Thank you, Madam Chair, for this opportunity to address the committee.
I am the president of the Insolvency Institute of Canada, a non-profit organization comprised of Canada’s most experienced restructuring professionals in the legal, accounting and financial fields.
The mission of the IIC is to promote excellence and thought leadership in commercial insolvency policy and practice in Canada. Speaking personally, I have been a lawyer who has practised exclusively in the restructuring arena for 37 years. During that time, I have been fortunate enough to have played leading roles in the restructuring of some of Canada’s biggest employers having defined benefit, or DB, pension plans, including Air Canada, AbitibiBowater and Stelco, in the latter case, twice.
The views I am presenting today are not just my own. They represent the unanimous view of the policy reform committee of the IIC and have been endorsed by the board.
The goal of the bill is well intentioned, aiming, as it does, to protect vulnerable stakeholders such as pensioners from the consequences of insolvency. However, I regret to say that this particular legislative fix would have several material, adverse, unintended consequences.
First, if enacted, this bill would cause a contraction of credit for non-investment grade companies and could trigger some insolvencies that would otherwise be unnecessary. Second, the bill would likely increase the cost of capital, making Canadian employers with DB plans less competitive. Third, this bill would make successful restructuring more difficult, with adverse consequences for employees, pensioners and others.
There are other and better alternatives to satisfy the bill’s stated goals that I will also address at the end, if time allows.
I'll turn first to the contraction of capital. Legislatively sticking pension deficits on top of the capital stack simply means that there's not as much value to go around to other creditors, including vulnerable, unsecured trade creditors. If passed, lenders would find themselves in a situation where they cannot make real-time, fact-based credit decisions. That's because a solvency deficiency is not a fact; it's a forecast of what might happen over time in the future based on factors over which the lender has no control. Lenders may simply refuse to lend to non-investment-grade companies with DB plans.
Consider the position of an operating lender. If this bill is passed, the lender would have to ask what the deficit is today and consider what it might be over the entire life of the loan. In Air Canada’s case, its pension deficit was over $1 billion when it filed. No operating lender who wants to get a first charge on liquid assets like accounts receivable is going to loan into a situation where they might be behind a billion-dollar priority charge.
Second, the increase in uncertainty and risk faced by providers of capital will mean that the cost of capital will increase, making large Canadian companies with DB plans less competitive than their non-Canadian counterparts. Canada is already a high labour cost jurisdiction relative to the U.S. and certainly Mexico.
Third, restructuring large employers with DB plans is already challenging. If this bill is passed, it will be even more difficult, because it will hamper the availability of critical interim financing for distressed debtors. Such emergency financing, often called debtor-in-possession, or DIP, financing, is the lifeblood of restructuring. It allows going-concern value to be maintained, and it avoids the dire consequences of liquidation. DIP financiers will not lend without a guarantee that their new money is in first place.
There is before the Supreme Court right now in the Canada North case a challenge that statutory charges cannot be primed or overridden by a court order. If that decision goes against the lender, and if this bill is passed, that will signal a significant challenge to any emergency financing of distressed employers with DB pension plans.
The best solution for employees and pensioners of a distressed company is for that company to be restructured and returned to financial health such that it continues to pay wages and continues to make contributions to the pension plan. This bill, if passed, would lead in the opposite direction.
There are, however, alternatives. The first is to try to fix the problem at the front end and not the back. To limit or even eliminate shortfalls, you should require calculations of pensions funded status quarterly instead of annually or more. Second, you should require more transparency in reporting to stakeholder groups, including regulators, unions and pension groups. Third, you should require tighter timelines to achieve full funding. Catch the problem early and fix it while it is manageable.
I see that my time is running out. Thank you for this opportunity. I'd be happy to answer any questions.