Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Rupert Chartrand, Marc Wasserman and Sachin Kanabar.  Rupert Chartrand and Marc Wasserman are partners in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP, and Sachin Kanabar is an associate in the group.
Rollups may never have been used in the Canadian insolvency context where all pre-petition debt was repaid or deemed to have been repaid on the first day of a proceeding under the Companies’ Creditors Arrangement Act (“CCAA”).  The availability of rollups is now even more doubtful due to section 11.2 of the CCAA, which was proclaimed into force in September 2009.  Whether rollups are prohibited by this provision has not yet been tested in the Canadian courts.  However, there are some cases in which a “creeping rollup” may be utilized in order to avoid this potential conflict with section 11.2 and still have the effect of a rollup.  Two recent restructuring proceedings under the CCAA have made use of “creeping rollups” in connection with their respective debtor-in-possession financing facilities (a “DIP Facility”).  In each of these CCAA proceedings, the creeping rollups were not challenged.
A “rollup” refers to an arrangement where all pre-petition loans provided by the same lender under the DIP Facility (the “DIP Lender”) are “rolled-up” into the post-petition DIP Facility effectively providing the DIP Lender with the benefit of the DIP Charge (defined below) for such pre-filing obligations.  Typically, the debtor is required to immediately draw upon the DIP Facility, once it is available, in order to satisfy the outstanding pre-filing obligations owed to the DIP Lender.  
Rollups may now be prohibited in the Canadian insolvency context.  On September 18, 2009, substantial amendments came into force under the CCAA and included section 11.2.  This provision addresses the priority charge (the “DIP Charge”) over the debtor’s assets, typically granted in the initial order commencing the CCAA proceeding (“Initial Order”), in favour of a DIP Lender for amounts advanced under a DIP Facility.  Such DIP Charges are similar to administrative charges granted in favour of DIP Lenders in proceedings under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”).  Section 11.2 expressly provides that a DIP Charge may not secure an obligation that exists before the Initial Order is made.
It is possible that rollups may be contrary to the express wording of section 11.2 of the CCAA, given that a rollup effectively results in the DIP Charge securing amounts owed under the existing pre-petition credit facility.  Since section 11.2 is a relatively new provision under the CCAA, there is no case law directly on point and such an argument has not yet been tested in the Canadian courts. 
In recent CCAA restructurings “creeping rollups” were used as a solution to avoid triggering this potential issue.  In each case, the creeping rollup was not challenged.  A “creeping rollup” is a variation on the rollup concept.  Rather than drawing on the DIP Facility to pay down obligations under the pre-existing credit facility, cash receipts of the debtor received during the course of the CCAA proceeding, which would typically be used to fund working capital, are directly applied to the pre-petition credit facility instead.  Since the funds used to repay the pre-petition credit facility are from the debtor’s cash receipts and not from the DIP Facility, an argument that the DIP Charge effectively secures the pre-filing obligation is more difficult to make. 
A creeping rollup was utilized in the recent CCAA proceeding of Cow Harbour Construction Ltd. (“Cow Harbour”).  Cow Harbour specialized in overburden removal and general contracting services for oil extraction companies in Fort McMurray, Alberta.  The company commenced a proceeding under the CCAA in order to stabilize its operations and explore strategic restructuring alternatives, including securing new financing. 
The Royal Bank of Canada (“RBC”) had provided Cow Harbour with a pre-petition operating line of credit for approximately $40.3 million (the “RBC Facility”), which was secured by a general security agreement and mortgage security on real property.  At the time of filing Cow Harbour was in breach of the terms of the RBC Facility.  After the commencement of the CCAA proceeding, RBC provided a DIP Facility to Cow Harbour of $15 million and a creeping rollup was implemented.  The initial 13-week cash flow forecast prepared by the company provided for payments under the RBC Facility and the monitor’s first report specifically provided that proceeds from the DIP Facility will only be used to fund working capital requirements and will not be used to repay any pre-filing indebtedness.
The ongoing CCAA restructuring of Angiotech Pharmaceuticals, Inc. and certain of its subsidiaries (collectively, “Angiotech”) also instituted a creeping rollup, though the circumstances in Angiotech are slightly different as it is a cross-border restructuring.  Angiotech is a specialty pharmaceutical and medical device company that develops and markets innovative technologies for acute and surgical applications.  Wells Fargo Capital Finance LLC (“Wells Fargo”), a U.S. lender, had provided Angiotech with a $25 million pre-petition credit facility (the “Wells Fargo Facility”) with Angiotech’s principal U.S. subsidiary (“Angiotech US”) as borrower and the parent company and certain other subsidiaries as guarantors.  Wells Fargo had taken general security over all of the assets of Angiotech for obligations owed under the Wells Fargo Facility.
Angiotech (including Angiotech US and other subsidiaries that are guarantors under the Wells Fargo Facility) filed for protection under the CCAA in order to, among other things, implement a recapitalization of certain of its bond debt.  The CCAA proceeding was recognized in the United States under Chapter 15 of the Bankruptcy Code.  The filings were events of default under the Wells Fargo Facility. 
In anticipation of commencing a proceeding under the CCAA, Angiotech negotiated a DIP Facility with Wells Fargo of up to $28 million.  Wells Fargo required that Angiotech US institute a rollup in connection with the DIP Facility, given that rollups are relatively more common in proceedings under the Bankruptcy Code in the United States.  However, since the primary restructuring proceeding was under the CCAA and within the jurisdiction of a Canadian court, the potential prohibitive effect of section 11.2 of the CCAA on the proposed rollup became a concern.
As a result, the repayment of the Wells Fargo Facility was structured as a creeping rollup in order to avoid this potential issue.  The Initial Order specifically provided that advances made to Angiotech under the DIP Facility will not be used to pay amounts outstanding under the Wells Fargo Facility.  Meanwhile, the initial 13-week cash flow forecast filed with the court provided for repayment of the Wells Fargo Facility from Angiotech’s cash receipts during the CCAA proceeding.
In the Canadian insolvency context, creeping rollups may provide a solution in response to the uncertainty raised by section 11.2 of the CCAA with respect to rollups, including in the context of a cross-border restructuring.  However, one may question the necessity of a creeping rollup if the DIP Lender has been granted adequate security for the pre-filing obligations of the debtor in priority to all other creditors.  The DIP Lender’s secured position with respect to such pre-filing obligations would ensure that its debt is satisfied in priority to subsequently-ranked creditors in the CCAA proceeding.  In such cases, creeping rollups may still be utilized merely as a tool for providing additional comfort to the DIP Lender.

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