Stephen Poloz, the Governor of the Bank of Canada, announced on 30 April 2019 that "[t]he Canadian economy is currently facing some headwinds
headwinds, but there is good reason to believe that the economy will accelerate in the second half of this year".

Canadian Prime Minister Justin Trudeau will have to fight harder to retain his premiership in the upcoming October general election than he would have anticipated when he first romped to victory in 2015 with a comprehensive majority of 184 of 338 seats. Victories of the United Conservative Party and Progressive Conservative Party in recent provincial elections are further evidence of an apparent shift in support to the right of Canadian politics, which has seen Trudeau’s Liberal Party and Andrew Scheer’s Conservative Party exchange leads in the polls in recent months.

Trudeau’s popularity has suffered in the wake of the SNC-Lavalin scandal, which saw his office accused of improperly interfering in a corruption case against the engineering company which employs 9,000 people in Canada. The scandal has already led to the PM’s Liberal Party expelling Jody Wilson Raybould, the former Attorney General who made the original allegations of improper interference, and former treasury board president Jane Philpott. Could Trudeau’s reign be the next casualty? We will find out in October.

The Canadian debt market has traditionally offered limited prospects to distressed investors in the secondary market with Canadian banks, including the Royal Bank of Canada, the Canadian Imperial Bank of Commerce and the Bank of Montreal, often acting as lenders and buying hold-to-own positions. This often results in smaller loan syndicates in the Canadian market, which is generally less liquid than its US counterpart.

However, there are signs that the Canadian loan market may open up to investors other than the main Canadian banks. Bloomberg reported on 17 April 2019 that the Canadian banks are not preparing adequately for potential high loan losses if conditions in the market continue to deteriorate.

It also reported that there is an increase in "riskier consumer-backed debt" in Canada, with the debt in recent deals being backed by a variety of assets including mortgages on the stores of junk-rated retailers, consumer loans (charging interest rates of up to 40 per cent) and home equity lines of credit. The Royal Bank of Canada arranged the CAD 250m issuance of securities backed by Hudson's Bay stores in Montreal and Ottawa which is Canada's first commercial mortgage-backed security which pools loans from one entity. Fairstone Financial Inc. also issued the first non-prime asset backed securities deal that Canada has seen since the credit crisis when it sold a CAD 322.4m bond issuance backed by consumer loans with interest rates as high as 39.99 per cent.

This month's Trade Alert considers key legal risks for traders in the Canadian loan market.


We appreciate the assistance of Guy David of Gowling WLG with the following discussion of Canadian law, regulation and practice.


As a legacy flowing from colonisation of North America by both France and Great Britain, two legal traditions co-exist in Canada within a bijural legal system. This coexistence was first formally recognised in the Quebec Act 1774 and was carried through to the Canadian constitution in 1887. Quebec, which was formally a French colony, still follows the civil law tradition except in matters of public and administrative law, whereas the other provinces and territories follow the common law. Federal legislation is drafted in a manner that acknowledges the common law and civil law traditions in both English and French.
Canada is a federal parliamentary democracy and constitutional monarchy consisting of ten provinces and three territories. The federal government is responsible for topics such as regulation of trade, defense, criminal law, banking regulation, intellectual property and other areas of national import, whereas the provincial governments have exclusive powers over property and civil rights within the province and other areas which were mainly of local concern at the time the constitution was adopted.

In 1982 the Canadian constitution was re-patriated from the United Kingdom with the adoption of the Constitution Act, which also enshrined Canada’s Charter of Rights and Freedoms as a foundational constitutional document.


Generally no banking licence required for a non-Canadian lender (both bank and non-bank lenders) to lend to a Canadian borrower so long as such activity does not amount to engaging in or carrying on business in Canada.
oLimiting the nexus to Canada minimises the risk of being deemed to be engaging in or carrying on business in Canada (i.e. not signing documents in Canada, not attending meetings in person in Canada or negotiating in Canada, payment flows not occurring in Canada and suchlike).
oAnalysis does not change if purchasing a term loan or revolver.
Assignment or novation can be used to transfer debt (except for Quebec where assignment and assumption should be used).
Security trustees / agents commonly used in Canada.
Generally no withholding tax on payments of interest.
Security over real (immovable) property or personal (moveable) property must be registered under provincial Personal Property Security Acts or applicable land registration statutes.
In Quebec many forms of security must be made by authentic act signed before a notary.


Entering into a secured lending transaction as a lender or administrative agent does not in itself give rise to any specific eligibility requirements for the lender. There are restrictions with regard to carrying on banking business in Canada which may require consideration if the foreign lender has a bank in its corporate group. Generally a foreign bank will not be permitted to engage in or carry on business in Canada under the Bank Act (Canada). This is the case except where the business is carried out through a foreign bank subsidiary, an authorised branch in Canada or other approved entity. Where a foreign bank from a non-WTO member wishes to establish a subsidiary or branch in Canada, there is a reciprocity requirement that the foreign jurisdiction offer treatment as favourable to Canadian banks wishing to establish in the foreign country. It can take approximately three years to obtain a Canadian banking licence and the process is very detailed and costly. The Office of the Superintendent of Financial Institutions (OFSI) (a federal regulator) assesses applications for the incorporation of banks and the establishment of foreign bank branches and makes recommendations to the Finance Minister. At a provincial level a non-bank lender may be required to obtain an extra-provincial licence where it is considered to be carrying on business under provincial corporate law. This is potentially the case in each province the lender operates in.

A loan transaction involving a Canadian borrower would not be void or voidable by reason of a lender’s failure to comply with applicable regulatory requirements in Canada. This is the case with either a bank or non-bank lender. Additionally a foreign bank is not prohibited by the Bank Act (Canada) from making a loan to a Canadian borrower as long as the nature and extent of its activities do not amount to engaging in or carrying on business in Canada.


Assignments can be effected through the use of a standard assignment and assumption agreement. Where debt is transferred, this is often assigned together with the benefit of the security so that a lender can assign without the borrower’s consent barring a contractual restriction. However, it is typical to obtain the consent of guarantors to a loan assignment.

Novation is also an effective way to transfer debt (except in Quebec). In Quebec, there is a risk that novation will result in the security being disassociated from the debt in question.

Where the assignor is the secured party of record, security registrations made under provincial personal property security acts (PPSAs) will often be amended to record the assignment. However, such amendments are only required for enforceability reasons in Quebec. Where a mortgage or other real property security is being assigned, the assignment must be filed at the applicable land registry for the assignment to be effective. In Quebec, the new hypothecary representative is unable to exercise any recourse under the hypothec until the substitution is registered where applicable.


The agency concept is recognised in Canada and is used extensively in syndicated lending for both administration of the loans and holding collateral. Agency provisions used are similar to those used by the Loan Syndications and Trading Association, with amendments made by the Canadian Bankers Association. Agency arrangements under the laws of other jurisdictions are also recognised.

The trust concept is recognised and enforced in Canada and trusts created under foreign jurisdiction are generally recognised, without the need for adjustment.

For the purpose of holding collateral security in Quebec, the most commonly used mechanism requires that a collateral agent be appointed as a hypothecary representative alongside a notarial deed of hypothec in favour of the hypothecary representative. In such cases, security documents do not need to be assigned even if the debt itself is assigned.


There are generally no requirements to deduct or withhold tax on payments of interest made by a domestic debtor or guarantor to domestic lenders. Similarly, most cross-border loan transactions involving non-related parties are also exempt from Canadian withholding tax. Related party loan transactions between Canada and the US are also exempted under the Canada-US tax convention.

Certain interest payments made in respect of back-to-back loans may be subject to Canadian withholding tax. Absent any applicable exemption under a bilateral tax treaty or under the Income Tax Act (Canada), withholding tax on interest payments may apply at rates of up to 25 per cent.

There are no documentary taxes payable on registration of security interests. There are minimal registration fees to register both personal and real property security but these are generally nominal and based on a flat rate fee in most provinces.


Notaries are not generally required for the taking or registration of security, except in Quebec.

This publication is for general purposes and does not provide comprehensive or full legal advice. It is based upon public information available at the time of publication and is subject to change. Brown Rudnick LLP does not accept any responsibility for losses that may arise from reliance upon information contained in this update. This publication is intended to give an indication of legal issues upon which you may need advice. The contents of this update may not be relied upon as accurate or sufficient and full legal advice should be taken in relation to specific trading situations.

On 11 April 2019, the UK government passed the European Union (Withdrawal) Act 2018 (Exit Day) (Amendment) (No. 2) Regulations 2019 (SI 2019/859) to postpone the day that the UK will leave the European Union from 12 April 2019 to 31 October 2019.

There remains uncertainty about the exact Brexit outcome following this latest development.

For more Brexit updates, please click here or contact Mark A. Dorff or Thomas J. Braiden.

AGROKOR D.D. (“Agrokor”)

On 1 April 2019 Agrokor, the Croatian food manufacturer and retailer, finalised the restructuring of its EUR 1.3bn debt burden with creditors including Sberbank, the Russian state-run lender.

As part of the restructuring, the operational business of Agrokor was transferred to Fortenova Group TopCo B.V (“Fortenova”) and Sberbank was granted rights to 40 per cent of the net assets in Fortenova.

This brings the lengthy reorganisation process, which began with administration proceedings in April 2017, to a close and is the culmination of an agreement reached with creditors in October 2018.


On 4 April 2019 Interpipe, the Ukrainian steel pipe and railway wheel producer, secured the consent of 100 per cent of its creditors for its debt restructuring plan, which it aims to complete by 30 June 2019.

Under the plan, creditors agreed to reduce the USD 1.297bn aggregate debt by approximately USD 900m, with the remainder being refinanced.

SENVION S.A. (“Senvion”)

On 17 April 2019 Senvion, the wind turbine manufacturer, announced that it had signed a EUR 100m loan agreement with its lenders. The loan is in the form of a debtor-in-possession facility ("DIP") which allows Senvion to continue its business operations and provide funds to its non-insolvent subsidiaries.

Senvion group companies earlier filed petitions to commence self-administration proceedings under the German insolvency code after initially failing to reach an agreement with creditors. On 24 April 2019, the supervisory board members resigned and handed their responsibilities over to Eugene Davis, Steven D. Scheiwe and Timothy Bernlohr as restructuring experts.

Senvion hopes that the loan agreement will give it the time to implement its reorganisation process which will see it withdraw from up to 30 markets and streamline its product offering. This follows a period which saw Senvion's shares lose nearly 90 per cent of their value between May 2018 and February 2019.


On 25 January 2019, a dam at the Córrego do Feijão mine managed by Vale S.A. ("Vale") in south-eastern Brazil collapsed. Samarco is a joint venture of Vale and BHP Billiton, and the dam collapse has impacted the joint venture's negotiations with creditors seeking to restructure some USD 6bn of debt and is expected to indefinitely delay the debt restructuring and licensing process. Vale also has other concerns with Moody's reducing its credit rating to below investment grade.


The terms "big boy language" or "enhanced big boy provision" (or variations thereof) are often heard in the course of trade negotiations. This is an important concept that should be considered and wording should be agreed by the parties at the time of trade. If this is not dealt with correctly then not only are there possible reputational ramifications, but also legal ones (particularly in the US courts which have not historically treated big boy provisions in a universal manner). In this article, we discuss when a party may be a "big boy" and what it should consider.

To read more please click here.


JD Sports' full year earnings for its financial year ending 3 February 2019 suggest a rise in pre-tax profits of 15.5 per cent to GBP 355.2m. This appears to buck the trend in the UK retail industry which has suffered in recent years due to, amongst other things (a) the "Amazonisation" of the market (with consumers moving to online sources which are now thought to make up around 20 per cent of the UK market), (b) a reduction in spending by UK consumers, and (c) concerns surrounding Brexit. Many high profile retailers entered insolvency proceedings in the last year or so including Debenhams, which recently entered a pre-pack administration, whilst others are desperately trying to avoid a similar fate, with Carpetright, Homebase and Mothercare closing (or considering closing) stores following their implementation of Company Voluntary Arrangements ("CVAs"). The Financial Times reports that the number of chain store closures is likely to top 1,000 this year following more than 900 store closures in the last 2 years.

The pre-pack administration of Debenhams follows a struggle to manage its debt burden, reported as GBP 417.4m on 2 March 2019, due to flat sales and declining profits and is indicative of the fate befalling the UK high street. Chad Griffin, Simon Kirkhope and Andrew Johnson of FTI Consulting LLP were appointed as joint administrators of Debenhams plc (the ultimate owners of the Debenhams group (the "Group"). Following their appointment, the joint administrators immediately sold Debenhams plc's shares in the Group to Celine Newco I Limited, an entity owned by certain of the company's secured creditors. GBP 101.81m was paid for the shares with GBP 520m of financial debt and the Group's pension obligations transferring with the shares. A condition of this transaction was immediate marketing for the sale of the Group. The pre-pack administration entered into on 9 April 2019 effectively handed control to the creditors (including Barclays Plc, Bank of Ireland Group Plc, Alcentra and Silver Point).

This was the culmination of an ongoing conflict between the creditor group and Mike Ashley's Sports Direct International plc, a holder of around 30 per cent of the share capital in Debenhams plc. Various lifelines were offered by both sides but it was ultimately the creditors that were successful with the board of Debenhams agreeing to a GBP 40m secured bridge loan in February 2019 and a GBP 200m new money facilities agreement on 29 March 2019. Sports Direct’s proposals were not considered implementable by the company due to the wider liquidity and financing needs of the Group as well as its obligations under various financing agreements. Furthermore, the proposals were deemed to attach too many conditions, including the appointment of Mike Ashley as chief executive. The creditors ultimately withheld around GBP 99m of the GBP 200m new money facilities agreement until the pre-pack administration was underway and the tactic appears to have been influential in their proposal prevailing. This withholding of funds was due to conditionality on the GBP 98.75m Facility B requiring that either (i) Sports Direct announce a firm intention to make an offer for the Group (satisfactory to the creditors, including the repayment of drawn amounts under the various loans and notes following the change of control); (ii) Sports Direct withdraw its request for an Extraordinary General Meeting and agree to either underwrite a GBP 200m rights issue by the company or provide a GBP 200m long-dated subordinated debt instrument; or (iii) the Group be transferred to a newly incorporated vehicle acceptable to the majority of lenders under the new money facilities agreement (in which case the funds would be made available to the Group but not to Debenhams plc).
To read more please click here.

Please contact Louisa Watt, Iden Asl, Hannah Geddes, Andrew Baker or Tobias Plowman with any queries regarding this month's Trade Alert.