Lifeline offered to shaky companies

OTTAWA — Canadian companies facing bankruptcy are being given access to a new $1 billion lifeline from Ottawa and major financial firms to provide breathing space to restructure operations and return to solvency, Export Development Canada said Wednesday.

OTTAWA — Canadian companies facing bankruptcy are being given access to a new $1 billion lifeline from Ottawa and major financial firms to provide breathing space to restructure operations and return to solvency, Export Development Canada said Wednesday.

The EDC said it has agreed to become the top contributor to a new fund that would act as the bank of last resort to struggling companies who are unable to obtain credit through normal channels.

The Crown corporation has put up $450 million and Toronto-based Brookfield Asset Management (TSX:BAM.A), the former Brascan conglomerate, another $100 million to the fund. Other investors include the Canadian Imperial Bank of Commerce (TSX:CM) and Sun Life Financial Inc. (TSX:SLF), one of Canada’s largest insurers.

Brookfield will manage the fund and provide so-called debtor-in-possession loans and other specialty financing to insolvent Canadian companies who need money to pay the day to day bills while they restructure or reorganize.

Credit conditions have been easing in Canada in the past few months, but EDC chief executive Eric Siegel said the $1 billion fund is designed to address a specific need of companies that have to go through bankruptcy proceedings.

In the last year or so, forestry companies hit hard by the recession have been restructuring to stay alive. Canada’s biggest airline. Air Canada, was also close to restructuring under federal bankruptcy laws but managed to avoid it with fresh financing and concessions from its workers.

In the past, companies ranging from Stelco and Algoma Steel to Air Canada, commercial printer Quebecor World and furniture maker Shermag Inc. have restructured under the federal Companies’ Creditors Arrangement Act.

Typically this (financing) has been supplied by banks or hedge funds, and they are there, but the concern is that there may not be as much capacity coming from those traditional sources,” he explained.

“We believe there is a real need now and we believe there will continue to be need going forward.”

This year alone, newsprint giant AbitibiBowater and pulp and paper producer Fraser Papers Inc. — and a spate of smaller companies battered by the recession — have filed for protection from creditors under the CCAA law. They are currently streamlining to emerge as leaner companies, with fewer employees and lower costs.

Segal said the fund could prevent viable firms from being forced into liquidation just because they lack access to bridge financing that would have enabled them to restructure and ride out the economic downturn.

In a news release, Brookfield managing partner Joe Freedman said the fund will help “viable enterprises emerge from the current recession in a strong competitive position.”

“Brookfield’s history of specialty bridge lending and expertise in corporate restructuring positions us well to provide tailored solutions to support companies through the restructuring process,” Freedman said.

Siegel said it is likely that the fund could expand beyond $1 billion.

He said so-called debtor-in-possession financing entails relatively low risk for lenders because it must be repaid before a company can emerge from the bankruptcy process, and has a priority position relative to other creditors in the event of a liquidation.

In this case, the fund will target mid-market and larger scale opportunities where at least C$20 million of financing is needed.

“CIBC is pleased to be a part of this initiative, which will help support Canadian companies in these uncertain economic times,” said Laura Dottori-Attanasio, global head of corporate credit at the big bank.

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