established the framework for the Credit Bid;
- accepted for filing a plan of arrangement addressed to the senior lenders alone (the Senior Lenders' Plan) to give effect to the Credit Bid;
- established a claims process for the senior lenders to file claims and vote on the Senior Lenders' Plan; and
- set a meeting of senior lenders on January 27, 2010, three weeks after the filing, to vote on the Senior Lenders' Plan.
The Senior Lenders' Plan was the best way to address any real or perceived governance issues. It created the voting mechanism to bind all members of the syndicate to the Credit Bid and all steps to implement the Credit Bid, without any dispute as to the extent the provisions of the credit documentation were insufficient. The senior lenders approved the Senior Lenders' Plan on January 27, 2010, by an overwhelming majority.
With market confidence protected by the Credit Bid and a process set in motion for its approval by the senior lenders, the SISP commenced on January 11, 2010. On April 30, 2010, two bids were put forward to acquire substantially all of the assets of Canwest and one bid to make an investment in Canwest. Following its review of the three bids, Canwest's court-appointed monitor determined that only the offer received from the Ad Hoc Committee of the 9.25% senior subordinated noteholders (the AHC Bid) was a credible, reasonably certain and financially viable offer and a Superior Cash Offer.
Canwest took the unprecedented step of seeking conditional sanction of the Senior Lenders' Plan while also seeking court approval of the AHC Bid. In this dual-track approach, Canwest would proceed toward implementation of the AHC Bid while concurrently taking steps to remain in compliance with the Support Agreement and moving toward the closing of the Credit Bid. In the event that the AHC Bid did not close, Canwest would immediately consummate the Credit Bid. The material terms of the AHC Bid were set out in an asset purchase agreement for substantially all of the assets of Canwest and shares of National Post Inc. (the AHC Transaction).
For administrative reasons and to facilitate a cleaner distribution, it was determined that the AHC Transaction should be implemented through a plan of arrangement (the AHC Plan). The AHC Plan provided for payment in full to the senior lenders and approximately C$150‑million to unsecured creditors through a combination of cash and shares representing 32.5% of the equity on emergence. After the filing of the AHC Plan on May 21, the AHC Plan was amended on June 10, considered and overwhelmingly approved at a meeting of affected creditors on June 14 and sanctioned on June 18, 2010. The AHC Plan sanction order vested the assets in the purchaser on closing, free and clear of all claims. By closing, approximately 89% of the noteholders participated in the AHC Transaction.
In the end, the AHC Plan represented the best available outcome for Canwest and its stakeholders. The SISP was a comprehensive and robust test of the value of the assets in the market, which gave the court the evidence needed to approve the innovative and unprecedented dual-track process.
When reviewing the course of events, it is apparent that the stakeholders of Canwest benefited from the stalking horse credit bid put forward by Canwest's senior lenders who were owed approximately C$950-million. To be effective for such stakeholders, the Credit Bid had to be put forward in a process that would allow a sufficient opportunity for interested parties to come forward with a superior offer, recognizing that a timetable for the sale of a business in distress is a fast-track ride that requires interested parties to move quickly or miss the opportunity. The court has to balance this need to move quickly, to address the real or perceived deterioration of value of the business during a sale process or the limited availability of restructuring financing, with a realistic timetable that encourages and does not chill the auction process.
The process that unfolded in Canwest did create that dynamic, resulting in a sale of assets to an entity sponsored by the Ad Hoc Committee. The sale resulted in payment in full to the senior lenders, a preservation of the business as a going-concern and continued employment for its workforce, plus some recovery for unsecured creditors. There is no doubt that the fasttracked and innovative process created some strenuous dynamics between the Ad Hoc Committee and the senior lenders. Nonetheless, the parties were able to negotiate through a process that ultimately resulted in a superior offer to the Credit Bid and a successful conclusion.
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