Alvarez & Marsal’s Richard Morawetz discusses the complexities of Arctic Glacier’s insolvency proceedings under Canada’s Companies’ Creditors Arrangement Act and Chapter 15 of the U.S. Bankruptcy Code. In an intricate proceeding that included among other things, a breach of financial covenants to its lenders, a U.S. Department of Justice antitrust investigation, an eleventh hour acquisition play by a major competitor and claims in excess of $460 million, Morawetz was joined by leading practitioners in their respective fields. They include: Kevin McElcheran from McCarthy Tetrault LLP, Marc Wasserman and Jeremy Dacks from Osler Hoskin & Harcourt LLP; Art Chipman from TD Securities, Inc.; Tony DeMarinis and Scott Bomhof from Torys LLP; and Elizabeth Pillon from Stikeman Elliott LLP.
In July 2012, Arctic Glacier was sold successfully to an affiliate of H.I.G. Capital – proving that while the transaction was all about ice, the company’s fate wasn’t written on ice.
Editor’s note: This is the first of a three-part series that delves into the unique situations recognized by this year’s Turnaround Management Association (TMA) Turnaround and Transaction of the Year Awards. The Arctic Glacier team won in the Transaction of the Year for Mid-Sized Company category. The series will first appear in conjunction with the TMA’s Annual Conference in Washington D.C. on Oct. 3-5.
ABL Advisor: Please describe the significant events that occurred for the Arctic Glacier companies that resulted in the company’s troubles.
Richard Morawetz: This case has been fascinating as well as challenging for a number of reasons, including: the size of the insolvency, the cross border elements and wide geographic dispersion of the business and certain significant claims that had arisen prior to the filing. Arctic started out as a small Winnipeg-based company and had grown dramatically through multiple acquisitions. The company would buy up “mom and pop” packaged ice businesses –- plants and distribution centers –- and kept on acquiring to grow its business. As a result, Arctic’s business and debt load continued to grow. By July, 2011, $91 million of convertible debentures were due to mature.
The company had planned to refinance the maturing debentures, but was unable to, given its financial condition. As a result, the debentures were converted to equity, causing a significant dilution to the existing unitholders. Previously, Arctic had also become embroiled in a Department of Justice (“DOJ.”) antitrust investigation, along with two of its major competitors: Reddy Ice and Home City Ice. Arctic in fact pled guilty to a criminal anti-trust violation in the United States. Understandably, this investigation, together with the related class action litigation in the U.S and Canada, caused Arctic to incur ongoing significant legal fees and created uncertainty within the company. Also, the weather in the second quarter of 2011 was unseasonably poor, negatively affecting the business, and therefore played a factor in contributing additional financial constraints. By then, Arctic was in breach of certain financial covenants with its senior lenders, the Canada Pension Plan Investment Board (CPPIB) and West Face Capital. Arctic owed CPPIB and West Face Capital approximately $260 million at that point. With the covenant breaches, the D.O.J. investigation and class action litigation, Arctic was unable to obtain fresh financing.
Alvarez & Marsal became involved in late 2011 and assisted the company and its advisors in preparing for filings in February 2012 under the Companies’ Creditors Arrangement Act (“CCAA”) and Chapter 15 of the U.S. Bankruptcy Code. At that point, our role evolved to court-appointed CCAA Monitor and Foreign Representative under Chapter 15.
ABL Advisor: You note that Arctic Glacier was the second largest Canadian insolvency proceeding in 2012. Considering the cross border element, the size of the insolvency and the parties involved, this appears to be a rather complicated transaction. What were the other aspects that made the Arctic situation even more complex?
Morawetz: There were numerous complexities to this case. Arctic was a public company vehicle -- an income fund structure and therefore had continuing stock exchange reporting obligations. As Monitor, we had to be mindful of this in our reporting to the court and in any discussions with stakeholders. Eighty percent of its business operations and revenue were in the U.S., but its head office was in Winnipeg. Also, Arctic employed about 1,200 people full time and that number ramped up to about 3,000 in the busy season. While the company owned a significant portion of its vehicle fleet, it would have to always lease additional delivery vehicles in the busy season to meet demand. With the insolvency filings, the employees, customers and vendors were understandably concerned about Arctic’s future ability to operate. Adding to the concerns, Arctic had pled guilty to the criminal fine in connection with the DOJ investigation.
From a logistics and distribution perspective, the company maintained 80 locations throughout North America due to the logistical requirements in the packaged ice business.
Arctic’s issues were further complicated by the many claims which had arisen prior to filing. There was a U.S. direct purchasers’ claim that was settled for $12.5 million of which only $2.5 million had been paid prior to the filing, leaving $10 million still owed. There was also the DOJ’s antitrust claim for the criminal fine, which at the time of the filing amounted to $7 million, and there was a Canadian direct purchaser class action claim that had been provisionally settled for CDN$2 million.
But the biggest elephant in the room was the indirect purchaser class action claim (“IPPs”). This group filed a claim for “at least” $463 million on behalf of consumers buying packaged ice from U.S. retailers. They alleged that consumers were overpaying for purchases of bags of ice based on an alleged conspiracy in the packaged ice industry. The IPPs objected to the company’s Chapter 15 filing and pushed for Arctic to be liquidated. The company nonetheless obtained the order sought and set out to put a formal sales process in place to restructure the business. The sales process, in conjunction with the DIP loan provided by the secured lenders, helped provide reassurance to the suppliers, customers and employees that we could keep Arctic intact as a going concern.
ABL Advisor: The sale to the H.I.G. affiliate was a tremendous result given the circumstances surrounding the Arctic Glacier proceeding. Please share your thoughts as to how this was accomplished in such a relatively short period of time.
Morawetz: When Arctic filed for creditor protection, it obtained court approval on day one for the implementation of a Sale and Investor Solicitation Process (“SISP”). All the professionals and the company worked hard to have the SISP finalized at the time of the filing so it could be presented to the court. The company had retained TD Securities as its investment banker 18 months before the filing to assist in restructuring the company’s debt. Because of the issues facing the company, that attempt was unsuccessful outside of a formal insolvency proceeding. TD Securities was very helpful in our sale process since they had a great deal of institutional knowledge about Arctic. They were able to pull together and update a significant data room containing information that prospective purchasers would be looking for.
When we were developing the terms and conditions of the sale process, the lenders were concerned that they were not going to be repaid in full. They were concerned about fees and costs, the cash “burn” rate, and hence, the duration of the sales process. Ultimately, the lenders agreed to a sales process that was abbreviated in terms of the timeframe but flexible enough to deal with the inherent uncertainties of an insolvency process. It meant that the professionals would have to work closely together to get the data room up and running, and carefully manage the process -- there would be no time for slippage.
The sales process comprised two phases. At the end of the first thirty days, or phase one, prospective purchasers were asked to submit non-binding letters of intent based on preliminary due diligence. If bidders wished to be approved and move into phase two, they had to submit their bid for an amount at least equal to the amount of the lender debt. The lenders were not prepared to accept an offer where they would not be repaid in full.
At the end of phase one, a number of offers were received that contemplated the lenders being repaid in full. It had been negotiated with the lenders that the next phase –- phase two –- to provide for completion of any due diligence and the submission of binding offers, would be for 30 days, with an option to extend for 15 days if necessary. Once we were in phase two, we quickly realized that the 15-day extension would be needed, so we wound up with a 45-day phase two process. In order to have the best chance of obtaining binding and firm offers at the end of phase two, a template of the asset purchase agreement was provided to all phase two bidders. That proved to be very advantageous as it saved a great deal of time in comparing offers from the various bidders.
Early on in the sales process, Reddy Ice, which had shortly before filed under Chapter 11, publicized that it intended to purchase Arctic Glacier, as part of its plan for a quick emergence from its own insolvency proceeding. That was a unique and challenging situation. While there was concern with respect to Reddy Ice’s participation in the sales process, we felt it added competitive tension among the top bidders. In the end, that’s exactly what happened as H.I.G. outbid Reddy Ice. The sale transaction with H.I.G. closed in July of 2012.
In summary, the sale was accomplished in a very short timeframe for a number of reasons: by developing the SISP in advance of the filing, by facilitating a short phase one and phase two but with sufficient flexibility, and by developing the asset purchase agreement template so that bidders would be working with the same document. You’ve got to be ahead of the game in these circumstances and anticipate the ways you might get delayed. That way you can implement a strategy to maintain control of the process and drive the result forward.
ABL Advisor: What made this transaction gratifying for you as a turnaround professional?
Morawetz: It’s always great when you can orchestrate a going concern sale as opposed to a liquidation. The vast majority of the employees at the company were offered employment by H.I.G. and that was a huge win. Many of these people had been long time employees who had worked really hard with us and were very supportive during the process. It was great to see them land on their feet.
Also, we were able to facilitate the Chapter 15 proceeding rather than filing Chapter 11 at the outset. That kept the costs down and fast tracked the process, and despite the fact most of the company’s assets and operations were in the U.S., it worked out very well. Moreover, we had this very large group of indirect class action purchase plaintiffs claiming more than $460 million. They wanted to liquidate the company and opposed the Chapter 15 filing. We were able to prevent that from happening. An additional point to note is that the Winnipeg head office has been retained and that’s good for Manitoba.
Lastly, I can add that the claims administration process is progressing reasonably well and that we’re hopeful that there’s going to be a distribution to the equity holders. That’s almost unheard of in restructuring proceedings. All these things add up to a huge success.