Lender flexibility dominates virus age
Canadian companies are chopping costs, suspending dividends, and cutting CEO salaries to stave off loan defaults amid the coronavirus. But there hasn’t been a jump in formal bankruptcy filings, according to one of Canada’s top restructuring lawyers.
Instead, the emerging pain for big and small companies spells booming business for out-of-court proceedings, said Luc Morin, a Montreal-based insolvency and corporate restructuring partner at Norton Rose Fulbright.
“It’s unclear that the pure liquidation of a company would yield better results than forbearing defaults in the current context,” Morin said. “For a lack of a better alternative for lenders and landlords, they are being more flexible. I’ve been working around the clock for the past three weeks as informal restructurings are, quite frankly, at least double the usual volume.”
Morin expects companies to file for bankruptcy if they are seeking new financing and the existing credit facilities don’t provide the proper flexibility for new cash.
Under normal circumstances, cases in which the company’s debts are complex, or creditors start fighting over who gets paid first, end up in court.
But most courts in Canada are now closed for corporate proceedings apart from electronic filings and “there is a real difficulty in enforcing any contractual rights that may result in a default,” he said. That will change in the postCOVID -19 period “once empathy is replaced by opportunity,” he added.
Companies that depend heavily on consumer spending will face an especially hard time, including retailers who were already under pressure from e-commerce. Restructuring in the cannabis sector is also poised to climb with several companies set to run out of cash in the next few months, Morin said.
Entertainment companies that depend on large crowds are also among the first business casualties of the virus. Cirque du Soleil Entertainment Group hired advisers to explore debt restructuring options and is in talks with investors for rescue financing, sources said.
Morin expects a pick up in distressed merger and acquisition activities once the pandemic is under control.
Bloomberg