Over the past year, there have been a number of insolvency
proceedings in Canada where lenders have used their loans or notes
to bid for assets which are being sold by an insolvent debtor. In
some cases, this was effectively intended as a form of realization
where some or all of the debt would be exchanged for the
debtor's assets and business. The lenders would then own and
operate the business, usually through a corporation, and
potentially sell it at a more opportune time. In other cases, the
credit bid was used as a "stalking horse" bid which set a
floor price in a sales process with the result that the lenders
would either be paid out in full or own the business. More often
than not, the parties holding the debt which was being bid acquired
the debt in the secondary market and were not the original
In Canada, the practice of credit bidding is not codified by
statute, as is the case in other jurisdictions, most notably the
United States Bankruptcy Code, but is a tool now utilized under the
rubric of reorganizations effected under the Companies'
Creditors Arrangement Act or even in receiverships. The advent
of credit bidding gives rise to a number of issues in the context
of a syndicated loan or trust indenture.
Under the traditional model of a Canadian syndicated loan, a group
of lenders appoint an agent to act on their behalf in dealings with
the borrower. The syndicate members delegate certain tasks to their
agent, while retaining the right to make decisions typically by
majority or supermajority vote, with some critical items, such as
changes to interest rates, loan amortization, term and security
(commonly referred to as "RATS") left to be determined by
unanimity. Until recently, this model has survived unchanged for
decades. Similar provisions exist in most trust indentures under
which debt is issued.
It is unclear in the context of typical syndicated loan provisions
whether an agent or indenture trustee has the ostensible authority
to bid the loans of its principals, the lenders, in exchange for
title to the debtor's assets which may constitute security for
the loan. Technically, the agent is the secured party on behalf of
itself and the lenders. The trustee performs a similar function but
technically is a fiduciary which acts on behalf of the noteholders.
However, it is often the case that the agent or trustee has little
or no debt (or is no longer holding debt) owed to it in such
capacity and thus little economic interest in any
As a practical matter, agents and trustees do not act without
instructions from the lenders or noteholders except maybe in highly
unusual circumstances. Most loan agreements and trust indentures
are ambiguous as to whether unanimity (or near unanimity) under the
RATS provisions is required for the agent or trustee to make a
credit bid or whether other special majority provisions apply.
Also, the majority provisions in the loan documentation may not
correspond to the voting provisions under insolvency laws or other
laws relating to corporate reorganizations which are sometimes used
as a substitute therefor (e.g., the Canada Business
Corporations Act arrangement sections). This can lead to
structuring arbitrage where statutory provisions are used to deal
with some debt and contractual provisions are used to compromise
Agents may also have conflicts if they represent different
syndicates or have different interests within syndicates such as
being an operating and term lender.
We urge parties to consider these issues in preparing loan
documentation and trust indentures. In particular, they should
consider whether special majorities should or should not be able to
bind minorities to a credit bid and whether dissident lenders
should be able to opt out or even to credit bid on their own. These
factors must be considered in light of the potential impact of such
decisions on the attractiveness of the debt in the secondary market
(particularly for buyers who have the objective of owning the
company) and the likelihood that other parties who own the debt may
have divergent interests. There is no single right answer for all
situations but there is clearly a need for intelligent discussion
among credit experts, syndication teams, those performing
administrative roles and counsel.
Parties who buy debt with a view to using it as part of a
"loan-to-own" strategy should carefully review the
underlying documents in order to ascertain whether such documents
will facilitate or impair credit bidding.
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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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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