Legal Trends 2016: Restructuring & Insolvency
April 6, 2016
ONE | OIL AND GAS SECTOR
Amid the protracted drop in oil prices and the decline of the Canadian dollar relative to the U.S. dollar, capitalizing on distressed opportunities in the oil and gas sector in a low-risk jurisdiction, such as Canada, has never been more attractive. These combined circumstances have resulted in approximately US$112-billion worth of oil and gas assets being made available for purchase. The semi-annual borrowing base reviews for reserve-based lending are resulting, in many instances, in increased pressure on borrowers to dispose of not only non-core assets, but also, in some circumstances, the “crown jewels” in order to bring borrowing base levels into compliance.
In Canada, exploration and production (E&P) companies have been among the first to struggle in the new oil economy. Canada’s flexible restructuring regime provides a number of ways to maximize value for these E&P companies. The restructuring proceedings of Connacher Oil and Gas Limited resulted in a corporate restructuring, GASFRAC Energy Services Inc.’s assets were sold as a going concern after it filed for court protection, and Laricina Energy Ltd.’s restructuring resulted in a court-approved settlement agreement, which included a strategic alternatives process and rights offering. Additionally, there are many more E&P companies pursuing out-of-court restructurings. The steady increase in the number and types of distressed opportunities is sure to continue as long as the economic climate for oil and gas remains depressed.
TWO | RETAIL
There was a wave of retail insolvency filings across Canada in 2015. The insolvent Canadian arm of Dutch clothing chain Mexx shut its 95 locations across the country. After seeking court protection, women’s clothier Boutique Jacob closed its approximately 90 stores across Canada. In a unique move, the largest landlord of women’s clothing retailer Boutique Laura provided the debtor-in-possession financing required to fund Boutique Laura’s restructuring. Comark Inc., the insolvent owner of three specialty clothing retailers, was able to complete a court-approved sale of all three banners and maintain operation of its approximately 300 stores following a court-approved sale process.
Dwarfing all other retail insolvency filings, however, was Target Canada Corporation’s (Target Canada) insolvency proceedings. Target Canada, the Canadian subsidiary of the Minneapolis retail giant, opened its first stores in March 2013. By January 2015, Target Canada filed for court protection and announced it would be closing all of its 133 stores. By April 2015, liquidation sales were completed and all stores were closed. The inventory liquidations resulted in proceeds of C$386-million, and the lease portfolio sale generated proceeds of approximately C$598-million. In addition to billions of dollars of intercompany claims, approximately C$2.63-billion of third-party claims, including landlord claims, were filed by the claims bar date. U.S.-based distressed investors have been very active in acquiring claims throughout the duration of the case. We expect continued activity in the distressed retail market.
THREE | MINING AND RESOURCE SECTOR
Depressed commodity prices continue to cause stress in Canada’s once robust mining and resource sector, a trend expected to last until global commodity prices rebound. The pain is being felt most acutely in the junior mining sector. These less diversified entities have limited access to capital and often face the twin menaces of significant cost overruns in development stages and restricted liquidity. Complicating matters, many junior mining companies headquartered in Canada have principal operating assets located in foreign countries that have less predictable insolvency regimes and challenging geopolitical environments. Although there have been a number of insolvency filings for junior mining companies in Canada, often these companies and their lenders adopt a “wait and see” strategy by deferring exploration projects or placing unprofitable mines on extended care and maintenance.
The impact of falling commodity prices, however, has not been restricted to smaller mining operations. Larger mining ventures have also been affected. RB Energy Inc., which indirectly owns a large lithium mine in northern Quebec, filed for protection in late 2014 and was placed in receivership in early 2015. The Bloom Lake mine and Wabash/Scully mine, large iron ore mines located in northern Quebec and Newfoundland and Labrador, respectively, also filed for court protection in 2015.
FOUR | STEEL
Two of Canada’s largest steel manufacturers, US Steel Canada Inc. and Essar Steel Algoma Inc., are currently under court protection. Notwithstanding the weaker Canadian dollar and the weak price of iron ore — the main component in manufactured steel — manufacturers have not been able to maintain profitability and offset the deleterious effects of the significant decrease in the price of steel. Macroeconomic factors such as the increased supply from China and other countries, with no corresponding increase in global demand, have conspired to limit the restructuring options available to these steel giants. Large pension obligations, sizeable obligations under collective agreements and environmental issues inherent in operating a large steel mill will continue to place considerable financial strain on this legacy industry.
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