When the lenders come knocking...If your first thought is bankruptcy, you might be playing into management's hands.
I think a more likely first step is a period of court supervised period of creditor protection under the CCAA, followed by a management Plan of Arrangement. A monitor would be appointed who oversees and reports back to the court. A typical outcome is a management proposal for a reorganization with the goal of restoring financial viability. The proposal can take any form, but needs to be approved by affected classes of creditors (such as secured debenture holders). It may or may not require equity (unit) holder approval (in our case, I'm thinking probably not).
As an example, a proposal might look something like this:
- senior secured debtholders being offered a combination of partial cash payout and new senior secured debt,
- junior secured debtholders (like the debenture holders) might be offered unsecured debt at a fraction of the face value of their old debt or maybe preferred shares
- unsecured debt holders might be offered new equity instead of debt
- equity holders might be offered a much, much smaller equity position or might be offered nothing (more likely in cases where equity holder approval is not required)
As a sweetener and show of faith in the new plan, sometimes management has found a few investor who agrees to buy new equity if the plan is approved.
Disclaimer: all the above is only my relatively uninformed opinion, but I've copied below part of a commentary from
a source that seems more reliable:
An alternative to the sale of the assets of the debtor company to an buyer or investor is a plan of arrangement involving the issuance of new shares of the company to the buyer or investor, in exchange for cash, debt or equity securities of the buyer or investor, or a combination. The cash and/or debt and equity securities can then be distributed to the debtor company’s creditors pursuant to the plan of arrangement. From a practical perspective, the value provided to the creditors must be an improvement over the recovery that the creditors could reasonably have achieved through the exercise of their legal rights, such as the appointment of
a receiver and the liquidation of the debtor company’s assets or a bankruptcy. Approval from the debtor company’s shareholders is not required merely approval from the creditors (unless the court orders otherwise, which might happen in the rare case that the existing equity is thought to still have material value). [My underlining.]