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LEGAL REPORT: INSOLVENCY "They're like an ace or a wild card up a creditor's sleeve. If a creditor is holding CDSs, they may have a lot more to gain from the company's failure than its survival." — SYLVAIN VAUCLAIR, MCCARTHY TÉTRAULT LLP the glue holding together many hundreds of trillions of dol- lars worth of deals between big banks, insurance companies, and multinational corporations around the world. The result has been the creation of a massive and complex web of people and companies that secretly insure each other, and which became part and parcel — some say the cause — of last year's global financial meltdown. As a result, CDSs are now seen as a mainstay in an arsenal made up of what Warren Buffett calls financial weapons of mass destruction. As the economic fallout from that meltdown continues, creditors around the world who have insured themselves against — or speculated in favour of — a company's bank- ruptcy by buying CDSs may, depending on the wording of their contracts and the solvency of CDS issuers like AIG, be tempted to protect their own interests by thwarting restruc- turing efforts and cashing in. For their part, uninsured creditors and banks faced with making massive payouts on those same CDSs are working desperately to support a com- pany's efforts to rebuild. The result, as insolvency professionals in Canada and elsewhere who are involved in those efforts are discovering, is that it is becoming increasingly difficult to distinguish friends from foes around the negotiating table. "There's no question that [CDSs] have had an impact in the context of restructuring cases we've been involved with," says Rob Chadwick, a corporate lawyer and partner at the Toronto office of Goodmans LLP and a member of the firm's corpor- ate restructuring group. "CDS[s] are clearly now a key issue in restructuring in Canada." Chadwick has worked on many of the recent big restruc- Business disputes mediated by an experienced CA Helping you get better results for your clients turing and refinancing files his firm has been involved with, including the $32-billion, third-party asset backed commer- cial paper, the US$1.4-billion refinancing of AbitibiBowater, the US$1.2-billion recapitalization of Tembec, and the billion-dollar-plus restructurings of corporate behemoths like Quebecor, Smurfit-Stone, and Canwest. He suggests the key to successful recapitalization efforts is finding common goals or issues around which debt holders can coalesce. "You need to understand the key drivers of your creditor group," he says. "As an insolvency lawyer, that's part of my job." That task, however, has become more difficult — even As a chartered accountant with more than three decades of experience consulting on complex business matters, Joel Cohen can help mediate fair and effective resolutions to numerous complex business disputes. t: 416.932.6216 | e: jcohen@rsmrichter.com www.rsmrichter.com Toronto | Montreal | Calgary RSM Richter is an independent member rm of RSM International, an afliation of independent accounting and consulting rms. impossible — in some cases where debt holders have either bet against companies or tried to hedge their investments by buying CDSs, which results in them having strong incen- tives to thwart the efforts of traditional stakeholders to reach restructuring agreements that will save companies in distress. "They don't tell you they have them [but] it becomes obvious they are following different strategies than other creditors," says Chadwick. Without naming names, he adds he has personally been involved in cases in which bond holders who stood to make 15 or 20 cents on the dollar from a restructuring also pos- sessed CDSs that would pay them 100 cents on the dollar if they were triggered in the case of a filing. "At the end of the day," says Chadwick, "they may prefer to see the company fail." Because Canada doesn't have a large number of com- panies, particularly outside Toronto and Calgary, that are big enough to seek and obtain financing on the world derivatives market, and because the financial crisis hasn't ravaged our economy the way it has the U.S., the impact of these so-called negative-basis trades has been much worse south of the 48 JUNE 2009 www. C ANADIAN Law ye rmag.com ntitled-1 1 5/22/09 11:40:22 AM