On November 2, 2016, Pacific Exploration & Production Corp., the largest non-state oil producer in Latin America, announced it had successfully implemented a Restructuring Plan under Canada’s Companies’ Creditors Arrangement Act (
CCAA). Falling oil prices in 2014 and 2015 had crippled the company, which, by the time of the negotiated Restructuring, had $5.4 billion in debt.
Pacific operated primarily in Colombia and, to a lesser extent, in Peru, Brazil and Belize, where collectively it employed more than 2,000 people. The vast majority of its creditors, however, were based in the United States, where most matters such as this would involve the company filing for Bankruptcy protection under Chapter 11. But because Pacific had been incorporated in British Columbia and its headquarters were located in Toronto, a decision was ultimately reached to restructure its financial affairs, through a “formal Plan of Arrangement” under the CCAA.
It was not an easy agreement to reach, especially considering that Colombia had its own, and different, process of dealing with a company in such dire financial straits. “Pacific has about 100 companies in its group,” says Tony Reyes
, a partner in the Toronto office of Norton Rose Fulbright
, which represented Pacific during the restructuring process. “None of them were in the US or Canada.”
Under Colombian law, a Superintendent was appointed, who potentially had the power to take over the company and run it as a Receiver would. If that occurred, “you lose a lot of control and that’s very bad for business,” says Brendan O’Neill
, a partner with Goodmans LLP
in Toronto. O'Neill led the restructuring process on behalf of Ad Hoc Committee of Noteholders and DIP Lenders, who held the majority of the debt. O'Neill told Lexpert: "By using Canada’s highly flexible and efficient CCAA process as the main process, with ancillary proceedings in the United States under Chapter 15 of the United States Bankruptcy Code and under Ley 1116 in Colombia, the company and its stakeholders were able to complete a highly complex and multi-jurisdictional reorganization in approximately 4 months of court time — a result that could not have been obtained had other jurisdictions served as the lead or main jurisdiction.”
Many of the players were not familiar with the CCAA, which had rarely been employed in Canada prior to the mid 1980s. “Chapter 11 is very much a rules-based system,” says Robert Thornton
, a partner with Thornton Grout Finnegan LLP
, which served as counsel for PwC, the court-appointed Monitor. “Whereas, the CCAA is what we call a principle-based system, in which principles and guidelines are set out but a great deal of flexibility is given to the judge. There’s a fundamental difference between the two approaches. In Canada, a judge is usually willing to approve an outcome if the process was open and transparent and everybody got a fair shake. In the United States, they’re more concerned about price. If someone comes in with a better offer on the court steps, then it’s okay to have top-up bids come in at the last minute.”
The issue of jurisdiction, or COMI (the Centre of Main Interest of the debtor), resulted in many “tense negotiations,” says O’Neill, especially during negotiations with the Colombian regulators. He made numerous trips to Colombia and, at one stretch, “worked every day for 30 days” on the case, which involved about 20 lawyers at his firm. “We were very insistent that this be filed in Canada, which we believe has a much more efficient, predictable and less litigious Restructuring regime. When you’re dealing with a pre-packaged case, as we were here, that was very important.”
It also took considerable time and effort to convince the American parties of the benefits afforded by the CCAA. “There was a big battle about which forum this should be filed in,” says O’Neill. “We had a lot of New York law firms who were involved in the debt who wanted to file under Chapter 11.” Reyes recalls meetings in New York “with maybe 60 people in the room, a bunch of noteholders and banks. There were some tense moments and some harsh words. Had we lost the cooperation of the majority of one of those groups it would have been much more difficult [to achieve a successful outcome] than it was.”Ultimately, all parties agreed that Canada was, indeed, the COMI, and that the matter would be best resolved under the CCAA.
“This was the first time ever that there had been a three-jurisdiction filing with those three jurisdictions,” says Thornton. It also marked the first time Colombia had ever recognized a foreign court in a Restructuring case.
“I think the CCAA served the creditors purposes exactly like they were hoping it would,” says Angela Libby, an associate with Davis Polk & Wardell LLP in New York City, which acted as administrative agents for the Bank of America. Adds O’Neill: “At the end of the day, we were proven right to use the CCAA because the Canadian court dealt with us very efficiently.”
O’Neill attributes a lot of the success to Frank Newbould (now retired), a judge of the Ontario Superior Court of Justice, and to the fact that Toronto has a dedicated list of commercial judges who hear CCAAs.
“Justice Newbould is an incredible judge with immense experience,” he says. Justice Newbould "knows how to separate the wheat from the chaff. He kept this on track while being firm but fair to everybody.” One of the matters Justice Newbould ruled on was an attempt by EIG Global Energy Partners “to launch a hostile takeover of the bonds,” says O’Neill. “They tried to derail the transaction and buy up all the bonds and tried any number of things. [But Newbould] didn’t allow it. He said we weren’t going down that road. He really was a big part in saving the company.”
In mid-2016, following an auction, Pacific selected a proposal by Canada’s Catalyst Capital Group Inc., which had the support of more than 75 percent of the company’s noteholders and lenders, well in excess of the two-thirds majority required.
Achieving a support agreement that could be taken to the CCAA as a package the company and its creditors had agreed to, and said they were willing to vote in favour of, was “very challenging,” says O’Neill. He referred to it as “financial emergency room surgery.” Angela Libby agrees: “It was one of the most complex and challenging matters I have ever seen,” she says, adding that the complexity, however, helped motivate the parties towards reaching a solution. “When you have that interplay between the various jurisdictions and legal issues and a very big capital structure, it can have the effect of driving consensus because people realize that rather than getting caught up in inter-creditor disputes, you need to collectively work together to make sure you’re coming up with the best solution.”
Under the final agreement, a debt-for-equity plan was arrived at. Almost all of Pacific’s debt was cancelled and all previous shareholders were removed. “Basically, what people got in exchange for their debt were shares in the new company,” says O’Neill.
There was an immediate need for $500 million to keep the company operating, which was raised equally from bondholders and from Catalyst, “which led the operational restructuring of the company,” he says.
There were also changes made to Pacific’s corporate governance, a new Board of Directors was named and a new CEO and CFO appointed. In June 2017, to help create a new start for the firm, Pacific changed its name to Frontera Energy Corporation.
“I think my client was very happy with the outcome,” says Tony Reyes. “The company was able to keep functioning and a lot of jobs were saved.”
Reyes was also particularly pleased with the decision to file the matter under the CCAA. “Under Chapter 11, you might have a dozen orders, some interim, and you have to go back to get final orders and you have to separate proceedings for each of the companies. In Canada, the process is just simpler. We can file any number of companies in one order, even if there are foreign ones. We have one affidavit. One appearance. And orders made on the first day are final. You don’t have to keep going back.”
He estimates the process under the CCAA “took half the time and cost a third of the money.”
Brendan O’Neill, who had previously spent six years working as a restructuring lawyer in New York, couldn’t agree more. “Chapter 11 can take too much time and cost too much in legal fees,” he says. “We had suppliers who were threatening to cancel contracts if the matter wasn’t resolved. And every dollar out the door was a dollar out of our jeans.”
He calls the Pacific Restructuring, “a triumph for Canada and its Restructuring laws. That’s the real story here. We needed the most efficient process possible and we were convinced the CCAA was the best way for that to happen. On a domestic level, the CCAA is a good forum for Restructuring. On an international level, if you have a Canadian parent, the CCAA is also an excellent forum. It’s a point of pride that the CCAA was able to handle this just like it handled Nortel and many other significant transactions. It’s an option I definitely suggest others consider when applicable.”