2023 recap and 2024 predictions

2023 was a busy year for Canadian insolvency professionals, with rising interest rates and a slowing economy finally pushing many companies into formal insolvency proceedings.

We wrote about 250 formal filings in 2023:

• Real estate led all industries with 38 filings mentioned, followed by manufacturing with 27 filings, and cannabis with 18 filings.

• 122 filings mentioned were in Ontario, followed by 41 in Alberta, 35 in British Columbia, and 31 in Québec.

• 62 CCAA filings were mentioned. EY acted as monitor in 10 of these filings, followed by Grant Thornton/Raymond Chabot with nine appointments, and FTI, KSV and PwC with eight appointments each. Several other firms had six appointments or less.

• Miller Thomson was engaged on 9 CCAA files as company counsel, followed by Stikeman Elliott with seven engagements, and Osler with five engagements. Several other firms had four engagements or less.

You can find details of all these files in our Filings Database, which is sortable by filing type, industry, location, trustee, counsel and more.

Below are some reflections on the past year from leading insolvency professionals and some thoughts on what 2024 has in store.

What industries are struggling?

Bobby Kofman, KSV Advisory
We are seeing significant activity in a variety of sectors, with a few standing out more than others. This includes real estate, retail, print media, mining, cannabis, and technology. Most of these sectors have been affected by higher interest rates, particularly real estate. Certain sectors are affected by other macro trends, such as print media (replaced by online media channels), retail (likely a function of disposable income or secular trends (such as Mastermind)) and cannabis (which continues to be affected by high taxation and other factors). As for retail, companies in the home furnishing sector (outdoor and indoor furniture) and/or which are big ticket items, appear particularly vulnerable. Activity in the real estate sector is also being driven by shareholder disputes, which for whatever reason seem to be more prevalent in this sector than others. There is also a significant number of fraud-related mandates, which we see as a product of loose lending from the former low interest rate environment.

Luc Morin, Norton Rose Fulbright
Real estate has been hit hard. In hindsight, this is not a big surprise. Here's an industry that was always going to suffer first from the rate increases. Arguably, the two most significant CCAA filings of 2023 dealt with the fallout of real estate empires (Groupe Sélection and Groupe Huot), with a combined real estate portfolio of over $2B. Mining also continues to be a conducive industry for restructuring and distressed opportunities. But this has little to do with interest rates, more with the highly speculative landscape in which the mining corporations operate. It attracts distressed capital with high rewards type of hopes. And the CCAA offers a unique set of tools to expedite a distressed investment, facilitating the compromise of existing equity and debt, while forcing the renegotiation of unprofitable agreements - and all of this in record time.

Anonymous Private Lender
As a private lender, our portfolio is diverse but much smaller than the banks. So it is more difficult to comment on industry trends in our portfolio. That being said, we have seen impacts in (shockingly) real estate development, construction and transportation. We have also seen wholesalers feeling the squeeze particularly with overseas supply chains.

D.J. Miller, TGF
We continued to see further restructurings in the retail space, with Nordstrom and WeWork being notable CCAA filings in 2023. Nordstrom’s exit from Canada was surgical and focused solely on the Canadian operations, whereas WeWork’s was a US Chapter 11 filing with the Canadian locations simply being caught up in the larger restructuring.

Some of the filings in 2023 involved businesses with very little in the way of hard assets, where the value was more in the intangibles, intellectual property rights, licenses and going concern nature of the business. Acerus Pharmaceuticals was one where the overall value of the R&D, pharma licenses, IP and tax attributes could only be realized through an RVO involving a related party. DMI Exim was another where there were no hard assets to speak of as it was a commodities business. BRON Media’s value (as yet to be determined, due to the court not approving the credit bid transaction sought by the company and Monitor) is also comprised of a significant amount of intangible rights and IP. Similarly, UTIL Canada’s value as a just-in-time supplier in the automotive industry was significantly impacted when it filed for protection.

Asim Iqbal, Miller Thomson
It’s been a tough year for the entertainment industry with multiple debtors filing for creditor protection. The strikes in the aftermath of the pandemic, together with productions being financed largely with debt, left the industry in a precarious position. With the strikes now over, time will tell if the industry can course correct.

The past year has also been tough for earlier stage, pre-revenue technology companies. The equity markets dried up, and without a proven revenue model, traditional debt financing can be harder to come by. Expect to see a lot of convertible debenture financings and balance sheet restructurings.

Kyle Kashuba, Torys
Oil and gas has been through the spin cycle more times than one can count. There is and always will be some consternation and apprehension in the energy industry, but where there's turmoil there's opportunity. That applies to the oil and gas practice, the corporate practice and the restructuring practice alike. Sometimes that results in a very busy insolvency environment, but in other cases this can create hesitation and a "wait and see" scenario. In some respects, we are seeing much of the latter in Alberta and out west, presently. WTI pricing was strong in 2023, which in many respects was the savior for the industry that is facing constant challenges, including a criticism to some extent on a global scale, a shrinking amount of players in Canada, and an ever-shifting regulatory framework.

What is the lending landscape looking like?

Bobby Kofman, KSV Advisory
Lender patience seems to be waning. Until recently, lenders were able to find alternatives for substantially all of their problems, or borrowers were able to identify replacement financing or other options. In some sectors, like real estate, refinancing opportunities are few and far between as real property valuations have taken a significant hit. Mortgage lenders, however, are prepared to use court processes to acquire and hold real estate until valuations improve. There seems to be a view that the real estate market is at or near lows and that the latter half of 2024 could see some improvement in that sector. Across other industries, lenders have, for years, been able to find solutions for their problems. This is not necessarily the case any longer, and certainly not at par. There appear to be a large number of troubled businesses for which there are no solutions (i.e. the so-called “zombie” companies) that survived due to one or both of Covid-related government support or low interest rates. It is somewhat surprising that it’s taken this long for the benefits of Covid-related government support to pass, but we are seeing the implications of that now. Overall, we see more companies having to resort to formal processes in the first half of 2024 due to the tight capital markets, and increased willingness of lenders to participate in, or initiate, those proceedings.

Arif Bhalwani, Third Eye Capital
Two pivotal factors shaped the lending landscape in 2023: inflation and interest rates. These twin forces ignited a climate of fear, uncertainty, and paralysis among borrowers and lenders. Transactions and the pace of investment slowed as both sides adopted a “wait and see” approach regarding the trajectory of interest rates. New borrowers preferred to go short duration but we’ve seen that shift as refinancing risk is now overshadowing cost.

Capital was at a premium, and private lenders with flexible dry-powder found themselves in a unique position to lend to high-quality businesses on advantageous terms. This year, more than ever, underscored the importance of tailor-made lending solutions.

Kyle Kashuba, Torys
Over the course of the pandemic, we saw a lot of reluctance amongst our Canadian lenders, large and small, to commence enforcement proceedings. There was of course the government “stimulus” payment program that kept many borrowers afloat, but there was also a palpable willingness to give debtors time to restructure their affairs and attempt to right their course. Forbearance agreements were entered into for longer periods than many of us had seen previously. I have to say that the “amend, extend and pretend” mentality is wearing thin. It has been a much more turbulent economic environment. Lenders are increasingly willing to pull the trigger, particularly where there is potential misconduct among management. There are many energy services, trades, real estate, and retail mandates, such that we have not seen in many years.

Anonymous Private Lender
One of the trends we saw in 2023 was a dramatic increase in borrower bad behaviour (e.g., late reporting, not entirely accurate reporting, lack of disclosure, ignoring negative covenants, moving money across corporate group, etc.). Not necessarily outright fraud (although we did see instances of that) but more often companies doing desperate things or making bad choices when liquidity becomes tight (resulting from the various macroeconomic factors – interest rates, slow down in demand, etc.).

Luc Morin, Norton Rose Fulbright
Special loan/workout departments of financial institutions/banks have made a comeback of some sort in 2023. As history will probably say one day, 2021 and 2022 were widely perceived as a generational period where capital market availability was seemingly without end. The post pandemic effervescence. This explained the patience of lenders during that period. And some investments leading to regrets. What we’ve seen in 2023 is that this patience has paved way to concerns, informal workouts and out of court restructurings. And an uptick in CCAA filings.

We’ve observed a lot of creditor-driven CCAAs in 2023. Do you see this trend continuing?

Luc Morin, Norton Rose Fulbright
That is the biggest trend we’ve observed, at least in Quebec. Creditor-driven CCAAs are far less uncommon. Groupe Selection was the biggest one, with 6 major Canadian banks literally taking control of the restructuring process under the CCAA because of their loss of confidence in the management and proposed path forward. But we’ve seen other investors favour that path too. More recently, Investissement Québec, a quasi-governmental entity, implemented a creditor driven CCAA in Tergeo. This signals a certain mainstream component to creditor-led CCAAs. My sense is that this trend will continue in 2024 with the current financial context.

Bobby Kofman, KSV Advisory
We don’t see creditor-driven CCAAs as a trend, recognizing, however, that there have been a few this year. We’ve been involved in many situations where this is discussed conceptually as an option, but when push comes to shove, it is complicated by various factors, including the need to work with at least certain key members of management and to have access to information at the outset of the process (i.e. to prepare a statutory cash flow, for example). Additionally, if a debtor company responds with a competing CCAA application, our view is that the company is more likely to be successful than the creditor-initiated process. There certainly may be situations where a creditor-driven CCAA process is an appropriate and workable solution, but more often than not, it may be easier to bring a receivership application or to influence the direction of a CCAA through the terms of the DIP-loan, enhanced powers of a Monitor and/or the involvement of a CRO.

In your opinion, what has been the most interesting or notable restructuring case of the past year?

Kyle Kashuba, Torys
There have been a plethora of interesting cases, and some themes that are standing out. Being from and practicing primarily in Alberta, I am particularly intrigued in the environmental cases that have been decided over the past year. Cases like the Alberta Court of King’s Bench and Court of Appeal’s decisions in Travelers Capital Corp. v Mantle Materials Group, Ltd., the recently heard appeal in Qualex-Landmark Towers Inc. v 12-10 Capital Corp, and the Saskatchewan Court of King’s Bench in Rural Municipality of Eye Hill v Saskatchewan (Minister of Energy and Resources), which confirmed that Redwater applies in Saskatchewan, and chastised rural municipalities for "lying in the weeds", and waiting to assert their claims. We have cases that have extended the principles in Redwater quite arguably beyond what was ever initially intended by the SCC. One has to wonder where this is all going - what extent of due diligence do lenders have to perform? What unknown and potentially unknowable risks are they prepared to take on? And these cases are by and large coming out of the western provinces that previously championed the energy industry. There is some irony there.

Michael McTaggart, PwC
For interesting and notable cases in 2023 I usually pay close attention to any case summaries that involve unique or developing situations pertaining to DIPs and RVOs as these topics come up regularly in CCAAs. Tacora is one situation that I followed fairly closely with regards to the DIP.

The Unitholder Priority Motion and subsequent Ontario Court of Appeal's decision on Bridging Finance was the largest and most complex situation I was involved with. There were approximately $202.4 million of Statutory Rescission Claims and approximately $218.8 million of Redemption Claims. As the Receiver on Bridging, our team spent a lot of time analyzing and discussing the potential impact of these claims under multiple scenarios with investors throughout 2023.

Luc Morin, Norton Rose Fulbright
I am obviously slightly biased, but the Groupe Selection creditor-driven CCAA recently made the Lexpert Top Ten List of Commercial Cases in their latest Special Edition on Litigation. It was the biggest CCAA process in Quebec in years, and arguably one of the biggest one in Canada. Because of the context (competing CCAA applications, highly contentious between lenders and debtors, with the Court siding with the lenders after a 4-day hearing), because of the magnitude of the restructuring (a real estate portfolio of over $1B), because of the complexities (the financing structure was secured on partnership units, not brick and mortar, many projects were owned with partners who had a majority stake). And because of the industry. GS’s assets were largely comprised of senior housing facilities, serving a vulnerable clientele, accentuating the media frenzy around this CCAA process. For a few months, every decision rendered by Justice Pinsonnault was the subject of many articles/editorials in La Presse. Speaking of which, we don’t say it enough, and it needs to be outlined, the dedication of Justice Pinsonnault in this matter is a true measure of the importance of having a strong Commercial Division. Dealing with complex questions which have an impact on vulnerable people, in real time. We are fortunate in Montreal to count on such a strong Commercial Division. It’s been a very busy year and I have taken part in many generational restructurings over the past 20 years (Quebecor, AbitibiBowater, Nemaska, etc.), but this GS CCAA restructuring process would rank very high in terms of complexity, size and creativity.

Bobby Kofman, KSV Advisory
I have some biases here.

Wallace & Carey was a challenging CCAA as it struggled with liquidity issues from the outset of the mandate. Not only did we file one MAC (material adverse change) report, but we filed two. That was a first for KSV. Ultimately, because of Wallace’s tight liquidity, we worked closely with the other advisors involved in the process, and certain members of the management team, to preserve the business by completing a transaction with Wallace’s largest customer, 7-Eleven Canada, Inc. That transaction is structured around a long-term transition services agreement while the company continues to operate in CCAA.

Validus Power Corp., which is comprised of a group of entities operating four power plants in Northern Ontario, also had some interesting and unique attributes:

• It commenced with a contested receivership application.

• Given the importance of Validus’ permits and licenses in the highly regulated Ontario power industry, it was determined that the eventual transaction would need to be completed pursuant to an RVO. As RVOs are less common in receivership proceedings, the Receiver brought a motion to authorize it to bring a CCAA application, and the purchaser’s transaction was conditioned on this.

• The Court granted the relief sought in the Receiver’s motion and issued the Initial Order. A SISP was then carried out by the Monitor in the context of the CCAA, which involved a complex stalking horse offer jointly submitted by the secured creditor and a former customer (with whom Validus was litigating).

• The stalking horse was recently deemed the Successful Bid and a motion seeking Court approval of that transaction pursuant to an RVO is scheduled to be heard in January 2024.

How do you see 2024 shaping up?

Natasha MacParland, Davies
In my view, “innovation” is the 2024 insolvency word of the year. As discussed in the October 2023 issue of Davies Insolvency Now, a rapid increase in insolvency activity and limited court resources mean that clients on all sides need innovative, easy to implement and out of court solutions. When court proceedings are required, clients will look to insolvency practitioners to collaborate and refine the formal processes within the applicable legislative structure. Whether in or out of court, AI-powered programs will provide important tools for lawyers, creditors and stakeholders to help ensure efficient yet equitable methods for resolving proceedings. I am also following several U.S. cryptocurrency insolvency cases in 2024 for developing a uniquely Canadian approach to regulating Canadian digital assets and their treatment in restructuring proceedings.

Bobby Kofman, KSV Advisory
I think 2024 will certainly start with significant activity, but I would not be surprised if activity declined in the latter half of the year, in line with what seems to be the emerging interest rate expectations. My experience over the years is that the bursts of activity like the one we are presently experiencing last a couple of years and then can wane quickly. I wouldn’t be surprised to see that happen again. Over my career there have been periods like this, where the majority of the economy struggles, followed by periods where the economy is generally doing well, but there are secular challenges. As we emerge from the present decline, we may see that again. That said, if we see a return to more “normal” interest rates, i.e. not what we are experiencing today, but certainly not the era of free money to which a generation has become accustomed, we may return to the times when there was more consistent number of formal restructurings versus the extreme highs of today and extreme lows of, say, 12 or 24 months ago (and prior).

Asim Iqbal, Miller Thomson
Every year forward is one year closer to the impending bond maturity wall across all industries that tap the debt capital markets for financing. These issues will have to be addressed one way or another.

2024 is shaping up to be a busy year. Loan loss provisions are higher. Lender patience is growing thin. There’s also lots of dry powder still on the side lines. Those factors should shape 2024 into an interesting year!

Kyle Kashuba, Torys
There are Chicken-Littles that have been running around yelling “The sky is falling! The sky is falling!” for years, particularly at the outset of the pandemic. But the world did not end. There were upticks in filings, and there were periods in the insolvency space that were as slow as molasses in January. It’s difficult to predict when the reckoning will come, but it feels like there is an increase in busy-ness across the board, and across the country. As the Beastie Boys once said, something’s got to give.

Arif Bhalwani, Third Eye Capital
As we look towards 2024, our expectations hinge on the continued adjustment of businesses to a “higher-for-longer” interest rate and inflation environment. While we anticipate a further weakening in corporate fundamentals, it's important to note that this does not necessarily signal a broad, market-wide credit crisis. Rather, we expect defaults to be idiosyncratic rather than systemic. Sectors likely to experience the most significant stress include real estate, construction services, traditional retail, and hospitality, both in terms of the magnitude and frequency of defaults.

But these challenges will bring immense opportunities. The old rising tide of low interest rates and easy money will no longer be there to lift all boats. In its place, lenders who possess robust relationships, ready access to capital, and demonstrated expertise in restructuring stand to generate considerable value.

What industries do you think are in for a rough 2024?

Luc Morin, Norton Rose Fulbright
Real estate will continue to suffer. I would say that retail will also continue to experience the downfall of stay-at-home shopping, but this will ultimately also become a real estate issue. That said, I don’t think it will be an industry-driven year in terms of distressed opportunities. Companies that find themselves over-leveraged and in need of financing will find it very hard to keep pace and that will lead to an uptick in distressed M&A.

Kyle Kashuba, Torys
If you look at the US and the insolvency filings in Europe, industries such as manufacturing and retail may be facing a difficult year in 2024. There is an ongoing shortage of skilled labour, technological innovation, continuing supply chain disruptions, and general economic uncertainty. Also, don’t forget the new requirements surrounding net-zero emissions goals that many companies are setting. The cannabis space has been in a downward spiral in 2023, and I expect that this will continue. It’s still a young industry, grappling with changing government requirements and regulatory hurdles. Cryptocurrency, although a different ball of wax, faces similar challenges. We have also seen a lot of rogue actors in this space, and the fallout from their misconduct and questionable market moves and manipulation.

D.J. Miller, TGF
Real estate development projects (Stateview, Mizrahi, Go-To Developments, Vandyk Group and others) and businesses that serve the construction industry (such as Quality Rugs, Bad Boy Furniture) continued to experience the fallout of post-pandemic supply issues and an increase in interest rates. I think we’ll see more of these types of real estate and construction-related restructuring matters throughout 2024.