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

Although Canada's conservative fiscal policies and regulatory regime shielded it from most of the fallout created by the sub-prime crisis, bank lending lagged in the years following 2008. This was down to a general lack of liquidity in the global market and continuing uncertainty....

Although Canada's conservative fiscal policies and regulatory regime shielded it from most of the fallout created by the sub-prime crisis, bank lending lagged in the years following 2008. This was down to a general lack of liquidity in the global market and continuing uncertainty. As one partner says: "Here people stopped lending just because they didn't know where things were going."

Canada was one of the first of the G7 countries to embrace the new Basel III regulations. In February 2011, the Office of the Superintendent of Financial Institutions (OSFI) issued its implementation plan. One partner concludes that ultimately, "Canada's regulatory response has made it stronger."

However, there is consensus that deals got done faster before the crisis, when "there was less paper and fewer covenants". Although both lenders and acquirers are thinking more carefully and increasing the level of their due diligence in deals under the new regime, the general response has been positive. "We're getting back to an established post-turndown standard of what the market is," comments one lawyer.

Another attorney paints a more robust picture. "Banks are climbing over each other to let money out the door," he says. "All of our financial institutions are telling us business is open - they're looking to float assets, arrange deals. M&A financing is back, private equity is strong, the loan books of Canadian banks are in a pretty good space."

Two sectors that have relied heavily on bank lending in 2010 and 2011 are infrastructure - particularly the construction of hospitals, roads, bridges, and renewable power - and financial services.

Acquisition financing, specifically in the natural resources sector, has also increased as companies look to recapitalise their portfolios to allow distributions. In addition, corporate loans are picking up.

So although Basel III has, as one attorney puts it, "complicated the whole universe of banking", it has also generated business for law firms as banks look for ways to convert their existing capital to the new requirements.

In July 2010, further complications were introduced by the US Dodd-Frank Act, which brings sweeping changes to the United States' financial regulatory system. This primarily affects Canadian companies listed on US exchanges, but also affects Canadian companies that are in any way regulated by the SEC. It has created business for Canadian law firms as international banks make the transition and Canadian companies look to limit their exposure to potential SEC investigation.

One possible threat to lending is a decision from the Ontario Court of Appeal in Re Indalex. In the spring of 2011, the Court ruled, in effect, that beneficiaries of a pension plan with a solvency deficit can take precedence over ranking securities interests. The concern is that this will have a profound effect on the availability of funds, as well as dramatically change the way restructuring is done.

Capital markets in Canada were on the upswing in 2010 and early 2011. Domestic investors appear to be gaining confidence and international investors are taking a renewed interest in the country, spurred by its rich reserves of natural resources, the strength of its economy, and the uncertain markets of the US and Europe....

Capital markets in Canada were on the upswing in 2010 and early 2011. Domestic investors appear to be gaining confidence and international investors are taking a renewed interest in the country, spurred by its rich reserves of natural resources, the strength of its economy, and the uncertain markets of the US and Europe. The most important developments have included the return of the Canadian IPO, and the growth of the Canadian high-yield debt market.

According to consulting company PricewaterhouseCoopers, 25 IPOs were listed on the Toronto Stock Exchange (TSX) in 2010, valued at $5.2 billion - five times the number of IPOs for 2009, valued at $1.7 billion. Most of the activity was in the mining and energy sectors.

Commodity prices were high during 2010. "Every commodity you can think of in the mining space is trading at an unprecedented level," comments one partner. The US continues to be a major player, with US mining companies raising funds in Canadian capital markets. China, the world's biggest consumer of commodities, is also increasingly gaining ground as a player in the Canadian markets. "China is looking at Canada as a gateway to the United States," notes another attorney. The China Investment Corporation, which manages part of China's foreign exchange reserves, established its first foreign office in Toronto last year.

Significant increases were also reported in the Canadian high-yield debt market as a result of increased liquidity, low interest rates, and the dissolution of income trusts. 12 Canadian issuers sold over $3 billion in high-yield notes in 2010, representing industries such as oil and gas, restaurants, media, transportation and finance.

New challenges may present themselves if the much-debated Canadian Securities Act is passed into law. In an attempt to streamline existing rules and strengthen regulatory power, The Act would create a single national body to oversee securities. The Supreme Court heard arguments related to The Act's constitutionality in April 2011, after the Courts of Appeal in Alberta and Quebec found in favour of provincial jurisdiction. There are currently 13 separate securities regulators - one for each of Canada's provinces and territories.

Nevertheless, one attorney concluded that the Canadian securities industry now appears to be "a vibrant market that really facilitates transactions". "We're back to a deal-friendly environment," he says.

M&A activity began picking up in Canada at the end of 2009, following the financial crisis. By the first quarter of 2011, consulting company PricewaterhouseCoopers reported an 81% surge over the previous year, bringing the market back to pre-crisis levels....

M&A activity began picking up in Canada at the end of 2009, following the financial crisis. By the first quarter of 2011, consulting company PricewaterhouseCoopers reported an 81% surge over the previous year, bringing the market back to pre-crisis levels. Most of the deals took place at the mid-market level, primarily in traditional sectors such as mining, energy, agriculture, technology and real estate.

The mining sector has been particularly busy, with "an enormous amount of activity from both home-grown Canadians and foreign investors," according to one attorney. Commodity-hungry Chinese investors are particularly interested in Canada's natural resources. "A few years ago, the Chinese weren't even on our radar," the attorney notes. "Now they are."

The market is being driven by unusually high commodity prices, partly created by the difficulty of finding new mineral deposits around the world. "Gold, copper, nickel, iron ore, every commodity you can think of in the mining space is trading at an unprecedented level," one partner observes.

Junior mining companies are growing into mid-tier and then senior mid-tier companies, before spinning off into new private companies. Whilst this has always taken place, it is a trend that has begun to accelerate in recent years. Junior mining companies tend to focus on exploration rather than production and therefore have the potential for huge profits. "It's happening all over the place," another attorney notes.

In what would have been the biggest transaction of 2010, BHP Billiton's attempt to acquire $38.6 billion in shares of the Potash Corporation of Saskatchewan, one of the world's largest fertilizing companies, was blocked by the Canadian government, which decided the transaction would not be in Canada's national interest. The action sent shock waves through the M&A industry, as it was only the second time in 25 years that a proposed foreign acquisition had been rejected, and the first time a public take-over bid has been rejected.

However, a promising sign came in 2010 with the return of the Canadian 'megadeal' (over $1 billion). Examples included Valeant's $5.7 billion bid for Cephalon, and the Target acquisition of 220 Zellers store locations from the Hudson Bay Company. Six megadeals were reported for the first quarter of 2011, including the LSE's failed $3.7 billion bid for the Toronto Stock Exchange.

A number of amendments to Canada's Income Tax Act in the March 2010 budget are expected to have a positive impact on cross-border M&A activity. These include the repeal of Section 116, which will affect foreign investors holding shares of Canadian companies, making it easier for them to sell and reducing administrative hurdles for new foreign investors.

Also expected to have an impact is a TSX mandate issued at the end of 2009. The mandate requires companies listed on the TSX to obtain buy-side shareholder approval for public company acquisitions that would result in the issuance of more than 25% of the issued and outstanding shares. There is speculation that this could dampen takeover bids and prevent transactions. However, one partner predicts that, "More likely, it will change the way deals are done."

Pipelines, hydroelectric plants, highways, wind farms, bridges, hospitals, ports, prisons, and secret spy facilities - you name it, Canada built it, or at least arranged the financing for it, in 2010 and 2011. "Canada has been providing infrastructure projects at a rate that outpaces the US," remarks one partner....

Pipelines, hydroelectric plants, highways, wind farms, bridges, hospitals, ports, prisons, and secret spy facilities - you name it, Canada built it, or at least arranged the financing for it, in 2010 and 2011. "Canada has been providing infrastructure projects at a rate that outpaces the US," remarks one partner.

In January 2011, the government announced its Building Canada Fund, an $8.8 billion investment which aims to create a stronger economy, cleaner environment and better communities through new infrastructure projects. The fund adds to Infrastructure Canada's seven-year, $33 billion Building Canada Plan. Introduced in 2007, the plan provides for a $25-million-a-year allocation to each province and territory, and is now mainly dedicated to existing projects. It also aims to encourage the use of the public-private partnership (PPP) procurement model, and in 2008 PPP Canada, a crown corporation, was created to further that objective.

"It's the busiest year we've had in PPPs," remarks one partner. As of January 2010, the Conference Board of Canada reported that PPPs accounted for 10 to 20% of total infrastructure spending for the year. The latest federal budget, announced in June 2011, required that all federal infrastructure projects creating an asset with a lifespan of over 20 years and costing $100 million or more must undergo a PPP procurement screen. Although the budget focuses primarily on deficit reduction, infrastructure is one of the few areas targeted for increased spending.

Practitioners noted an uptick in lending by Canadian banks for infrastructure projects, signalling renewed confidence in the economy. The maximum loan terms for domestic banks rarely exceed seven years, so the long-term loans required for project finance are still primarily held by European banks. However, "Domestic banks have been kept busy underwriting bond transactions for PPP projects, which they do almost exclusively," notes one attorney.

Ontario has been especially busy. "Infrastructure Ontario has the biggest, most aggressive pipeline in Canada," comments one partner. Also known as the Ontario Infrastructure Project Corporation, Infrastructure Ontario is a government-owned corporation established by the Ontario Infrastructure and Lands Corporation Act, 2011. The organisation is dedicated to the renewal and maintenance of the province's infrastructure. It does this primarily through the promotion of PPPs and by providing loans.

"On the power side, there has been a robust uptake in project finance in Ontario because of the feed-in-tariff (FIT) regime," notes another attorney. FIT's encourage external investment by guaranteeing energy prices, but the FIT's Domestic Content Requirement continues to draw negative attention, with opponents objecting that it violates World Trade Organisation (WTO) agreements. Japan, the US, the European Union and the WTO itself has been particularly vocal in expressing their opposition. The FIT has encouraged foreign companies to invest in the province to ensure that they are eligible under the domestic content requirement.

In May 2011, the government of Quebec announced Plan Nord - a massive 25-year-plan to develop the province's northern and Arctic regions. The project aims to revive Québec's mining industry, and is forecasted to represent an overall investment of C$80 billion ($84.1 billion).

Most firms in Canada reported a decline in restructuring and insolvency activity since the fall of 2010, with cases winding down as the country recovered from the 2008 financial crisis. Over the past year there has been a growing preference for M&A over restructurings, and more restructurings are taking place outside of formal court insolvency proceedings....

Most firms in Canada reported a decline in restructuring and insolvency activity since the fall of 2010, with cases winding down as the country recovered from the 2008 financial crisis. Over the past year there has been a growing preference for M&A over restructurings, and more restructurings are taking place outside of formal court insolvency proceedings. There is consistent pressure from cost-conscious clients and stakeholders to reach a pre-arranged agreement on assets before going into formal proceedings.

There has also been a shift in restructuring and insolvency cases from Toronto to the western part of the country. One attorney expresses dismay about the lack of major filings in Toronto since CanWest and Nortel, while another laments, "Most of the interesting filings in Canada have all been out west." These have primarily been in the energy sector, and forestry, which has been affected by import/export tensions. Commonly referred to as the softwood lumber conflict, the long-standing dispute centres around the US perception that Canadians have access to cheaper timber than is available to the US market, and the Canadian view that the US imposes unfair taxes on Canadian lumber imports.

Changes to Canada's Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act (CCAA) finally came into effect in 2010. Both saw a series of amendments which were passed in 2005 but never enacted, followed by a second set of amendments in 2007 which went through the same process. In 2009, however, the government announced that the amendments would come into force by September of that year.

A CCAA filing gives a company with more than $5 billion in liabilities permission and time (usually 30 to 90 days) to come up with a restructuring or reorganisation plan so that it can keep operating, without creditors taking any action to collect the money owed to them.

Amendments to the CCAA, which were designed to create a more balanced restructuring process, include creating a more active role by the Superintendent of Bankruptcy, codifying the court's ability to grant debtor-in-possession financings and corresponding priority charges. These changes are designed to create a more balanced restructuring process, authorising the court to grant charges over all or part of the debtor's property. The court can order that the charge takes priority over all other claims against the company, including those of secured lenders. The amendments also include rules relating to cross-border insolvencies and recognition of foreign proceedings.

The Ontario Court of Appeal issued a landmark decision in the spring of 2011 concerning Indalex, an Illinois maker of soft alloy products which filed for Chapter 11. The ruling effectively stated that beneficiaries of a pension plan with a solvency deficit can take precedence over ranking securities interests. Some lawyers are concerned that this will have a profound effect on the availability of funds, leaving potential lenders unable to provide financing for restructurings. According to one expert in the field, the ruling "will dramatically change the way restructuring is done."

The biggest challenge in the coming year though will be finding enough restructuring and insolvency work to go around. "2011/2012 may be more of a challenge because of the number of transactions completed," says one attorney.