Restructuring offers a means to salvage value

The pace of today’s globalized market puts companies under intense pressure to manage technological change, growing competition and wide-ranging economic forces. When these pressures become insurmountable, a strategically managed insolvency or restructuring may be the best solution.

“Restructuring professionals are looking at different ways of salvaging value,” says Mario Forte, partner at Ogilvy Renault LLP, “as opposed to the traditional utilization of bankruptcy process per se; exploring corporate reorganization methodologies, like plans of arrangement outside of a company’s credit arrangement or bankruptcy solvency proposals. I think we may see more of that, and I think the parties involved may be more inclined to accommodate.”

The first wave of insolvencies in this cycle, he predicts, will be of very troubled businesses. “There may be nothing to do but shut the doors and liquidate the tables and chairs. The amount of capital flowing in the economy over the past seven years means that companies have generally been able to build up substantial cushions of equity. Therefore, those companies that are really in trouble now have shown demonstrable lack of ability in attracting capital, and usually the reason is that their basic business wasn’t very good to begin with.”

More complex are the companies that have a viable business or a business to restructure. “With classic entity restructurings, such as Air Canada and Stelco, you may have entrenched positions, lots of hard bargaining, with a view to maintain the enterprise as opposed to a corporate and a business whole.

Those types of situations arise when the company has some bargaining strength and support,” says Mr. Forte. Edward Sellers, a partner at Osler, says, “There is a much greater activity level in the distressed space today; (in some cases) it’s being done in conjunction with sales processes, run by companies or by court officers, where there is no pretence about what is afoot, simply that ‘we have it up for sale, the best offer takes it.’ But there are other circumstances where the buyer, more often a financial interest, is looking to sponsor a restructuring. Financially interested parties as well as strategic parties are coming to the table, looking to acquire assets that they may have had their eye on for some time. Because the owner of the assets is now facing some financial challenge, they have to sell, and acquirers are ready to take advantage.”

Despite the decline in non-distressed activity among private equity buyers, Mr. Sellers suggests it is Important that hopeful acquirers of distressed assets not underestimate their competition. “There are now dedicated, specialized players that have their own sources of capital – specialized restructuring funds – private equity interests that continue to do transactions that make sense. There’s still very much a back channel of funding availability for the right deals. A strategic purchaser who believes they should have a clear path to acquire a disabled competitor may find it’s not that simple.”

In Canada, new insolvency legislation passed in January and expected to come into force this year may change the environment for insolvent companies. “There are new rules dealing with how companies shed contracts, which is a very important part of restructuring an entity; the other big change is that bargaining power with labour will be shifted dramatically in favour of labour,” says Mr. Forte. “There will be no doubt now that collective agreements will not be shed as part of a contractual relationship. The insolvency proceedings will have to be cognizant of the fact that they will be playing on the labour tribunal’s home turf for at least part of the proceedings.”

For Canadian companies facing a possible insolvency, his advice is straightforward. “One hundred out of 100 insolvency professionals would tell you this – do something early. Do it when you still have room to manoeuvre, when you still have value – when you still have money available and credibility. Don’t wait until there is no other alternative. That is really the single reason restructurings have such a poor success rate – options have degraded down to the point of a Hail Mary. Recognize the problem, consult with professionals early on and determine the best approach together – then implement it effectively and quickly.”