Industry Committee on Dec. 2nd, 2010

[The Chair, Conservative, David Sweet]

I call the meeting to order.

Good morning, ladies and gentlemen. Bonjour à tous. Welcome to the 49th meeting of the Standing Committee on Industry, Science and Technology.

With us today are Bruce Robertson from AbitibiBowater and James Lopez from Tembec Inc. From the Federally Regulated Employers - Transportation and Communications, we have John Farrell, as well as Brian Aitken, who will be presenting.

I will just remind members and witnesses that we have five minutes for opening remarks and then we'll have a round of questions. We're trying to be consistently fair with all the witnesses we've heard up until now, and I think you're aware that we're having this second wave of witnesses because of the amendments that were proposed to the bill.

I want to advise members as well, please, not to leave right after we have finished today at around noon, because I have a small but important issue that we need to deal with in camera for about three minutes.

Mr. Robertson, please try to stay within your five minutes. Thank you.

[Bruce Robertson, Chief Restructuring Officer, AbitibiBowater Inc.]

Thank you, Mr. Chairman. I'll do my best.

My name is Bruce Robertson, and over the past 18-plus months, I've been serving as the chief restructuring officer for AbitibiBowater as the company works through the challenging period of restructuring itself under the Canadian CCAA and U.S. chapter 11 creditor protection processes.

I'm pleased to respond to your request to appear today to provide my thoughts on Bill C-501.

I must say at the outset that we're in the final stages of restructuring AbitibiBowater, and the company anticipates emergence within the next couple of weeks. Through the restructuring efforts, the company has been transformed to become one of the lowest-cost forest products companies in North America, with 18 pulp and paper facilities--11 of which are in Canada--24 wood products facilities in Canada, and close to 12,000 employees. The company has $5 billion in revenues and markets its products in more than 70 countries around the world.

Now, as a restructuring professional, I'll do my best to help the committee in its review of Bill C-501.

I'm afraid that however well-intentioned, Bill C-501 would have significant unintended consequences and would likely further penalize the very people the bill's author desires to protect.

Let me explain with a real-life example. If the proposed legislation had been in force in Canada two years ago, AbitibiBowater would have most likely been forced to liquidate its Canadian assets. Why? Because required financing for the Canadian operations, both debtor-in-possession and exit financing, would not have been available due to the huge reserves necessary to account for the pension solvency deficit super-priority.

What would have happened? In a liquidation scenario, employees and retirees would have taken a significant loss in their pensions. Canadian pensions for the company would have paid anywhere between 65¢ and 80¢ on the dollar. In effect, this would have locked in losses at the absolute bottom of the market and would have had the opposite of the intended effect. Also, as a result, up to 8,500 direct AbitibiBowater Canadian jobs would have likely been lost. In addition to these direct jobs, another 32,000 Canadians working in indirect jobs in communities across Quebec and Ontario would have been impacted. More than 40,000 Canadians, mostly in rural regions that are economically dependent on the forestry sector, would have been out of work.

Furthermore, the headquarters of AbitibiBowater would most likely have then moved to the U.S., where the Canadian portion of the company would have likely restructured and emerged with its American mills operational, a further potential hollowing-out of Canadian corporate head offices.

This real-life example demonstrates that the proposed legislation puts Canadians, companies, employees, and our country overall at tremendous risk and at a significant competitive disadvantage.

Mr. Chairman, I encourage you and the other committee members to also review the public record on another company that was recently under CCAA protection, Terrace Bay Pulp. Again, if this bill had been in place, I believe that this company in northwestern Ontario would not have emerged. Four hundred direct jobs would have been lost, many times that number would have been affected in indirect employment, and the pensions would have been significantly and adversely impacted.

An area of grave concern I have with Bill C-501 relates to the ability of companies to raise capital in credit markets to operate their businesses and provide jobs to Canadians. If passed, this legislation would make it extraordinarily difficult for Canadian companies to raise capital. Canadians would once again be at a strategic disadvantage in the marketplace. Financial institutions would have to take into account the possibility of even greater losses if a company were to enter bankruptcy proceedings, thus raising the cost of doing business in Canada.

Canadian companies would suffer from reduced available liquidity. During the credit crisis over the past two years, all Canadians saw what a loss of liquidity means to the economy. I'm concerned that this proposed legislation would reduce the productivity and competitiveness of our nation. With fewer Canadians working and fewer companies making profits and paying taxes, our governments and the social programs they provide would be impacted.

I believe that the best way to deal with pension deficits with companies in creditor protection is the approach taken by AbitibiBowater. Positive collaboration by management with the unions, provincial governments, retiree groups, creditors, and other stakeholders has resulted in no reduction to the pension benefits of the 20,000 Canadian AbitibiBowater retirees, and the company will continue to pay 100% of pension benefits to retirees and beneficiaries as the company emerges from creditor protection.

Let me make one further point. With today's extraordinarily low interest rates, the way we calculate solvency of pension plans in Canada creates a flawed reality. The formula utilized in Canada results in a significantly larger headline solvency deficit relative to the U.S., for example. Because of these differences, the companies do not face a significant pension deficit south of the border.

I realize that it's not the subject of today's hearings, but I encourage federal and provincial governments to consider alternative calculation methods and pension solvency formulas, as well as pension insurance, improved regulation, and other reforms.

In summary, Bill C-501 will kill credit for many good businesses and put them in danger of liquidation. This would obviously not be good for employment or economic growth. It will also encourage businesses to cancel what remaining private sector pension plans exist. As the penalty in terms of lost credit and risk will be too high, it will not actually protect existing pensions better than the current regime.

Policies that help strengthen the financial position of companies are the best solution to ensure that pension benefits are paid over the long term. These policies would include those that attract capital and encourage investment to improve productivity and to create jobs and economic wealth.

Thanks, Mr. Chairman.

[The Chair, Conservative, David Sweet]

Mr. Robertson, that's good. That was the limit of my grace on that one.

[Bruce Robertson]

I practised, Mr. Chairman.

[The Chair, Conservative, David Sweet]

Fairness is the main thing here on the committee, Mr. Robertson. That's the only reason I would cut you off.

Go ahead, Mr. Lopez, for five minutes, please.

[James Lopez, President, Tembec Inc.]

Good morning, Mr. Chairman, honourable members, and ladies and gentlemen. My name is Jim Lopez. I'm the president and CEO of Tembec Inc. We are a company that has 5,000 employees worldwide, 4,000 of whom are right here in Canada.

My business is the forest products business. We produce lumber as well as pulp and paper in many rural communities throughout Canada. In this country our company operates in Quebec, Ontario, and British Columbia, so it's safe to say that Tembec is the most pan-Canadian forest products company in Canada. I think we have a good breadth when we touch our communities and when we talk about the impact of Bill C-501 on our operations.

I'm here today not to talk to you hypothetically; I'm here to talk to you about real experience, practical experience, that I personally have had with Tembec, just as Mr. Robertson has had with Abitibi.

This industry went through a decade of very difficult times, a decade of downturn in virtually all our commodity products that was exacerbated by the high Canadian dollar. It has been very difficult for a lot of companies in Canada to compete and has created financial stress on many of our balance sheets. Tembec was a perfect example of that.

That resulted in a need for the company to restructure its balance sheet in February 2008. Our company's restructuring was done through a CBCA plan of arrangement, as opposed to a CCAA arrangement. The difference is that in a CBCA, the creditors and the shareholders do a consensual deal. As opposed to a court-imposed deal, it's a consensual deal that the court blesses once the shareholders and the other debt holders agree to it.

The linchpin of getting through that process was how this company was going to deal with its new debt going forward. During our restructuring we were able to obtain a $300 million U.S. term loan and renegotiate the company's operating line, which was an asset-backed loan. With that were first and second liens on the company's fixed assets.

Without this arrangement with our ABL lenders and the new term lenders, our CBCA plan of arrangement would never have happened. With this bill in place, those arrangements could never have been made with those lenders. What would have been the consequence? Our restructuring would not have gotten done, and we would have been, in all likelihood, in a liquidation mode.

Given the fact that this industry was going through very difficult times and that many operations were unprofitable at that time, it likely would have meant that 30% to 40% of our assets would have been liquidated. They would have been shut down. The balance probably would have been sold, but 30% to 40% would have been shut down, thus involving 30% to 40% of our employees, including, in all likelihood, the largest pulp and paper operation in Canada, in Témiscaming, which was going through very difficult times at that point in the cycle. It would have been shut down.

In this industry, we have 4,000 jobs in Canada. The traditional multiplier for indirect jobs is four. That's 16,000 people, so 30% to 40% of the 16,000 people who have depended on Tembec to get its restructuring done would have been let down if this bill had been in place.

I'm happy to say that we did get a restructuring done. I'm also happy to say that defined benefit pension plans for all of our employees were unaffected by our restructuring. I'm happy to say that all the solvency requirements for the various provincial jurisdictions where we operate continue to apply for our pension plans, and we're funding them as per the law.

Furthermore, the loans that were put in place in the restructuring had a maturity date of 2012, so it still was a black cloud hanging over the company's head, because it was still a relatively short-term loan. We went to the public debt markets this summer and sold $255 million U.S. of new debt, which we used to repay the other debt. We extended their maturities to 2018, and now the company is in a great position to be able to invest $50 million in operations this year, with a plan to spend several hundred million dollars over the next five years. We never would have gotten that indenture done in the U.S. with this bill in effect.

In summary, I think this bill is going to be a killer of Canadian jobs and a killer of investments in Canada.

Thank you, Mr. Chairman.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Lopez.

We'll go to Mr. Farrell for five minutes.

[John Farrell, Executive Director, Federally Regulated Employers - Transportation and Communications (FETCO)]

Thank you, Mr. Chairman.

My name is John Farrell, and I'm the executive director of Federally Regulated Employers - Transportation and Communications. With me today as an advisor is Mr. Brian Aitken, vice-president, CFO, and treasurer of Nav Canada. Nav Canada is a member of FETCO.

Regarding the amendments to Bill C-501 proposed by Mr. Rafferty, the revised wording clearly extends the super-priority treatment to the entire solvency deficit, such that the entire deficit would have to be paid in order for plans of arrangement under CCAA to be approved by the courts. This is consistent with the preamble of the bill. It is also consistent with the basis upon which FETCO made its submission to this committee on November 23. Our submission on November 23, 2010, remains unaltered by the proposed amendments to Bill C-501.

It is clear that the former Nortel employees and pensioners have suffered significant losses as a result of the bankruptcy of Nortel. This is extremely unfortunate. Employees much prefer defined benefit pension plans over defined contribution plans because they reduce many of the risks to employees. However, it is not possible to remove all the risks.

Bankruptcy is fundamentally the death of a company. CCAA is a mechanism that is analogous to intensive care, where the object is to prevent the death of the company so that it can recover and continue as a going concern. However, if the company cannot be saved, bankruptcy follows, and it is a process designed by legislation to settle the estate of the deceased company in a way that is fair to all stakeholders.

The CCAA bankruptcy proceedings at Nortel happened at the worst possible time. The company failed. We all know that. Financial markets were crashing, and equity values were extremely low. The major culprit was and continues to be persistent low long-term interest rates not seen in over half a century. Low rates have dramatically increased the calculated value of solvency liabilities. Simply put, typical defined benefit pension plans' solvency liabilities, which are a proxy for the cost of settling the plan's obligations, have increased by 30% as long-term Canada bond yields have fallen over the last decade from approximately 5.5% to 3.5%. For a large, mature, defined benefit plan, a 0.25% reduction in long-term interest rates can cause an increase in pension liabilities in excess of $250 million.

I have no doubt that those advocating Bill C-501 are well-meaning. However, the facts demonstrate that Bill C-501 will inflict far greater harm than good on employees, pensioners, and companies with defined benefit pension plans. It would also hurt individual Canadians who hold corporate bonds issued by these companies in their RRSPs, their mutual funds, and their individual retirement portfolios.

There is no doubt that this a complicated matter. This committee has seen a parade of expert witnesses and has received a number of written submissions. The people who have been here include the top solvency and bankruptcy experts in Canada, the top actuaries and pension experts and consultants in Canada, a major Canadian law expert in pension law and bankruptcy proceedings, several top credit market analysts and experts, and some of the leading employers' organizations in Canada. Witnesses from the forest products industry have provided real examples of the harm that Bill C-501 can have on a company's ability to raise capital, make investments for future growth, and maintain employment for thousands of Canadians.

What are all these witnesses saying? They're all saying the same thing: Bill C-501 is bad medicine. It is medicine that kills the patient and infects everyone in the community. You've heard the witnesses say the following: companies with defined benefit pension plans that are in financial difficulty may be forced to seek protection under CCAA. Some companies in CCAA may not be able to restructure and emerge. They may be forced to liquidate, causing the unnecessary loss of jobs. It will increase the cost of capital for companies with defined benefit pension plans, particularly those companies with investment grade bonds. They would see Bill C-501 cause their ratings to fall below investment grade. It would reduce the value of corporate bonds that have been issued by companies that provide defined benefit pension plans.

As a result, countless Canadians holding corporate bonds of the companies that sponsor defined benefit pension plans will have their individual RRSPs, mutual funds, and personal retirement savings portfolios hurt. The passing of Bill C-501 would inflict serious harm and could cause a sudden event that will raise the cost of capital for many Canadian companies that provide the bulk of defined pension benefit plans in Canada. This bill will be the death knell of DB plans in Canada as we know them today.

Pensions and retirement security are a major public policy issue in Canada. The federal and provincial governments have been modifying their laws to strengthen pension plan funding rules, which will improve the security of private pension plans and benefit entitlements.

Further, finance ministers across the country—

[The Chair, Conservative, David Sweet]

Mr. Farrell, I'm sorry to interrupt—

[John Farrell]

—are working very hard on this issue.

Mr. Chairman--

[The Chair, Conservative, David Sweet]

If there are some key things at the end, you could clear them up during questions.

[John Farrell]

I have a couple of key things. I witnessed a debate—

[The Chair, Conservative, David Sweet]

I'll have to stop you, Mr. Farrell, but if you want to squeeze it into a question, please go ahead. I'm sure some member will be gracious enough to allow you to do that.

Now we go on to the Liberal Party. Go ahead, Mr. Rota, for seven minutes.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Thank you, Mr. Chair.

I want to thank the witnesses here today for coming out and making what they've gone through and the effects that Bill C-501 would have had on them very graphic and real. As you know, Bill C-501 is an attempt to fix a real problem, a pension problem, and it's a problem that has developed over years. Someone mentioned a perfect storm. It just seems that the interest rates, the bond and equity markets, a weak economy, and everything else all seemed to happen at once. We're reacting to that and trying to prevent it from happening again.

The bill, as it was introduced, secures what is owed to pensioners from the date of insolvency to bankruptcy. That was my understanding. Now amendments brought forward have revised the wording, and now, as Mr. Farrell has mentioned, it would make it so that all pensioners would have priority over all creditors, or priority status.

It's difficult here because we're all sitting here trying to balance the interests of the pensioners, the employees, and industry. We're trying to get the results right and trying to make it work.

Mr. Lopez, I know the story of Tembec and the success rate that has come up. With the modified amendments giving full priority status, I think you alluded to where Tembec would be today. Where would it be today if this bill were in place? It's a very simple question.

[James Lopez]

Tembec wouldn't exist today. A handful of our assets would have been sold off for the benefit of the creditors, whoever they would be, but Tembec wouldn't exist today as a company, and, as I mentioned earlier, many of our jobs would be gone.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

How many jobs would that be?

[James Lopez]

I would say it would be 30% to 40% of our 4,000 employees, so you're looking at 1,200 to 1,500 direct jobs and perhaps 6,000 to 8,000 indirect jobs, or something in that range, because of all the indirect spinoff jobs that come out of our industry in forestry.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Very good. With regard to the pensions, which is basically what we're trying to protect, you mentioned that the pensions were unaffected. What would be the status of the pensions if this bill had been in place?

[James Lopez]

Well, had the bill been in place, it's very difficult to say, other than that it depends on just how the assets are carved up and how much revenue they would achieve in carving them up. I think the more important point here is that although you're maybe going to save the pensions, you're going to wipe out the jobs.

What we've been able to do is save both the jobs and the pensions. It seems to me a bit as though we're building the church for Easter Sunday here, doing it for the very remote situations in which it does come about that a company becomes insolvent and the employees do lose a portion of their pensions. That's not something that happens very often. There's a high-profile case in Canada now that everybody is focusing on, but companies are better off having the ability to access capital markets to keep the doors open, to make the investments, and to keep the jobs viable. I think we have to look at the big picture on this thing.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

We've heard this a number of times, especially with the investment community. For them it's just a statistic. It's a small group.

We're trying to protect pensions, but we're also trying to protect the industry. I understand what you're saying.

Are there any solutions? We're grasping for solutions. The intentions of this bill are good, but how do we solve the pension problem? It really is a small solution. I know other countries have done different things. I know Tembec operates in different countries. Are there any other solutions that are out there that you have seen work, and work well, within your industry?

[James Lopez]

My recommendation is that the committee look at the work that's already been done by provincial governments. Mr. Robertson alluded to it earlier.

When we fund our pensions—and we have to do our calculations for contributions every year—the laws in most provinces require us to do it on a solvency basis. In other words, you have to assume that the company is insolvent, that the pension is wound up, and that it's put into annuities at very low interest rates. That's what we have to fund over five years. We only have five years.

The provincial governments have already been very progressive in putting these laws into place. We don't get to use what the ongoing interest rate is; we have to use a solvency rate. There's a big difference there, so I would urge the committee to look at what the provincial governments have done.

What happened in this particular case that I know you're looking at is a convergence of low interest rates and low markets at the same time. I think that's what caught their pension plan, but overall, pension plans are more healthy now because of the provincial policies that are in place.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Very good. Thank you.

I'll go to Mr. Robertson. After that I have a question for Mr. Farrell as well.

Mr. Robertson, you're restructuring. You're coming to a certain point where everything looks very positive. You have 8,500 employees and 20,000 pensioners, mainly in Ontario and Quebec.

I basically have the same question for you. If Bill C-501 had been in place when you started restructuring, where would we be right now?

[Bruce Robertson]

I think the outcome would be as Mr. Lopez said.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

It would be exactly the same. There would be no difference.

[Bruce Robertson]

It would be exactly the same. You might have some operations that survived, but--