Court grants first RVO in a CBCA plan of arrangement

The lines continue to blur between arrangements under corporate and insolvency statutes.

In Xplore Inc. (Re), 2024 ONSC 5250, the Court broke new ground by granting the first reverse-vesting order (“RVO”) in a corporate plan of arrangement under the Canada Business Corporations Act (“CBCA”).

The restructuring involved Xplore Inc. (“Xplore”) and its affiliates, a group of privately-held telecommunication companies providing rural-focused internet access to more than 300,000 subscribers across Canada (“Xplore Group”).

Xplore Group’s successful restructuring resulted in: (i) a reduction of ~$1.7 billion in secured debt to ~$330 million; (ii) a reduction of ~$120 million in annual interest costs; (iii) access to $100 million in new debt financing; and (iv) access to upwards of $500 million in new equity financing.

1. The Xplore Group

Founded in 1998, the Xplore Group became Canada's largest rural broadband service provider, employing 1,085 employees and providing internet access to more than 300,000 subscribers across Canada.

The Xplore Group had three business lines: (i) the fixed wireless business; (ii) the satellite business; and (iii) the fibre business.

At the time of filing, Xplore reported outstanding secured liabilities of approximately $1.76 billion (“Indebtedness”), comprised of:

• $1.34 billion owing to first lien term loan lenders (“First Lien Term Lenders”);
• $132 million (excluding letters of credit) owing to first lien revolving lenders (“First Lien Revolving Lenders”, and with the First Lien Term Lenders, “First Lien Debtholders”); and
• $276 million owing to second lien term loan lenders (“Second Lien Debtholders,” and with the First Lien Debtholders, “Secured Debtholders”).

Stonepeak Falcon Guarantor Inc. (“Stonepeak Guarantor”), the sole direct parent of Xplore, had guaranteed the Indebtedness. The First Lien Debtholders held a first-priority security interest over all assets of both Xplore and Stonepeak Guarantor, while the Second Lien Debtholders held a second-priority security interest over the same assets.

Xplore’s satellite business delivered internet services via home modems connected to orbiting satellites. Xplore leased satellite capacity from three providers (the “Satellite Providers”) across five satellites. At the time of filing, the Xplore Group reported outstanding unsecured liabilities owing to the Satellite Providers, including USD $8.77 million owing to Hughes Network Systems, LLC (“Hughes”).

2. Liquidity challenges and the need for restructuring under the CBCA

Due to liquidity constraints, Xplore was unable to make a $44 million interest payment on its first and second lien term loans. Additionally, Hughes indicated it was prepared to suspend service for Xplore’s failure to pay its invoices, which would have significantly disrupted Xplore’s ability to continue delivering internet services to approximately 80,000 of its rural customers.

In June 2024, Xplore and its affiliate obtained a preliminary interim order under section 192 of the CBCA and a stay of proceedings in favour of the Xplore Group.

3. The arrangement

The plan of arrangement included the following key terms:

1. The Indebtedness would be extinguished;
2. Xplore would issue to the Secured Debtholders their pro rata share of new “Takeback Term Loans” (less certain amounts) in the aggregate principal amount of $330 million. The Takeback Term Loans would be secured by all of Xplore’s assets;
3. First Lien Debtholders and Second Lien Debtholders would receive, on a pro rata basis, new common shares (“New Class A Common Shares”) in the capital stock of Stonepeak Falcon Holdings Inc. (“Stonepeak Holdings”), the sole direct parent company of Stonepeak Guarantor. The holding parent company(ies) of Stonepeak Holdings would exchange all of the existing class A and B common shares for a single new class B common share;
4. Xplore would issue new common shares to Stonepeak Guarantor, which in turn would issue new common shares to Stonepeak Holdings. All such shares would be in equivalent value to the New Class A Common Shares issued to the Secured Debtholders;
5. Xplore would receive a new $100 million financing facility (the “New Money Term Loan”), with 70% funded by certain First Lien Debtholders and the remaining 30% funded by “Stonepeak Funder,” an indirect parent of Stonepeak Holdings;
6. Stonepeak Holdings would issue:
   1. new common shares for proceeds of up to $150 million, permitting the Secured Debtholders to subscribe for additional common shares of Stonepeak Holdings; and
   2. new preferred shares for proceeds of up to $350 million, permitting the Secured Debtholders to subscribe for preferred shares of Stonepeak Holdings;
7. Secured Debtholders would be entitled to additional consideration if they participated as a New Money Term Loan lender, provided backstop financing, or consented to the plan; and
8. The Satellite Providers would each receive a one-time cash payment of $250,000, and Xplore’s contractual obligations to the Satellite Providers would be vested out by way of the RVO (as discussed below).

4. The fairness hearing

The Court sanctioned the final plan of arrangement during the fairness hearing.

In approving a CBCA plan of arrangement, the Court must be satisfied that:

1. the statutory and court-mandated requirements have been complied with;
2. the application has been put forward in good faith; and
3. the arrangement is fair and reasonable.

Xplore’s arrangement was put forward in good faith because it served a valid business purpose: it reduced Xplore’s indebtedness and its annual interest costs, and generally improved its capital structure.

The arrangement was also fair and reasonable. Among other reasons, the Xplore Group obtained two supportive valuation opinions and a fairness opinion, and key economic stakeholders all agreed that the plan was the best and only viable option.

This was notwithstanding the following unique features of the plan:

1. There was differential treatment between the First Lien Term Lenders and First Lien Revolving Lenders, in that they were not both receiving “CVRs” (i.e. contingent value rights) (the Court found the value of the CVRs was contingent and did not form a significant portion of the overall value provided to this group of securityholders);
2. The plan provided additional consent- and backstop-funding-related consideration for certain debtholders (the Court found this consideration was ultimately available to all securityholders who supported the plan or who advanced backstop funding); and
3. There was differential treatment of the Satellite Providers from the broader group of unsecured creditors. While this was unusual—since CBCA plans generally do not involve compromises of trade debt—courts in previous cases have acknowledged that trade creditors can be affected by stay orders and arrangements. Notably, in a liquidation scenario, the secured creditors would hold a deficiency claim that would vastly exceed the unsecured claims of the Satellite Providers, effectively eliminating any possibility of recovery for them.

5. Satellite Providers: Requirement to provide services and RVO

At the interim order hearing, the Satellite Providers argued that, given the stay of proceedings and the restriction on contract terminations under the preliminary interim order, they should be entitled to full contractual payments during the stay period if they were required to continue providing services. Where the CBCA is silent (as here), the principles of the Companies’ Creditors Arrangement Act (“CCAA”) should be incorporated by analogy. The Satellite Providers submitted this supported their assertion that a supplier that continues to provide services is entitled to be paid in full.

The Court disagreed with the Satellite Providers. The Court held that under section 11.01 of the CCAA, suppliers are only entitled to “due payment,” not necessarily full contractual rates. Additionally, subsection 11.4(2) allows courts to require critical suppliers to continue to supply on “any terms or conditions that the court considers appropriate.” The fact that an order precisely of this nature (temporarily staying the contractual recourse of a trade creditor said not to be affected by a proposed arrangement, knowing that the company is not able to pay them their full contractual payments) has never been made before did not preclude the Court from granting such an order in appropriate circumstances.

As under section 11 of the CCAA, the Court’s discretion and authority under section 192(4) is “broad and flexible,” and the Court may grant an order precluding critical suppliers from terminating the provision of services, even if they are not being paid in accordance with contractual terms.

The Satellite Providers’ agreements and claims were addressed by way of the RVO.

In the CCAA context, the Court’s jurisdiction to grant an RVO flows from its section 11 authority to “make any order it considers appropriate.”

The Court in Xplore Inc. (Re) held it has similar authority under subsection 192(4) of the CBCA to “make any interim or final order it thinks fit.”

Subsection 192(4) of the CBCA and the CCAA serve a similar purpose: to provide a broad procedure aimed at facilitating the restructuring of corporations. Both provisions, the Court reasoned, must be interpreted similarly and liberally.

The Court applied the test for approving RVOs as set out in Harte Gold Corp. (Re), and found it was met:

1. RVO was necessary: Xplore had various non-transferrable licences and tax credits. A traditional asset transaction would also require significant notices to contractual counterparties;
2. RVO provided economic result at least as favourable as other viable alternatives: A restructuring under the CCAA, being the next viable alternative, would have been more costly;
3. RVO did not make any stakeholders worse off: Implementing the recapitalization under the CCAA would have produced the same result for secured debtholders, but a worse result for many unsecured creditors that were otherwise unaffected by the plan. Further, the arrangement did not deprive stakeholders of any consent rights or blocking positions that would have been available elsewhere; and
4. Consideration paid reflected the value of licences, permits, and other intangible assets being preserved under the RVO: The consenting lenders were assuming substantially all of the out-of-the-money unsecured obligations of Xplore. This represented the very material “price” being paid to complete the transaction.

The Court rejected the Satellite Providers’ arguments that RVOs are the exception in CCAA arrangements and are unprecedented in CBCA arrangements: “novelty of the RVO structure in the CBCA context [did] not foreclose the possibility of a finding that the proposed Arrangement [was] fair and reasonable.”

6. Takeaways

The Court’s approval of the first RVO in a CBCA plan highlights the evolving intersection of corporate restructuring and insolvency law. The Xplore Group’s case demonstrates the Court’s willingness to further expand the use of RVOs.

As a result of the restructuring, some credit rating agencies, including S&P Global Ratings, have raised their issuer credit ratings on Xplore.

Critically, Xplore’s restructuring reduced its secured debt by over $1.4 billion while providing up to $600 million in new financing. The deleveraging was made possible only by the equitization of Xplore’s corporate parents, which aligned stakeholder interests and preserved organizational value.

References

Xplore Inc. (Re), 2024 ONSC 3251.

Xplore Inc. (Re), 2024 ONSC 4593.

Xplore Inc. (Re), 2024 ONSC 5250.