On May 28, Restructur Advisors organized a webinar hosted by PwC and sponsored by Bennett Jones to discuss what's involved in the corporate restructuring of companies in the cannabis sector. We discussed red flags to watch for, tools to use, alternatives to consider, logical steps to take, and timing involved.
Here are some key take-aways from the discussion and a link to the recorded session.
Angela Blake, a Partner at Bennett Jones, kicked off the hour setting the landscape for how the industry got to the point where restructuring was a major topic. A number of internal and external factors contributed to the sector's current phase of 'correction' or 'right-sizing' of valuations, capacity, and organizational structures.
over-spending
early hyper-valuations
early 'easy money' produced expectation that it would continue
unrealistic market projections
race to build production capacity
inadequate regulatory support for retail roll out
unrealistic sales projections
economic downturn
slow international legalization
financial sector slow to be involved
regulatory complexity created unnatural vertically integrated companies lacking focus
licensing paradigm made complicated valuations and M&A
Michelle Grant, a Partner at PwC, picked up from there to discuss the primary options for management/directors to consider when facing a potential need for restructuring.
Monitor for leading indicators of distress which often are precursors to restructuring such as limited access to capital, litigation, regulatory problems, management overturn, etc.
Identify what limitations may exist to a potential restructure such as regulatory/compliance obligations, foreign subsidiary or parent companies, key personnel, inaccessibility of typically legal mechanisms, insurance, valuation, transfer-ability of certain assets, inventory management, etc.
Assess the suitability/desirability of the basic options:
'informal' corporate workout (non-enforcement negotiation)
'formal' corporate restructure (e.g., under Canada Business Corp Act (or equivalent)
court-supervised restructuring under CCAA or proposal under the BIA (or equivalent)
court-supervised liquidation (bankruptcy)
receivership
As someone who has sat at the management table of a cannabis company and been involved in corporate restructuring, Rob Hill, a Partner at Restructur Advisors, then discuss his take on what directors and officers should be thinking about when gearing up for a potential restructure.
Filing for creditor protection in court is not a failure. It can be a useful tool to accomplish the restructure you want if you go in with a clear and executable plan. Filing for bankruptcy is not just a one-way street to a fire-sale.
Assess your true financial to create value not just survive. Value is never created in distress.
Assess and engage with your creditors. Understand what they want but what they can live with/without.
Honestly assess your core and non-core assets/programs/people. Make the tough choices early. Involve external help for objective analysis and execution
Finally, Gavin Finlayson, a Partner at Bennett Jones, provided a high-level summary of the different uses of and steps involved in the various insolvency proceedings available to cannabis companies in Canada introduced earlier by Michelle.
CBCA arrangements provide the most flexibility but only to re-organize corporate structures, equity, or convertible debt. It cannot be used to deal with trade debt or where all parties are insolvent. Such arrangements also typically require shareholder approval.
CCAA or BIA proposals are typically used to restructure terms with creditors and/or trade debt. These allow the debtor to remain in management and control of the company using debtor-in-possession financing while the plan is approved and executed. Should the restructuring plan fail, the court can continue with a full or partial sale of the remaining assets.
Receivership is a creditor-led enforcement mechanism used to appoint a receiver to take control over and liquidate the company's assets.
For those wanting to watch/listen to the recorded webinar, here are the details:
Cannabis Restructuring Webinar - 2020 0528 1903-1
Held Thursday, May 28, 2020
Play recording (1 hr 15 mins)
This recording does not require a password.