This bulletin contains a summary of certain events in the Canadian forestry industry sector in 2009 that continued the recent trend of an industry undergoing substantial change due to low commodity prices, a volatile currency, and the global economic recession.
- The announcement by the Canadian federal government of its $1 billion aid package for pulp and paper mills in Canada.
- AbitibiBowater Inc., the eighth largest publicly traded pulp and paper manufacturer in the world, filing for creditor protection in Canada under the CCAA and making a voluntary petition for Chapter 11 protection in the United States.
- Significant industry participants such as Fraser Papers Inc. and Grant Forest Products seeking creditor protection in Canada under the CCAA, and the Forest & Marine Financial Group going into receivership.
- The announcement by the Canadian federal government of the first deficit budget in years, under which the Canadian forestry industry is set to receive $170 million over the next two years.
- Changes to the federal business tax regime such as a reduction in the general corporate tax rate to 19%.
The Ontario and BC governments announcing plans to harmonize their provincial sales tax with the federal GST to create a single, harmonized sales tax.
Changes to the Competition Act and the Industry Canada Act, that could substantially increase the financial thresholds for transactions subject to governmental review.
2009 Update on Opportunities in the Forestry Industry in Canada
Events in 2009 have continued a recent trend which reflect that the Canadian forestry industry is undergoing substantial change brought about by low commodity prices, a volatile currency and the global economic recession. We have seen some of the major players in the forestry business sector file for creditor protection under the Companies’ Creditors Arrangement Act (“CCAA”) in an effort to restructure their operations into more sustainable business models that safeguard their long-term interests. However, with restructuring comes opportunity, and this is evidenced by the willingness of foreign investors to extend credit to those involved in the Canadian forestry industry.
Moreover, 2009 saw the passing of the first deficit budget in Canada for a number of years, pursuant to which a substantial sum of money will go towards creating a more sustainable forestry industry. The federal government announced that it will extend a $1 billion aid package, which will benefit eligible pulp and paper companies in Canada. The interest of foreign investors and the government in the Canadian forestry industry are encouraging signs and they show that, despite the global recession, there remains opportunities for growth and investment in the industry.
Ottawa’s $1 Billion Aid Package for the Forestry Industry
On June 17, 2009, the federal government announced its plan to give $1 billion in aid to the Canadian forestry industry. The initiative is a direct response to an American subsidy that has given competitors south of the border a significant advantage over their Canadian counterparts. Forestry companies in the United States have been exploiting a loophole in American energy measures allowing them to become eligible for up to US$8 billion in tax credits by adding diesel to “black liquor” and burning the mixture in their recovery boilers for heat and energy (“black liquor” is a byproduct of chemical pulp production historically burned by pulp mills in their recovery boilers without the addition of diesel). The subsidy has, in some cases, reduced production costs in the United States by approximately $200 a tonne.
Pulp and paper mills in Canada that produce black liquor will be eligible for a grant under Ottawa’s $1 billion aid package. The program calculates a maximum funding envelope for eligible companies based on a credit of 16 cents for every litre of black liquor produced by their mills between January 1, 2009 and December 31, 2009. As a condition, however, the mills will be required to invest the money received under the grant in capital improvements, such as green power projects and cogeneration plants, over the next three years. Currently, about 27 pulp and paper mills in Canada would qualify for funding.
Mills in British Columbia, which produce between 42 to 44 per cent of the country’s pulp and paper, stand to gain about $400 million from the federal aid package.
Parliament must still approve the initiative, which will be incorporated into spending legislation that will not be tabled until the fall of 2009.
The Latest CCAA Filings
AbitibiBowater Inc. (“Abitibi”), the eighth largest publicly traded pulp and paper manufacturer in the world whose activities involve the production of a wide range of newsprint, commercial printing papers, market pulp and wood products, filed for creditor protection in Canada under the CCAA on April 17, 2009. This was subsequent to the voluntary petition filed by Abitibi in the United States on April 16, 2009 under Chapter 11 of the United States Bankruptcy Code (“Chapter 11”). Abitibi’s operations in Canada are located primarily in Québec and Ontario, with a sawmill, newsprint and cogeneration facility located in Mackenzie, British Columbia.
On April 18, 2009, Abitibi received court orders in the United States and Canada in connection with its Chapter 11 and CCAA filings. In Canada, the order by the Québec Superior Court approved the debtor-in-possession (“DIP”) financing of approximately $200 million offered to Abitibi on April 16, 2009 by Fairfax Financial Holdings Limited (“Fairfax”) and Avenue Management LLC for certain of Abitibi’s Bowater subsidiaries.
On May 7, 2009, the Québec Superior Court granted Abitibi an order authorizing it to enter into a loan agreement with the Bank of Montreal for DIP financing, guaranteed by the Québec government. This agreement provides Abitibi with borrowings in an aggregate principal amount of $100 million, of which a minimum undrawn availability of $12.5 million must be maintained at all times.
Most recently, on July 22, 2009, the Newfoundland and Labrador government formally began the process of providing $35 million to laid-off workers from Abitibi’s mill in central Newfoundland, which has been closed since Abitibi filed for protection in Canada and the United States. Specifically, Abitibi announced that it had reached an agreement with unions to provide severance and other benefits to about 800 people who used to work at Abitibi’s paper mill in Grand Falls-Windsor. The financial help will be provided to unionized and non-unionized mill workers, as well as others involved in logging operations.
Fraser Papers Inc.
On June 18, 2009, Fraser Papers Inc. (“Fraser Papers”), an integrated specialty paper company that produces a broad range of specialty packaging and printing papers, and all its subsidiaries, filed for creditor protection under the CCAA. Fraser Papers also filed for protection for its US subsidiaries pursuant to Chapter 15 of the United States Bankruptcy Code (“Chapter 15”), thereby giving those entities bankruptcy protection in the United States. Chapter 15 also recognizes the CCAA filing in Canada as the primary filing. In support of the restructuring process, CIT Business Credit Canada has agreed to continue to revolve the existing working capital facility and, in addition, Brookfield Asset Management (“Brookfield”) has agreed to provide Fraser Papers with DIP financing. Together, these two facilities will provide Fraser Papers with up to $20 million to fund operations during its restructuring process. Fraser Papers has operations in New Brunswick, Maine, New Hampshire and Québec.
Forest & Marine Financial Group
On March 26, 2009, the Forest & Marine Financial Group (the “Group), which is engaged primarily in the financing of heavy mobile equipment, helicopters, tugs and barges utilized in the forest products and marine industries, sought and was granted creditor protection under the CCAA by order of the Supreme Court of British Columbia (the “BCSC”). On May 1, 2009, the Group received a further order of the BCSC extending the CCAA protection by a further period of three months expiring on July 31, 2009. Most recently, the Group was forced to go into receivership when its major creditor called its loan, with the BCSC appointing The Bowra Group as receiver on August 18, 2009.
Grant Forest Products
On June 25, 2009, Grant Forest Products (“Grant Forest”), a privately held Canadian maker of oriented strand board used in residential construction, sought and was granted creditor protection under the CCAA by order of the Ontario Superior Court. At present, Grant Forest has yet to announce any comprehensive restructuring plan.
The above CCAA filings reflect the ongoing difficulty in the Canadian forest products industry as a result of the most severe cyclical downturn the industry has experienced in recent memory. Given the current financial climate, it is likely that we will continue to see such restructurings. Despite this fact, however, investment activities in the industry continue to occur. The DIP financing offered to Abitibi and Fraser Papers by Fairfax and Brookfield respectively, for example, illustrates that even in times of economic hardship, investors are still interested in extending substantial amounts of capital to the Canadian forest products industry. Indeed, the current economic climate will create opportunities for those looking to enter or expand their presence in the industry during the downturn.
Forestry and the 2009 Federal Budget
On January 27, 2009, Canada’s minority Conservative government tabled Canada’s first deficit budget (the “Budget”) in a number of years. The Budget provides the Canadian forestry industry with a total of $170 million over two years for certain measures that will secure a more sustainable industry by helping companies develop new products and processes, and take action on new opportunities in the international market place.
Firstly, the Budget provides $80 million over two years to Natural Resources Canada for the Transformative Technologies program administered by FPInnovations, a not-for-profit forest research institute focused on the development of emerging and breakthrough technologies related to forest biomass utilization, nanotechnology and next generation forest products. In addition, $40 million will be provided to Natural Resources Canada in 2010-11 to develop pilot-scale demonstration projects of new products that can be used in commercial applications.
Secondly, the Budget provides Natural Resources Canada with $40 million over two years for the Canada Wood, Value to Wood and North America Wood First programs to help forestry companies market innovative products internationally. An additional $10 million will be provided to Natural Resources Canada in 2009-10 to support large-scale demonstrations of Canadian-style use of wood for construction in targeted off-shore markets, and non-traditional uses of wood in domestic markets.
Changes to the Business Tax Regime in the Budget
The Budget passed, and introduced a number of changes on the business tax front, including the following:
- The government confirmed a reduction in the general corporate income tax rate to 19% as of January 1, 2009 and confirmed the already announced phased reduction of that rate to 15% by 2012. The government challenged its provincial counterparts to join Alberta and British Columbia in reducing their income tax rates to 10% by 2011. The overall goal is a combined federal/provincial statutory income tax rate of 25% by 2012.
- The Budget adds, extends and modifies certain stimulatory, accelerated capital cost allowance incentives, including allowing a 100% depreciation rate for eligible computers and software acquired after January 27, 2009 and before February, 2011 and allowing a 50% straight line CCA rate for manufacturing and processing machinery and equipment acquired in 2009, 2010 and 2011 (such machinery is subject to a “half year rule” which reduces the CCA claim by one half in the year of acquisition).
- The government affirmed its commitment to harmonizing the various remaining provincial sales taxes with the federal value added tax (the GST), which is generally refundable to businesses. Ontario has since announced that it plans to harmonize Ontario's retail sales tax with the federal GST. In addition, on July 23, 2009, the BC government announced its plans to harmonize its provincial sales tax with the GST effective July 1, 2010.
- The Budget proposes to permanently eliminate tariffs on a range of machinery and equipment which they state will lower the costs for Canadian producers in a variety of sectors, including forestry.
Changes to the Competition Act and Investment Canada Act
Also included in the Budget legislation were a number of fundamental amendments to the Competition Act and the Investment Canada Act. Many of the amendments had been initially proposed in the Report of the Competition Policy Review Panel, and they represent the most significant changes to both of these Acts in the last 20 years. The changes included the following:
- The merger review under the Competition Act would be subject to a "second-request" type process, similar to that currently utilized in the United States. The current 14 and 42 day closing periods for short-form and long-form notifications would be replaced with a 30 day period which the Commissioner could then unilaterally extend by requesting the production of additional information, in which case closing would be prohibited until 30 days after the parties had complied with that second request.
- The “size-of-the-transaction” threshold for merger review would increase to $70 million from the current $50 million level – the threshold would thereafter increase annually by the rate of inflation.
- The Commissioner's ability to challenge a completed merger would be limited to a period of up to one year after closing, rather than the current three year period.
Investment Canada Act
- Higher thresholds for the “net benefit to Canada” review under the Investment Canada Act for the acquisition of a Canadian business by a non-Canadian would be established, starting at $600 million and increasing over time to $1 billion (the threshold currently stands at $312 million – subject to limited exceptions, transactions below the threshold are not reviewable and only require a notification within 30 days of the completion of the transaction).
- Entirely separate and apart from the existing “net benefit to Canada” review, a new “national security” review process would be instituted. Any acquisition or establishment of a Canadian business by a non-Canadian, regardless of the value, could be made subject to a national security review where the Minister has reasonable grounds for believing that the investment could be injurious to national security. “National security” has not been defined in the legislation, so the actual application of this new review procedure remains highly uncertain.
- Notwithstanding Industry Canada’s refusal to approve ATK’s acquisition of MacDonald, Dettwiler and Associates Ltd. (“MDA”) in 2008 (on grounds of national interest and security) and recent media reports of potential governmental intervention over transactions in the Nortel bankruptcy proceedings, most informed commentators would be surprised if these events reflect a new governmental approach to the “net benefit to Canada” review under the Investment Canada Act. We believe both the MDA and the Nortel situations are highly unique and fact specific. We continue to believe that the Act’s primary purpose of promoting foreign investment in Canada will be adhered to and that these amendments to the Act (which substantially increase the financial thresholds before pre-transaction review is required) are reflective of long standing government policy and it is highly unlikely any Industry Canada intervention will occur on any of the Nortel transactions.
Although the Budget legislation has passed, the amendments to the Investment Canada Act that increase the financial thresholds are not yet in force. Those amendments will be brought into force at some point in the future.