Question
July 1, 2008
Mr. Michael Verne
Premerger Notification Office
Bureau of Competition
Federal Trade Commission
600 Pennsylvania Avenue, N.W.
Washington, DC 20580
Re: Application ofthe Section 802.63 Creditor Exemption
Dear Mike:
Thanks forparticipating in the conference call last week with me and (REDACTED). Thefollowing is to confirm our conversation regarding the application of theSection 802.63 exemption to the transaction that we discussed and youragreement that the exemption applies.
As you may recall,the issue we discussed concerned the application of the exemption to a creditorwho acquired a participation interest in a Senior Secured Debt Facility("SSDF") of a debtor as well as the right to acquire the remainingparticipation interests in the SSDF prior to the debtor publicly announcing itsintention to file a petition under the Companies Creditors Arrangement Act ofCanada ("CCAA"). The assets of the creditor will be acquired pursuantto an Asset Purchase Agreement entered into in a bona fide debt workoutagreement between the debtor and (REDACTED), the lenders' agent. Based on thefacts presented, you agreed that the acquisition qualifies for the Section802.63 exemption. Although we spoke on a no-names basis, for clarification andease of discussion, the following identifies the parties involved in thistransaction and sets forth in detail the facts that we believe support theconclusion that the exemption applies.
Background
The transactioninvolves the acquisition of the assets of (REDACTED) Corporation("(REDACTED)") pursuant to an Asset Purchase Agreement that has beenentered into in connection with a bona fide debt workout. As explained in moredetail below, the debt workout arrangement was negotiated with the originallenders and successor creditors under a SSDF that was entered into as ofJanuary 9, 2007, and subsequent amendments to the agreement. As discussedfurther below, the SSDF incorporates both direct lenders and lenders by way ofparticipation interest. Participants and direct lenders are sometimescollectively referred to as "lenders" in this letter.
(REDACTED), thedebtor, has recently experienced economic difficulties due to the downturn inthe housing industry and the increased costs of supply and transportation. At acertain point thereafter, (REDACTED) met with (REDACTED), the Agent under theSSDF, to discuss the possibility of a default under the SSDF. In January, (REDACTED)and the lenders entered into a Forbearance Agreement pursuant to which thelenders agreed not to pursue existing defaults under the SSDF until February 1,2008, which period could be extended at the option of(REDACTED) until March19,2008. Subsequently, (REDACTED) exercised such option to extend and theForbearance Agreement was extended to April 1, 2008 and later to June 12,2008.
To further addressits financial difficulties, (REDACTED) sought the assistance of a privateconsultant to solicit preliminary proposals to refinance the SSDF. The effortwas unsuccessful. (REDACTED) also engaged in an effort to raise capital byselling its Spa Business. An agreement for the sale was entered into in May2008. Lastly, (REDACTED) engaged an outside consultant to solicit prospectivepurchasers for (REDACTED)'s remaining assets. None of the offers received wereof sufficient value and, on May 8, 2008, (REDACTED) indicated that it would notsupport a transaction that would fall short of enabling (REDACTED) to repay infull its obligations to the lenders under the SSDF.
Subsequently, aftera period of negotiation, (REDACTED) and (REDACTED) and certain of itssubsidiaries, entered into an Asset Purchase Agreement, dated as of June 11,2008, pursuant to which (REDACTED), or its assignee, will acquire certainassets of (REDACTED). The purchase price for the assets is the amount owed by(REDACTED) to the lenders pursuant to the SSDF (approximately C$271 million)including a DIP credit facility (approximately C$30 million) and the assumptionof certain liabilities of (REDACTED) arising under existing contracts (realproperty leases, collective agreements), trade debt, product warranties, andobligations to employees.
On June 12, 2008,(REDACTED) announced publicly that it reached an agreement with (REDACTED) tosell its assets and filed a petition under the CCAA with the Superior Court,Province of Quebec. The assets that are to be sold are located in both Canada and the U.S. As of the date of this letter, (REDACTED) has not filed a petition with thebankruptcy court in the U.S..
Background regarding the Senior Secured DebtFacility and the Current Holders of the Debt
The original lenderunder the SSDF with (REDACTED) was (REDACTED). On March 9,2007, (REDACTED) and (REDACTED)became participants in the loan. They held debt of (REDACTED) or participationinterests therein of approximately C$115 million, C$60 million and US$ 50million, respectively. In connection with the SSDF, (REDACTED) entered into anInter-creditor Agreement whereby the junior participation interest holders (atthis time (REDACTED)) were granted the right to acquire the participation anddirect lender interests of (REDACTED)and (REDACTED) (the senior participationinterest holders) (hereinafter the "Intercreditor Agreement").
In September 2007, (REDACTED).acquired an additional junior participation interest from (REDACTED) of C$50million and entered into a put/call arrangement with (REDACTED). and (REDACTED)(collectively, "(REDACTED) whereby this junior participation interest of(REDACTED) could be put to (REDACTED) by (REDACTED)or called by (REDACTED)from(REDACTED). (REDACTED) is an affiliate of (REDACTED). (REDACTED) holdsapproximately 89% of the economic interest in the arrangement.
On May 1, 2008,(REDACTED) acquired from (REDACTED) its junior participation interest in thedebt of (REDACTED). As a junior participant under the Inter-creditor Agreement,(REDACTED) also received the right to acquire the senior participation interestsof (REDACTED) and (REDACTED) and the direct loan interests of (REDACTED).(REDACTED) holds approximately 89% of this participation interest in the debtand the rights under the Inter-creditor Agreement.
In connection withthe negotiations of the Asset Purchase Agreement, (REDACTED), through itsparticipation interests, agreed to extend to (REDACTED), DIP credit financingof about $30 million to enable (REDACTED) to continue its operations during thependency of the CCAA proceeding.
Structure of the Transaction
The assets of(REDACTED) will be acquired, pursuant to the Asset Purchase Agreement, by anewly formed entity ("Newco") that will be controlled by (REDACTED).(REDACTED) will hold approximately 89% of Newco's voting securities and theremaining shares will be held by two other (REDACTED) partnerships. Newco willhold the participation interests in the debt of (REDACTED) acquired by(REDACTED) prior to (REDACTED)'s public announcement of its intention tofile under the CCAA.
At or just prior tothe closing, (REDACTED) will acquire the participation interests in thedebt held by (REDACTED) and (REDACTED) pursuant to the Inter-creditor Agreementand the put/call arrangement with (REDACTED) and will also acquire the directlender interests of (REDACTED) pursuant to the Inter-creditor Agreement. Afterthese acquisitions, (REDACTED) will hold 100% of the beneficial interests inthe SSDF either as a participant or as a direct lender. (REDACTED) will thenassign its nominal rights as a direct lender to (REDACTED) so that (REDACTED)becomes the full legal and beneficial holder of all loans under the SSDF. Thisdebt will then be contributed to Newco.
At the closing,Newco will hold all of the outstanding debt of (REDACTED) under the SSDFincluding the DIP facility and this debt will be the consideration paid for theassets of (REDACTED). As stated above, the purchase price for the assets is theamount owed by (REDACTED) to the lenders pursuant to the SSDF (approximatelyC$271 million) plus a DIP facility (approximately C$30 million) and theassumption of certain liabilities of (REDACTED) arising under existingcontracts, trade debt, product warranties, and obligations to employees.
HSR Analysis
Based on thesefacts, it appears that under existing interpretations, (REDACTED)'s acquisitionof (REDACTED)'s assets is exempt from the HSR Act requirements under Section802.63 of the HSR Rules. This conclusion is based on the fact that (REDACTED)is acquiring the assets of (REDACTED) as a creditor in a bona fide debt credittransaction. (REDACTED) is a bona fide creditor because it (and (REDACTED).)acquired and obtained the rights to acquire all of the participation interestsin the SSDF of (REDACTED) prior to the public announcement by (REDACTED) of itsintention to file a CCAA petition. Moreover, the acquisition is a bona fidecredit transaction because it will occur in connection with a bona fide debtworkout arrangement between (REDACTED) and (REDACTED), agent for the lenders.This is further supported by the fact that the consideration for (REDACTED)'sassets is the amount of the outstanding debt under the SSDF which willeffectively be exchanged for assets of (REDACTED) to make the creditors wholeand satisfy (REDACTED)'s credit obligations.
Please let me knowat your earliest convenience, if you still agree with this conclusion.
Sincerely yours,