Industry Committee on Dec. 2nd, 2010

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

I've been to your Thunder Bay plant. How many jobs are there?

[Bruce Robertson]

We probably have 400 there, or maybe a bit more than that.

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

How many would be left after this, if Bill C-501 were in place?

[Bruce Robertson]

It could be zero.

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

It could be zero.

Okay. Very good. Thank you.

Mr. Farrell, you had a comment, and maybe I'll just let you continue.

[John Farrell]

I wanted to say that I think there are solutions. The problem with Bill C-501 is that it's just not the right kind of solution. I've observed what AbitibiBowater has been doing. They worked with the regulator in Quebec and the regulator in Ontario. They found a way to protect their pensions without reducing their value for current employees and they restructured the basic pension formula moving forward, so there was not as much of a contingent liability for their plan.

Bruce, I could let you speak to that, but I'm aware that you've done a great job, and a very difficult job, in working with the provincial governments, the provincial regulators, and the unions. You've put together a deal that works for everybody, and it allowed you to restructure.

[The Chair, Conservative, David Sweet]

Your time of seven minutes has pretty well expired, Mr. Rota. I'm sorry.

Thank you for your answers.

Now we go to Monsieur Bouchard.

You have seven minutes, sir.

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

Thank you, Mr. Chair.

Good morning and thank you for coming in to testify.

I will direct my questions first to Mr. Robertson, and then Mr. Lopez can add to the answers.

Both of you said that, had Bill C-501 been in force, you would have had to liquidate your facilities and assets. I believe that you both said this. Basically, you're both against Bill C-501.

Mr. Robertson, you said that the bill would have made things difficult in terms of credit. I would like to get more details on this issue. Would bankers or your lenders have raised the interest rates they charge? What real consequences would you have suffered?

Mr. Robertson could answer first, and then Mr. Lopez could go ahead.

[Bruce Robertson]

Thank you, sir.

If you look at the liabilities of the company, particularly as they relate under Bill C-501, you would have pension solvency deficits in the neighbourhood of $1.3 billion. Then you would have some secured debt on top of that, which would be securing all of the Canadian assets.

For a company to emerge from creditor protection, they need to make sure that they have a proper balance sheet, not too much leverage, and sufficient access to capital. Creating a super-priority basically creates a first charge for the entire solvency deficit over all of the assets of the company. We're talking about, in Canada, liabilities of $1.3 billion, and that number can float all over the place. As we've recently discussed, the solvency deficit is at times a function of interest rates. It is largely a function of interest rates, as well as plan performance and what have you.

To successfully emerge, you need access to capital. You need liquidity. At the end of the day, we wouldn't have had sufficient assets for us to be able to secure the exit financing to be able to continue ordinary operations. It would have resulted in liquidation of the company.

Perhaps some of the mills might have found new owners. We've recently seen that mills that have continued to operate have been basically operating with the help of provincial support, but it is extremely unlikely that the company as a whole would have continued to operate.

[James Lopez]

Mr. Bouchard, thank you for the question.

In the case of Tembec, when we went through our plan of arrangement, basically we had the shareholders and bondholders vote on how to divide up the ownership of the company. The existing shareholders got a very low percentage of the shares, about 5%, and the bondholders, who are debtors and who had the security of our fixed assets, got 95%. That dealt with the large debt load that the company could not sustain, but we had no cash and we had no credit. As you know, a company needs cash and credit to survive.

When we went to potential lenders, the first thing they'd ask was, “What sort of security are you going to give me?” It's no different from going to somebody for a $300,000 mortgage for your house. They're not going to give you the mortgage without getting the security on the house, and the security that a company such as ours has is our fixed assets.

If there was $200 million in front of them, which was just about the total pension deficit of the company, they would never have agreed to loan us $300 million, because then they'd have to be convinced that there was $500 million worth of assets in the company that they could sell at any point in time, and that is a very difficult deal.

Unfortunately, when loan agreements are written or bonds are issued in the public credit markets, lawyers are hired on both sides, and the majority of the discussion is about what happens if the worst case happens. Even though nobody believes that the worst case is going to happen--because if they did, they wouldn't give you the money--it's always about what will occur if the worst case happens, and how they can secure themselves. That's where the fixed assets come into play.

That was our real-life example. We could have never gotten it done if I'd had to say that there was a couple of hundred million dollars parked in front of you for security.

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

I have another question.

Mr. Robertson, how much money did retirees get after your restructuring? Did they retain all the benefits they were entitled to under their pension fund?

[Bruce Robertson]

Post-emergence, all retirees are going to be entitled to 100% of their pension benefits.

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

In Tembec's case, did your retirees retain all their pension benefits?

[James Lopez]

That's correct. All retired employees and all existing employees have 100% of their pension benefits.

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

Had Bill C-501 been in force, would the outcome have been the same? Would you have been able to fund their retirement benefits?

[James Lopez]

It's an interesting trade-off, because the assets would have been liquidated. In other words, they would have been sold. As I said, only 60%, or maybe 70%, of the assets could have been sold, and yes, if the bill were in place, the pension would have been fully funded. However, 30% to 40% of our employees, while they would have kept their pensions, wouldn't have a job in La Sarre, Quebec, or Témiscaming, Quebec, or Kapuskasing, Ontario, or in a lot of our high-risk operations that were going through difficult times.

To us, we need to have a scenario in which we protect the employees in their jobs and protect the pensions at the same time. The bill forces a choice of either protecting the pensions or protecting the employees in the entire company.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Lopez.

Thank you, Mr. Bouchard.

Now we'll go to Mr. Rafferty for seven minutes.

I apologize; it's Mr. Lake, and then Mr. Rafferty.

Go ahead, Mr. Lake, for seven minutes.

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

I was prepared, Mr. Chair.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

So am I.

Mr. Robertson and Mr. Lopez, it's great to have you before the committee. I was reluctant to have extra meetings, but now I'm glad we had this extra meeting to have you both give practical examples of some of the challenges with this legislation.

Two of the significant things we've heard about over the course of the committee hearings are the potential unintended consequences of this bill. We've also heard a lot of talk about the significant positive direction the government is headed in, in terms of what we've already done to protect pensions. One of the people who has written quite a succinct and very well-thought-out overview of this situation is a former Deputy Prime Minister, a former Minister of Finance, and a former Minister of Industry from the Liberal Party, John Manley. In just three pages he wrote what really defines the situation well.

I'm going to take the time to read some of what he had to say, and then I will table it with the committee, Mr. Chair, if I may. In terms of the action taken by the government, Mr. Manley had this to say:

The federal government has already put forward a number of significant reforms that will enhance protection for plan members. Some of these measures are contained in Bill C-9, the 2010 federal budget bill; others are included among regulations announced on May 3. In the past, for example, a federally regulated company that terminated its defined-benefit plan would have been free to walk away from any pension deficit. In future, such a plan will have a claim on the assets of the corporation similar to that of any other unsecured creditor -- the same level of protection currently offered to members of provincially regulated defined-benefit plans. Moreover, if the company is behind in its contributions or has failed to remit employee contributions, those amounts will be treated as “super-priority” claims.

Mr. Manley goes on to say:

In addition, the proposed reforms will compel plan sponsors to file actuarial updates every year, rather than every three years, a step that will reduce the size of future pension deficits by requiring that companies make supplementary payments sooner. The government is also moving to restrict the ability of employers to suspend contributions when pension plans are in surplus, and to revise the current tax rule that requires companies to halt payments when the plan is more than 110% funded.

Several witnesses before the committee applauded these steps, witnesses on both sides of this particular piece of legislation.

Mr. Lopez, I'll come to you to comment on this after I read this. With regard to the unintended consequences, Mr. Manley says:

One of the major flaws in the bill is that it would choke off credit to companies at a time when they were most in need of it.

He goes on to say:

If C-501 passes, however, investors and lenders will have little or no incentive to provide financing to weakened companies with defined-benefit plans. They will either refuse to lend them money, or demand significantly higher premiums.

As a result, the bill would almost certainly drive into bankruptcy companies that otherwise would have been able to continue offering employment and pensions to their employees. Instead of being given a chance to restructure, such companies could be forced to liquidate.

Maybe we could have your comments, Mr. Lopez.

[James Lopez]

Thank you for the question.

I think Mr. Manley's points are right on, and it's the same point that Mr. Robertson and I were making earlier. He is talking about the hypothetical; as I said, we've been able to come here this morning and talk to you about the practical situations he is addressing in his report.

However, I'd like to say that there's a “furthermore” here. We're talking about companies having trouble, trying to get out of CCAA, but let's look at the positives, and I'll again use my company as an example. We're going to invest over $50 million in 2011 in our Canadian operations. We're talking to our board of directors about spending several hundred million dollars over the next five years in our Canadian operations to modernize our facilities and move us into the next century in terms of technology and in terms of green energy.

I may have to go to the capital markets to do that, and if this bill is in place, it would create the same sort of impediment. If I go to the capital markets and have to provide them with security against assets of the company, they're going to say they're not sure they can loan us money for that $100 million project if they know a couple of hundred million dollars is parked in front of the company.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

I'll go to Mr. Farrell. You didn't get a chance to finish your opening comments, and I want to give you the chance to do that now.

[John Farrell]

Thank you, Mr. Lake.

I really want to talk about the good things that seem to be going on today across Canada with respect to pensions.

The federal Minister of Finance and the provincial ministers of finance are working hard at looking at restructuring the public pension plans. There was a fabulous debate in the House of Commons on the evening of November 23, when the members of Parliament talked about pensions for five hours. I saw that as a very enlightening debate. It was a very constructive discussion. All members of all parties were talking about ways of improving the pension system that exists in Canada.

Fundamentally, I want to make the point that this is where this problem belongs. This is a big-picture problem. It is not a problem that can be handled on a piecemeal basis. All I can do is urge members of this committee to recognize that.

This bill fundamentally should not move beyond this committee, because it will hurt Canadians, it will hurt Canadian companies, and it will impede the progress of improving income security for all Canadians.

One has to always respect what happened to the Nortel employees. There's no question that it's a most excruciating position to be in, but....

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

I'm going to finish by reading a little bit more on that note from Mr. Manley, a former Liberal industry minister:

By giving pension deficits priority over corporate bondholders, C-501 would hurt the many millions of Canadians who invest in bonds as part of their own retirement savings. Supporters of the bill like to pretend that corporate bondholders are all rich, greedy investors and faceless corporations. In fact, most corporate bonds are held either by individual investors (who purchase bonds directly or through mutual funds) or by large public- or private-sector pension funds. In effect, C-501 would benefit one class of future retirees -- those employed by federally regulated companies with defined-benefit pension plans -- at the expense of many others.

That's what Mr. Manley had to say.

[The Chair, Conservative, David Sweet]

Thank you, Mr. Lake. That's cutting it very close.

I assume, Mr. Rafferty, that you're still just as ready as before, so I will give you seven minutes.

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

I am. Thank you, Chair.

It's interesting that Mr. Lake quotes Mr. Manley, because of course he oversaw the fiasco at Nortel. Actually, Mr. Manley is the main reason this bill is here today. I'm not sure that I would put much into the quotes we just heard from Mr. Manley.

I have a quick comment for Mr. Farrell.

Mr. Farrell, your membership includes companies such as Air Canada, Bell, and what used to be Nortel. You have those companies, don't you?