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Pension Ruling to Complicate Insolvency Proceedings?
Jeff Gray of the Globe and Mail reports in CTV, Pension ruling to complicate insolvency proceedings:
A
controversial Ontario Court of Appeal decision that boosts the rights
of pension plan members when their employer heads into a restructuring
could have wide ramifications, lawyers and lenders say.
The
court ruled this week that two underfunded pension plans at Indalex
Ltd. should rank ahead of a secured lender in the distribution of the
proceeds of the sale of the company, which sought protection from its
creditors in 2009 under the Companies Creditors Protection Act.
That
reverses the conventional pecking order in CCAA proceedings, in which
so-called debtor-in-possession (DIP) lenders agreed to lend companies
emergency funds on the understanding that they would be paid back before
anyone else.
While a win for pension
plan members, many in the financial and legal worlds say the ruling
could have negative unintended consequences not just for the CCAA
process, but for Canada’s credit markets in general.
Newton
Glassman, head of Catalyst Capital Group Inc., Canada’s largest
distressed-debt investor, cautioned that he has not studied the ruling
in detail, but said it could make it harder and more expensive for
struggling companies to get DIP financing.
These
kinds of loans will become inherently more risky and less predictable,
he argued, because lenders can no longer be certain that they will be
first in line to get their money back.
Even for companies not in
court protection from their creditors, he said, borrowing money could
get harder as senior lenders take another look at whether pension
obligations are being met.
“If the case is not read narrowly, it
actually does have very wide implications, and very bad implications,”
Mr. Glassman said. “Not just for DIP lending ... but I would argue for
the credit markets generally.”
Every
partner at Catalyst has been told to read the decision over the
weekend, he said, as pension and insolvency experts scramble to predict
its impact.
Elizabeth Brown, a
pension lawyer with Toronto firm Hicks Morley Hamilton Steward Storie
LLP, said the case will have a major impact.
“This case has
everyone in the insolvency and pension world turned upside down,” Ms.
Brown said, as unpaid pension deficits could now jump to the front of
the line in an insolvency proceeding. “It’s quite a far-reaching
decision.”
Lawyers who argued the case
on behalf of the pension-plan members say the decision does not mean
pension plans will always come first in future proceedings.
They
say the ruling means that companies in a CCAA proceeding cannot
automatically ignore an under-funded pension plan. Instead, companies
will have to first make a case in court that they cannot meet their
pension obligations.Robin Schwill, a leading insolvency lawyer
with Davies Ward Phillips & Vineberg LLP in Toronto, said the
decision raises “thorny questions” and even creates uncertainty for
CCAA cases currently under way.
The decision suggests that a
formerly solid guarantee to a DIP lender could be thrown out by a court
that later determines a company was guilty of a “breach of fiduciary
duty” to pension plan members, he said.
“That’s going to cause any DIP lender a lot of pause,” Mr. Schwill said.
Kevin
McElchern, a Toronto insolvency lawyer with McCarthy Tétrault LLP,
said the decision could see creditors push ailing companies that are
facing massive pension liabilities into full-blown bankruptcy. That’s
because in a bankruptcy, as opposed to a restructuring under court
protection from creditors, pension claims are pushed back again to the
end of the line, he said.
“It’s a very big win for the
pensioners, and of course every one is concerned about the pensioners,
but I’m just not sure in the long run ... it won’t actually have a
negative or rebound effect,” he said.
Some say predictions of widespread problems for CCAA financing are overblown.
“Practically
speaking, it’s just a question of dollars and cents and of return
rates. There’s still a lot of money to be made by being a DIP lender,”
said David Ullmann, an insolvency lawyer with Minden Gross LLP in
Toronto.
He said he did not believe the ruling means that pension
plans would always rank ahead of other lenders, but that the pension
issue would now have to at least be addressed in court during a
company’s restructuring.
“It’s something else to add to the list,
more than it is some sort of cataclysm that would prevent DIP lending,”
Mr. Ullman said.
I agree, I don't see this
as a 'cataclysm' for DIP lending or for Canadian credit markets. There is a
lot of fear mongering going on right now but when the dust settles,
this ruling won't have a material impact on DIP lending.
Meanwhile, CBC reports that Ex-Nortel workers look to make pensions an election issue:
A
group of former Nortel workers are fighting to make bankruptcy reform
an election issue, and are targeting Conservative incumbents in over 20
ridings, including three in the Ottawa area.
The
group, calling itself the Silver Fox Alliance, says it is looking to
unseat Conservative MPs in response to what they say was a lack of
support when Nortel filed for bankruptcy protection.
Nortel
pensioners had sought the government's assistance to give their
pensions greater priority amongst creditors. In particular, the group
was upset the Conservatives did not support an NDP private member's
bill seeking to add that protection to pensions.
"For two years
we have watched the ambivalence and apathy of the Conservative
government and now we are just fed up," said John Tyson, a spokesman
for the group who worked at Nortel for 35 years.
"We're going out
to appeal to those millions of private-sector employees and pensioners
and as this election unfolds, voter turnout is going to be the
single-largest deciding factor", said Tyson.
In the Ottawa area,
the group is focusing its energy on rallying support against sitting
MPs John Baird, Gordon O'Connor and Pierre Polievre.
The
Conservative party platform, released Friday, offers to extend wages
and severance protections for workers whose employer's restructuring
attempts take longer than six months and then fail.
The party
also promised to work with the provinces and territories to establish a
pooled retirement pension plan. But the platform is silent on changes
to bankruptcy laws as it pertains to pensions or disability payments.
Tyson
said the group hasn't aligned itself with one opposition party but is
instead endorsing strategic voting and parties that support their
cause.
"As the election campaign unfolds, we will in fact endorse
opposition candidates that support the need for changes in the
bankruptcy act," said Tyson.
Opposition parties offer different plans
The
federal Liberals said in their party platform they would provide
greater priority for long-term disability benefits owed to workers
during bankruptcy proceedings.
Their platform outlines a plan to
create a pension agency to ensure Canadian workers could transfer
their pensions into the Canadian Pension Plan rather than placed in a
low-return annuity.
The Green Party platform, released Thursday,
calls for corporate pension plans to be audited to ensure they are
fully funded and for party members to review federal and provincial
laws with the view to enact legislation to protect pension benefits.
The
NDP and Bloc Quebecois will not release their party platforms until
this weekend, but both parties have argued for reform to bankruptcy
laws.
Ottawa Centre MP Paul Dewar said Friday the party would
push for legislation to allow pensioners to be put to the front of the
line when it comes to recouping funds from companies that face
bankruptcy or insolvency.
I referred to Nortel's disabled in my post on "Big CPP" being dragged into Canadian politics.
They're still waiting for justice. Pension politics are heating up in
Canada and it's about time politicians and voters wake up and start
asking some tough questions on pensions. Importantly, bankruptcy laws
are not there just to protect creditors. They should first and foremost
protect disabled workers and pension plans. All this just confirms my
thinking that companies should be offloading their defined benefit
pension risk to new or existing government pension funds. Companies should worry about their business, not pensions.
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Leo: the article is about setting aside the rule of law, and trying to replace it with special interest group pandering. You made a comment that the law should not "protect creditors" but the disabled and other special interest groups. That may seem pragmatic and expedient to you (and besides, who could argue against the disabled--the Disabled!!--without risking being called Hitler or worse?) but it further tears down the rule of law and replaces it with an ever-shifting quagmire of pressure group warfare.
The end result is a system to discourage investment. It creates not a zero-sum game, but a negative sum.
I've thought ever since GM and Chrysler that anyone who bought bonds in a company with a union and defined benefit plan will be hosed. Let the unions finish off the carcasses they are currently consuming and then, like any other parasite without a host, starve off.
"The end result is a system to discourage investment. It creates not a zero-sum game, but a negative sum."
I didn't say the law shouldn't protect creditors. What I said is that the disabled and pensioners should be first in the pecking order, ahead of creditors. That's a law that makes good moral and economic sense. The fear mongerers will tell you otherwise, but Canada's credit markets will not shut down if this law takes hold.
Fine, just don't change the law post facto. That is nothing more than a theft enshrined in the law to satisfy your own preferences.
I've often wondered why creditors aren't allowed the eat pensions if the person is deep in hock to CC's, Mortgage liabilites, bounced checks...you name it. Not even sure how these people are allowed to get any credit if they are in arrears in their debts and claiming legal insolvency.
Fuck em.
This is exactly how it started state side. So Leo. I personally think all pensions (public or private) should be considered equity to slush if a creditor is considered during bankruptcy proceedings.
"I agree, I don't see this as a 'cataclysm' for DIP lending or for Canadian credit markets. There is a lot of fear mongering going on right now but when the dust settles, this ruling won't have a material impact on DIP lending"
Whew--that's reassuring! Pinhead said it, so it must be true...
Classic argument. "Some say that the creation of the Federal Reserve, the central bank of the United States, is going to lead to inflation and deflation, increased volatility especially in interest rates, and boom and bust cycles. Such views are fear mongering and pander to the rich who hoard their gold..."
This counting on unrealistic returns is comming home to roost and theres going to be alot of pain...
http://finance.yahoo.com/news/College-Plans-You-Thought-nytimes-19416526...
Oops! I hate it when that happens...
Silver,
The guy who invested in the Illinois college plan will redeem deflated dollars when it implodes.
He should make a run on this 'too good to be true' deal immediately, penalty or not.
The new norm, don't count on others to manage your money.
He is relying on a bailout from hopeless debt, Illinois.
Puke...poor bastard!
Exactly my friend..
Leo & Bruce,
I have long supported a ruling of this type and hope it comes to the USA. My argument is that the pecking order should be the IRS (or that country's equivalent, the DB pension plans, then the senior debt holders. My reasoning is that if the pension is insolvent then it ends up with the taxpayers through a PBGC type entity. Taxpayers must be the last to be hit. Debt holders knew of the DB pension plans when they funded company X and should be able to take that into acount when providing the debt. Secondly, and though not addressed in this ruling should be that senior executives are treated the same if their company becomes insolvent. Pay packages annuities etc. of these individuals get thrown in to the mix to make the DB pension plan whole and their pension now comes from the PBGC. This group has been able to walk out of these situations with nary a scratch while the pension plan and debt holders take it in the shorts. Another issue that Bruce brought up is the assumption of 8%+ that many of these plans use. If we went to an assumption of 125% of the 30 year bond that would be far more realistic. Just my 2 cents.
125 over the 30-year would be ~6% for the past three years. If you used that number to value Calpers it would scare the crap out of the folks in Cali.
I think six is too high. Look at the last ten years. Look at the last 4 years. My number? 5%.
This would put most programs D.O.A. Of course they are dead. We just haven't recognized it.
Bruce,
I meant for that 125% to be a regulatory limit for the assumption. Yeah 6ish is high and perhaps it should be based on the 10 year. At any reasonable rate Cali folks would pass out. It would have to be phased in over a substantial period.
Who is going to finance DIB if this ruling holds up? Answer, no one.
If you're talking debtor in possesion financing, it'll probably still exist but at higher rates and covenants covering companies requirements to fund DB pensions. This has in effect been treated as an off balance sheet item that can be disposed of in insolvency and dumped on the taxpayer. This is why I think it's crazy to offer a DB plan. I would rather see higher IRA/401K limits. Then if an indivudual wished they could always take a portion and buy an annuity.
Whistling past the graveyard again. Only a fool would agree to give DIP lending under present conditions if a court can subsequently change the order of priority. Probably better to just bid pick up the pieces once the bankruptcy is finished in a lot of cases. The ruling sort of changes DIP to DIPON (possession of nada).
Leo, A little off topic, but you should read/write about this article in Bloomberg.
Calsters needs a 10% return for...30 years to meet its obligations.
In other words, they are stone cold bankrupt. DBs are dead my friend.
http://www.bloomberg.com/news/2011-04-08/california-teachers-fund-needs-...
I have to agree with Bruce.
A pension is nothing but a promise.
A simple glance three to ten years back shows a bloody trail of promises broken by Legislative and Judicial branches of government.
What has been made clear in the past 3 years is that the individual will come last, not first.
Governments and central banks are breaking every promise ever made to citizens.
WaMu, GM, Supreme Court KELO and Corporate Campaign Contributions, Social Security, Medicare, Bailouts for Banks and Insurance companies then "Austerity" for individual citizens, etc., etc., etc.
Notice how our CONgress stayed up late and engaged in theater to "valiantly" make cuts to programs for individuals - the same way they stayed up late in 2008 and "valiantly" bailed out the banksters?
Lies, lies, all lies!
" DBs are dead my friend."
Bruce,
DBs are not dead. All this tells me is that the US DB model as we know it is DEAD. The large US state plans need to get realistic invest return assumptions, states need to top up pension plans, stakeholders need to accept increases in contributions or cuts in benefits, and last but not least, adopt Canadian pension governance model where you compensate pension fund managers properly and have an independent investment board made up of industry experts (I would include finance profs with no ties whatsoever to industry) who oversee these funds.
Again. If they pension funds are going to serve people all taxes across the board must increase 70%. Want your cake? It's going to cost everyone. Again I'm including all pension, welfare, paychecks, disability payments must also be taxed at 70% as well.
People want it, pay for it and stop with the dithering pretending that it doesn't require public investment to create the returns required to make it work properly.
Fucking statists...swear to christ..
Corporate executives are getting out of the pension business. That is exactly what switching to DC plans does. Why would a CEO have any incentive to pass over a DB plan to a government agency, wherein his funding options may be legislated, possibly killing the host? The Canadian pension plan is not fully funded. Bruce is right, the trend out of DB to DC plans is not going to change, because there is no incentive to doing so.
The pension industry was built with faulty assumptions. It is in the process of being dismantled. The DC plan is the chosen solution. Nothing is going to change that.
The only faulty assumptions that the pension industry used were the following: 1) that governments would put sufficient controls in place to ensure greedy bankers wouldn't destroy the world financial system; and 2) in the absence of such controls due to ridiculous "free market" theories being widely adopted, that greedy bankers would control their own level of risk for fear of destroying themselves and the world economy. These should have been good assumptions....but what a terrible miscalculation of human nature they turned out to be!
T.E.I.N. everyone!
the only reason Canadian pensions have held up better than US or European is so far Canada has had a 'good' recession. As soon as Canada turns bad your pension plans will be in the exact same shit state as everybody elses
"good governance" my arse... 'Dream On' crone
If you think that Canadian Pension Plans invest more in Canada than the States then you are sadly mistaken. The majority of Canadian pension plans are invested in American stock. But I would say as a general rule Canadian investment goals are more conservative. Canadians are working with the exact same set of investment opportunities but with different goals and different strategies. The Canadian pensions may go south but when they do, I would suggest a move to a fallout shelter because the sky will be falling.
LONG LIVE OLD FARTS AND THEIR juicy tarts that require whipped cream and entitlements to dose away in the midday sun on ....RETIREMENT furlow...it's like being in earthly heaven, on probation. We all Love probational leave...from work prison!