PrefBlog

Bill C-501 is a Liberal-sponsored bill to amend the Bankruptcy and Insolvency Act and other Acts – although its chief proponent found it impossible to find any support for its provisions in a major speech.

John Manley explains in Bill C-501: Myths & Reality:

The proposed legislation would force bankrupt companies to give so-called “super-priority” status to unfunded pension plan liabilities, on the grounds that this will help to ensure benefits are paid if a company goes out of business.

DBRS Comments on Pension Fund Bill C-501:

Based on present information, the enactment of Bill C-501 would have potentially negative consequences for the ratings of certain Canadian-based companies and would likely add volatility to bond markets on a whole as market participants reacted to the meaningful change. The primary impact would relate to the reality that bondholders of entities with DBs would now rank behind the new senior obligation. Secondary effects would likely include the reality that the overall credit strength of some entities may be weakened by changes that would result in higher funding costs and accentuated liquidity challenges, noting that this would likely be concentrated within weaker credits, particularly during periods of stress.

Douglas Rienzo, a Pension & Benefits partner at Osler, comments:

Extending super-priority status to the entire solvency deficit could place significant additional burdens on the financial capacity of DB plan sponsors, impede their ability to cost-effectively raise capital, adversely affect their ability to invest in Canada’s economy and remain competitive, and, ultimately, impair their ability to fund their pension obligations.

For example, the proposed amendments to the BIA and CCAA could have the following implications:

• •the elevation of billions of dollars of potential pension claims ahead of lenders in the priority ladder;
• •the revaluation by credit markets of assets available for security and the deduction of higher-priority claims, thus resulting in a significant reduction of available credit; and
• •the creation of immediate default situations, based on covenants in existing trust indentures restricting the existence of claims that would have priority over the existing lender.

While the protection of members’ accrued benefits in a restructuring or bankruptcy situation may well be a public policy goal worth pursuing, the unintended consequences of Bill C-501 could include not only the weakening of the financial viability of DB plan sponsors, but possibly the wholesale abandonment of DB plans by corporate Canada.

As far as preferred shares go, this is pretty much a non-issue: the default assumption is that if an operating company defaults at all on its preferreds, that implies a total loss on the preferred shares. The senior bondholders and pension retirees can fight amongst themselves for whatever’s left over.

Update, 2011-6-23: Died on the order paper.

This entry was posted on Sunday, January 9th, 2011 at 3:25 pm and is filed under Regulation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.