Industry Committee on Nov. 23rd, 2010

[Judy Sgro, Liberal, York West, ON]

I appreciate your comments. It's amazingly complex and difficult for everyone to understand. I've been working for two years on this issue with an expert working group across Canada that put out a white paper with 28 recommendations. Much of it talks about changes up front, not changes at the tail end, which is what we're looking at today.

The reality is that we are trying to find a way, if possible, to help the people of Nortel. If this bill is passed, is it going to help people from Nortel? We heard the other day that it wouldn't. What's your opinion?

[John Farrell]

It is our understanding, collectively, that there would not be a provision for retroactivity. Unfortunately, Nortel employees will not benefit from this bill.

[The Chair, Conservative, David Sweet]

Mr. Breton, can you do it in 20 seconds?

[Jean-Daniel Breton]

As Mr. Farrell said, because there is no retroactivity, this bill will not help the Nortel employees, unfortunately. The issue of pensions is one that permeates the entire economy. It's not only the Nortel employees. They're the ones who are in the forefront, and we hear of them more. But actually, the economic crisis affected everybody. Everybody's pension plan, their RRSPs or whatever, took a dip. It's a question of cyclical....

[The Chair, Conservative, David Sweet]

Thank you, Monsieur Breton. Twenty seconds flies by fast.

Mr. Bouchard, you have five minutes.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chairman.

Good morning and thank you for coming to testify this morning. In listening to you, we can see there is some similarity in your remarks. I believe we can say you are not much in favour of Bill C-501. I thought I heard the same reasoning from a number of you with regard to the cost of capital. I understand that the cost of capital, interest costs, would be higher if Bill C-501 were implemented. Perhaps I'll put my question to Mr. Farrell or to Mr. Boychuk.

Did you estimate how much it would cost if Bill C-501 became law, if it were adopted? What would be the cost of capital for businesses that would have to borrow?

[Michael Boychuk]

I'll try to answer that in French, but it's very specific to each organization. It will be costly for those at the bottom, what's called investment grade 3B, and that will be very, very specific. The cost is already estimated in a study conducted by PH&N on the impact on these classes of bond issuers. The study states that it will cost nearly $17.5 billion.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Do you have the percentage figures?

[Michael Boychuk]

In percentages, once again, we're talking about basis points. I don't want to go too far into the technical details, but I can say one thing: most credit agencies do their calculations based on current events. We included some charts in our submission. I'm going to use a good example of what happened in the case of a company called Manulife so that everyone around the table will understand.

On August 5, Manulife reported its second quarter results. This is a company similar to a pension fund; it does asset liability management. Its earnings release resulted in downgrades by the credit rating agencies. In a very brief period of time, the cost of its credit on the 2018 bond rose by 55 basis points. That means more than half a point. That's just one case among many. I could give you examples of a number of other situations in which an event occurred. Perhaps Mr. Dafoe can talk more specifically about the events, about what would happen if Bill C-501 were poorly perceived by the capital markets.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

I'm going to move on to something other than the cost of capital.

I have a second question on severance pay. For example, a business is in bankruptcy, or protected under the Companies' Creditors Arrangement Act, closes a plant, employees leave and there are severance payments. Have you estimated how much that would cost if those payments became super-priorities or, at least, if those claims had to be protected more than the amounts owed to the banks or taxes payable?

I would like to hear what you have to say on that subject. I don't know whether Mr. Breton can comment on that. No one talked about severance.

[Jean-Daniel Breton]

I mentioned severance in my presentation, and there would indeed be a major impact on credit in general and it would be particularly pronounced—

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Of what magnitude?

[Jean-Daniel Breton]

We can't quantify it because we don't yet know how it would be interpreted by the market. What is particularly disturbing about severance is that we don't know how much there is. It obviously depends on the business and on circumstances; it could range from one week to 42 weeks' notice, and those are just the statutory amounts. Other amounts could also be owed under employment or common law agreements. We can't know; we can't really quantify them.

For that reason, we can't predict with any certainty what the impact will be on credit or on any contraction of credit. All we know is that it's a large amount. In the context of a business, 42 weeks of salary represents a lot of money. If a banker has to consider a reserve representing 42 weeks of salary in its credit decision, if it lends on an asset basis and cuts it back by the priority amount, that doesn't leave any borrowing room. So there will be no further possibility of guaranteed borrowing.

Perhaps Mr. Kennedy will be better able to explain this phenomenon, which occurs in the case of loans to all businesses. However, it's definitely something that could well affect all businesses in Canada.

[The Chair, Conservative, David Sweet]

Thank you, Monsieur Breton. Thank you, Monsieur Bouchard.

We're over time. Unfortunately, if Mr. Kennedy wants to add something, he'll have to add it on another speaker's time.

Mr. Wallace, for five minutes.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman.

Thank you to our guests for coming this morning. Your messaging is very clear.

Ms. Urquhart, who we've heard before, talked about 30 other countries—I think she said 30—giving preferred status to pensioners in bankruptcy and so on. Maybe Mr. Boychuk could answer. Is this an accurate statement? Is that protection available in other countries? Is the pension system different? What is your opinion of Ms. Urquhart's testimony here?

[Michael Boychuk]

I think it's somewhat misleading, to be quite honest. To my knowledge, there are no major countries that offer preferred creditor status to unfunded pension deficits. There are several countries that offer it, as we do in Canada, to the current employer service costs, any employee service cost that has not been remitted, and as well the defined contribution plan side of it.

Again, I believe her comments are out there but pertain mostly to countries that have defined contribution plans, and with respect to this issue that's a rather moot point.

[Mike Wallace, Conservative, Burlington, ON]

Because the DC plan is totally different from the DB plan.

[Michael Boychuk]

Completely.

[Mike Wallace, Conservative, Burlington, ON]

Mr. Farrell, in your opening statement you mentioned something about AbitibiBowater. Could you give me a bit of background about yourself, first? And second, I know there's been some activity on that file recently. Are you able to fill us in on what's happening there, and what effect this bill could have had in this situation?

[John Farrell]

I can.

Among other things, in addition to my responsibilities for managing FETCO, I have been, and continue to be, involved in the pulp and paper industry. I'm responsible for working with the companies to coordinate the collective bargaining activities from the Manitoba border through to Newfoundland.

AbitibiBowater has been a member of this group that I manage for over 25 years. As a consequence, I know the officers and people at the company. Just yesterday I was speaking with Bruce Robertson, who's the chief restructuring officer of AbitibiBowater. Fortunately, after almost two years of restructuring at AbitibiBowater, the company is restructuring and is emerging from bankruptcy protection under the Companies' Creditors Arrangement Act, which is extremely good news for all the people who live in the communities where AbitibiBowater operates.

How did they get there? An arrangement has been made with the pension regulator in Quebec and Ontario to preserve the value in the pension plans for current retirees, so that the plan was not wound up, and it prevented the crystallization of the losses in the plan.

As well, the company and the union have agreed that in the future they will scrap the defined benefit plan and they will move forward with a form of target benefit plan, which is similar to a defined contribution plan, with far less risk. They have found a way to work with the regulator over a two-year period to sort out their restructuring. They fortunately didn't have to go bankrupt and they found a solution.

So I asked Bruce Robertson, “What if this Bill C-501 had been in existence two years ago?” His answer was that it would have increased the risk dramatically, that we would not have been able to achieve restructuring, and liquidation would have been almost certainly what would have happened. If liquidated, the company would have been forced to eliminate the employment of 8,500 direct jobs.

In a mill community, where the entire community is dependent on the operation of the mill, it's well known that every single job that's lost in a mill will cause the further reduction of four jobs in the community. So this would have resulted in the eventual demise of an additional 34,000 jobs, for a total of 42,500 jobs that would have been lost if AbitibiBowater was unable to find a solution to its pension problem and its restructuring issues.

[The Chair, Conservative, David Sweet]

Now on to Mr. Rafferty, for five minutes.

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

Thank you, Chair.

Naturally, I have lots of questions for all of you. Feel free to be brief.

I'm feeling very sorry for Mr. Davis, who is here and unable to answer any questions. So Mr. Davis, I have some questions for you. Mr. Hill, feel free to be part of this too.

The Insolvency Institute, you're all lawyers, right? You're made up of lawyers who process restructurings and insolvencies within whatever the laws of the land happen to be. Is that true?

[Craig Hill]

No. The institute is made up of a number of trustees. Fellow representatives from CAIRP are also in the institute. It includes people like Mr. Davis, who is a professor at the University of British Columbia.

[John Rafferty, NDP, Thunder Bay—Rainy River, ON]

How does one become a member?

[Craig Hill]

You become a member by having experience in insolvency and restructuring.