CREDIT BIDDING. A Presentation to the Insolvency Institute of Canada September 22, 2012

Transcription

1 CREDIT BIDDING A Presentation to the Insolvency Institute of Canada September 22, 2012

2 Credit Bidding: Allows a secured creditor to bid the face value of the secured debt as currency in a sale of the collateral in order to acquire the business of a debtor.

3 A recent rise in popularity: CCAA proceedings involve increasing use of sale of all or substantially all of debtor s assets; Auctions/bid processes are becoming the procedure of choice for large-scale asset sales; Sophisticated loan-to-own investors frequently participate in processes to acquire debtor company or assets through a credit bid, whether inside or outside a CCAA plan.

4 Common Strategies behind the bid: Loan to Own Investment Strategy - Acquiring discounted debt on secondary market and converting into equity position in distressed company Preservation of Collateral - Acquiring and holding the company for interim period with intent to sell when market conditions improve Minimum Bid Guarantee - Encouraging higher bids or ensuring acceptable lowest bid at auction to avoid unacceptable losses

5 Potential Risks with credit bidding: Governance disputes Inter-lender disputes not entertained by CCAA court, subordinate creditors and drag-along rights Potential to chill the market Senior secured creditor influencing sale process may result in weakened confidence in fairness and transparency resulting in fewer third party bids Appeals to Court Timing of challenges is critical. Once sale process has court approval, appeals will often not be entertained by the bitter bidder in an attempt to change the outcome of the bid

6 Principles considered for sale approval: Soundair whether a sufficient effort has been made to get the best price and the seller has not acted improvidently; the efficacy and integrity of the process by which offers were obtained; whether there has been unfairness in the working out of the process; and the interests of all parties.

7 Credit Bidding Inside a CCAA plan: Voting requirements from s.6 of CCAA apply Courts may exercise a cram-down of subordinate creditors if assets of debtor are insufficient to pay out secured creditors Re Philip Services Corp.

8 Credit Bidding Outside a CCAA Plan: Pre-2009 and enactment of s.36: Court relied on power to impose terms and conditions under s.11; and the inherent jurisdiction to fill in the gaps of the CCCA - Red Cross Society (Re) Post enactment of s.36: 36(6) The court may authorize a sale or disposition free and clear of any security, charge or other restriction

9 Factors considered under s.36 (3) & (4): Reasonableness of Sale Process - Senior creditors not unduly restricting sale process - Sale should appear fair and transparent Monitor Approval of Sales Process - Monitor balances interests of all parties Sale Relative to a Bankruptcy - Monitor confirms sale more beneficial than liquidation

10 Factors under s.36 (3) & (4) Continued: Consultation with Creditors - Informed decisions, and balanced consultation with other stakeholders Effect of Proposed Sale on Creditors and Other Parties - How likely, due to debt ratio, are unsecured creditors to receive payment under a different process Fair and Reasonable Consideration - If prior factors satisfied and process handled fairly, courts can easily conclude result is also fair Related Party Sales - Greater scrutiny on transactions with insiders

11 Take Home Points: Credit bids are here to stay - courts have accepted credit bids. Valuation of credit bid - credit may be bid at face value - a dollar of credit bid is equivalent to a dollar of cash bid. Careful drafting/review of credit documentation - may be found to authorize the terms of the sale, including "drag along" of minority lenders. Transparency of Process - due to the bitter bidder doctrine, transparency and court approval up front can almost assure any sale will be upheld at the end.