IFLR 1000
The Guide to the World's Leading Financial Law Firms

The absence of subprime mortgage investment exposures and a history of conservative management have saved many Canadian financial institutions from the losses suffered in the US. But the contagions of fear and misperception still pose a hurdle, even in Canada....

The absence of subprime mortgage investment exposures and a history of conservative management have saved many Canadian financial institutions from the losses suffered in the US. But the contagions of fear and misperception still pose a hurdle, even in Canada. While transactional work has suffered, the need for regulatory advice remains consistent in the jurisdiction. "Banking has actually been a bright spot. Transactions are off across the board, but, fortunately, Canadian banks are relatively strong and can be acquirers," says a partner. Following a flurry of recapitalisation transactions in the capital markets, many Canadian financial institutions now find themselves in an advantageous position. The question now is whether they will alter the business model that has prevented loss in order to improve post-recession market share.

Banking and finance partners in Canada say they began noting the pullback of foreign financial institutions from the US and Europe as early as the spring of 2008. The speculation then, much as it is now, is whether Canada's prominent investment banks and insurance companies will try to fill the void. "Who knows, it may be the rebound of the investment banks in Canada," says one partner. "What we've seen previously is a gradual erosion of the Canadian investment banks to large American banks like JPMorgan, Bank of America, and Citi. Maybe since those guys are hiccupping at the moment, we'll see the Canadian investment banks re-establish themselves."

This potential re-development of the domestic financial sector is already causing some ripples in the legal community as well. As the banks examine the events of the past year, and the legal advice they received, some Canadian counsel see a shake-up of the historic relationships that have come to define some firm's finance departments.

The prospect of any regulatory change in Canada is doubtful thanks to the financial sector's limited subprime exposure. In fact, many see the Canadian system as a working model for the regulatory overhauls under discussion elsewhere in the world. This has allowed lawyers here a tempered optimism as firms find their corporate departments posting better-than-expected results through early 2009. "We essentially have been busier than ever in financial services, mainly because our clients and all the banks and insurance companies have been busy building capital," says a partner.

Conservative investment strategies saved much of the country's financial community from the substantial losses suffered elsewhere in the world. "We're not recession-proof....

Conservative investment strategies saved much of the country's financial community from the substantial losses suffered elsewhere in the world. "We're not recession-proof. I think we're recession-resistant," is how one lawyer describes Canada's present economic health. And while most capital markets departments in the US were starved for deal flow, Canadian firms received a lower but consistent pipeline of transactions to keep them busy.

The capital markets have remained open for Canadian financial institutions and commodities issuers in particular. The defensive investments made in gold through the fall of 2008, during the freefall of market paranoia, exhibits that sector's ability to sustain activity as well. "It was not nearly as deep a recession as we feared. There was more activity in traditional areas than we might have expected," comments one partner. That activity does not include IPOs, however, as the Canadian market has witnessed a virtual halt in initial public offerings along with the rest of the world.

Recapitalisation is the foremost concern of Canadian banks. With their lending capabilities contracting considerably in the last year, financial institutions took advantage of market appetite for common stock and medium-term note offerings throughout the year. CIBC (Canadian Imperial Bank of Commerce), RBC (Royal Bank of Canada) and Scotiabank are only a handful of the institutions restoring their balance sheets through such transactions. But despite this flurry of activity, Canada's financial law firms were forced to rely on a broader base of issuer clients than in the past. Several lawyers emphasised the importance of mid-market clients because of their consistent activity in any market.

Risk aversion has led to the renewed popularity of the bought deal structure for issuers. Developed nearly two decades ago as what lawyers describe as a defensive tactic against foreign investment banks, the entire issuance is pre-sold to an underwriter before being marketed to syndicated investors. Offerings for Manulife Financial and the Canadian miner Cameco, two of the largest in the market this year, operated on the bought deal model. Canadian issuers operating bought deals have also led a resurgence of the MJDS (multijurisdictional disclosure system) with the US, allowing issuers to pre-emptively file for SEC approval before the transaction occurs.

The Canadian M&A market witnessed a reduction in deal volumes last year similar to those seen in 2002-2003. Hostile market conditions allowed for few of the headline-grabbing deals seen in previous years and unravelled some of those that did make it to market....

The Canadian M&A market witnessed a reduction in deal volumes last year similar to those seen in 2002-2003. Hostile market conditions allowed for few of the headline-grabbing deals seen in previous years and unravelled some of those that did make it to market. For many Canadian lawyers, the failed privatisation of BCE (Bell Canada Enterprises) signalled not only an end to years-long negotiations, but to the era of leveraged buyouts as a whole. The transaction was abandoned after an audit revealed that the $41 billion buyout was no longer an acceptable financial risk for the company.

Restricted lending and poor debt spreads resulting from the credit crisis have forced Canada's private-equity investors to retreat from their previous binge of leveraged buyouts. "It's a very different climate than it was 18 months ago, when you had private equity still enormously active," says a partner. "The pension funds in Canada have suffered. They've got lots of problems to manage. We're not seeing them provoke M&A situations."

The scarcity of financing has ultimately forced deal activity into the mid-market, producing the double-edged sword of sustained deal volume with lower overall values. "The pattern in Canada is there are still a lot of deals happening but it's the size that's fallen off," says one partner. "There are some significant transactions that have happened, but the over-$1 billion deals you can count on the fingers of one hand."

According to lawyers here, this sudden focus on the mid-market has strained the bench strength of Canadian firms, favouring those with a stable of talent beyond their high-profile partners. Going forward, the ability to broadly staff lower-value files is seen as an area of growth for firms.

Diminished stock prices have created marked dislocation between buyers and sellers, halting most deals in their preliminary stages. "That's the biggest problem right now. It's weird because other than AIG and people you would suspect would be sellers, the sellers are not so pushed that they're lowering their prices. And the buyers aren't going to pay those prices." The gridlock has left most deals to wither on the vine as sellers come to terms with the valuations of the new, post-recession, reality.

Appetite for new project financings underwent a predictable reduction in the fall of 2008 as the growing financial crisis restrained lenders' already conservative balance sheets. What began as a potential banner year for some Canadian law firms' project finance teams suddenly fell apart after Lehman Brothers' collapse fuelled negative speculation in the market....

Appetite for new project financings underwent a predictable reduction in the fall of 2008 as the growing financial crisis restrained lenders' already conservative balance sheets. What began as a potential banner year for some Canadian law firms' project finance teams suddenly fell apart after Lehman Brothers' collapse fuelled negative speculation in the market. Credit became a scarce commodity even for borrowers with historical relationships with banks. According to lawyers here, most loans operated below a $225 million threshold.

In the spring of 2009, the lending environment showed signs of modest improvement. "The money is still there for good projects," says one partner. But as deals entered preliminary stages, unanticipated market shifts became evident. Standard long-term debt had vanished as many foreign investment banks retreated from Canada. Replacing the typical 30-year agreements were mini-perm loans offering seven-to-ten-year commitments with Canadian institutions. The predominance of short-term money only compounded uncertainty in the market, raising refinancing concerns for borrowers and lenders alike.

"The practical reality is that the only people taking the risk on long-term debt were institutional investors, and now they're having second thoughts," says a lawyer. With Canadian banks reluctant to rush into any new underwriting agreements, club deals dominate the market.

The debate now focuses on whether Canadian institutions will become comfortable with extending loan horizons to match the 30-year terms typically offered by foreign lenders. Another question is whether Canada's pension funds will discard their historical equity preference and begin taking debt positions on projects. Lawyers here say this would be a complete turnaround for pensions, who typically see concession schedule returns on project financings as too long. Still, after a year of uncertainty, the allure of a stable income stream cannot be underestimated.

Infrastructure and renewable energy are the Canadian government's focus in the near term. Ontario's passage of the Green Energy Act has spurred deal activity in that province, with Infrastructure Ontario's sponsorship of projects ranging from transit renovations to energy distribution technologies. The bulk of these projects have been contracted through PPPs (public-private partnerships) on the DBFM (design-build-finance-maintain) structure, but there has been debate as to whether the ratio of public-to-private investment should shift toward the government in the current market.

The restructuring of Canada's ABCP (asset-backed commercial paper) market occupied much of the restructuring talent at law firms here throughout the last year. In January 2009, the long-negotiated settlement between the concerned financial institutions and investors was finally enacted, prompting an exchange of the original $32 billion in non-bank commercial paper for longer-term notes....

The restructuring of Canada's ABCP (asset-backed commercial paper) market occupied much of the restructuring talent at law firms here throughout the last year. In January 2009, the long-negotiated settlement between the concerned financial institutions and investors was finally enacted, prompting an exchange of the original $32 billion in non-bank commercial paper for longer-term notes. Unlike the neighbouring US market, the ABCP matter was one of the few restructuring matters to take place in the financial sector. Instead, it has been the ailing forestry sector providing many of the marquee filings. Filings in 2008 for Tembec and Pope & Talbot have given way to filings by Ainsworth Lumber and Smurfit-Stone Container Corporation in the new year.

Insulation from the write-downs suffered by financial institutions abroad hasn't meant Canadian banks are any more willing to assume lending risks. In fact, the avoidance of losses like those seen in New York and London may have only made them more discerning. This has created a scenario where banks have to reconcile risk aversion with the uncertainties of recouping investments through foreclosure and subsequent liquidation. "Banks are becoming hesitant to put bullets into companies" says one restructuring partner.

The scarcity of available financing has also impacted on filing options for debtors in Canada recently. A previous, if not typical, emphasis on CCAA (Companies' Creditors Arrangement Act) proceedings has given way to a flurry of filings under the CBCA (Canada Business Corporations Act). Ainsworth Lumber and Tembec, two of the largest filings this year, followed the CBCA model, which supporters tout as an alternative to CCAA court costs and the restraints of court-appointed monitors. Disadvantages do exist, however, as CBCA does not provide restructuring protections for a company and the process largely favours entities restructuring debt holdings.

One positive impact of the economic downturn may be the growing experience of courts across the Canadian provinces in handling restructuring and insolvency matters, levelling what had been an emphasis on filing in Toronto. "You just decide to file where it makes the most sense," says one partner. The restructuring of multinational companies has also led courts in the US and Canada to conduct simultaneous restructuring proceedings, placing an emphasis on cross-border experience for Canadian law firms. Paper-maker Smurfit-Stone stands as the most recent example of this type of co-ordinated proceedings.