Risk Management in Today’s Troubled Times
In January of 2009, Nortel Networks and its many subsidiaries filed for protection from its creditors in Canada, the United States, Europe and elsewhere.
In Canada, Nortel obtained an Order, without notice, under the C.C.A.A. Similar Orders were obtained in the United States and U.K. under their insolvency legislation.
These Orders had a substantial impact on creditor confidence in Canada and, in particular, the banking community. This, in turn, has had a ripple effect throughout the business community.
The Canadian Order provides as follows:
1) All actions to collect debt against Nortel are stayed, including lawsuits;
2) All creditors must continue to supply to Nortel in accordance with existing contracts;
3) Nortel is at liberty to cancel any contracts, including Leases;
4) No guarantee of payment to continuing suppliers is put in place.
This Order had an immediate impact on hundreds of creditors and suppliers. Secured creditors were prevented from enforcing their security, even where the collateral was at risk.
Shortly after the filing, we were contacted by a U.K. client who was owed several millions of dollars. They were being ordered to continue supplying product on a 30-60 day payment cycle. They were understandably concerned about getting further into debt. We investigated and learned that all product orders were placed by Nortel Canada. Product was directed to various subsidiaries around the world, but paid for by Nortel’s U.S. subsidiaries. Suppliers to Nortel U.S. and Nortel U.K. have greater protection under U.S. and U.K. law. There is no similar protection in Canada under the C.C.A.A.
We therefore gave Nortel 2 options:
1) They could amend their contract so that Nortel U.K. purchased directly from our client (which assured payment); or
2) We would stop supplying and seek instructions from the Court.
Nortel U.K. agreed to purchase product directly.
The Order also allows Nortel to cancel existing contracts. In one case, a client of the firm was sub-leasing several hundred thousand square feet of commercial space from Nortel. Nortel U.S. terminated that sublease. It did not have any apparent business reason for doing so. Fortunately, the client was able to negotiate a new lease directly with the owner.
The Nortel Order and filing (along with other significant C.C.A.A. and B.I.A. filings since then) has had a substantial effect on the lending community. It demonstrates how their security interests can be put at risk:
1) First of all, enforcement of security is stayed;
2) Secondly, a B.I.A. or C.C.A.A. filing can have a direct effect on the value of the security itself.
An example of this may be found in the automobile industry. Banks who lend money to dealerships have an agreement with the manufacturer, requiring the manufacturer to buy back all new vehicles from the bank if the dealer becomes insolvent. In a C.C.A.A. filing, this agreement can be cancelled by Court Order. In response to this, lenders have reduced lines of credit, placed dealers on “credit watch” and increased lending interest rates and administrative costs.
The same thing is happening in construction, housing, restaurant and related businesses. Some of these businesses have been operating for decades.
From a risk‑ management point of view, it is important to realize that early intervention by professionals can have real benefits to a struggling business. Businesses must recognize the early warning signs which as requests for audits, requests for new or amended security or new lending terms. As lenders become more familiar with the new economy, they will be less likely to “over-react” to a business slow down.
This article was originally posted in the October 6, 2009 edition of the Ottawa Business Journal.