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Debt ratings on watch after major Indalex ruling

Air Canada

Timothy Stake/CNW Group

A landmark Ontario court ruling bolstering the rights of pension plan members in bankruptcy cases could have an impact on credit ratings for companies with underfunded pension plans, according to a new report by debt rating agency Moody's Investors Services Inc.

Moody's said a review of 84 Canadian industrial companies it rates found two companies -- Air Canada and Essar Steel Algoma Inc. -- whose debt might be vulnerable to downgrade if the Ontario court decision is upheld by the Supreme Court of Canada. The report said the impact would likely be limited and would affect ratings of specific debt instruments rather than a company's overall credit rating.

The rating agency report examines an April decision by the Ontario Court of Appeal involving former staff of Indalex Ltd., who claimed they had a priority on the insolvent company's assets to fund a shortfall in their pension plan. The court ruled in their favour, saying the company had not consulted with pension plan members or notified them about their intention to file for bankruptcy protection.

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The decision sent shock waves through Ontario's pension community because pension plan members usually rank behind many other secured creditors when an employer becomes insolvent. The decision upset the traditional pecking order and left companies concerned they could face difficulties raising debt financing during times of financial difficulty if secured lenders ranked behind pension plans in the event of insolvency.

Indalex's U.S. parent, Sun Indalex Finance LLC, has filed an application with the Supreme Court seeking leave to appeal the Ontario decision. The court has not yet ruled on the application.

Moody's said the ruling would not have a broad impact on company's credit ratings because the agency has always considered unfunded pension liabilities to be a form of debt.

"The ruling does not change how we measure debt and other liabilities, but it does change the priority of claim and the relative ranking of liabilities, which is relevant when assessing individual debt-instrument ratings," said Bill Wolfe, Moody's vice-president and senior credit officer.

"On this basis, we expect that only instrument-level ratings will be affected by the ruling."

Moody's said subordinating bonds to pension liabilities is not sufficient to change the ratings of debt instruments of "the vast majority of Canadian companies."

Although Air Canada and Essar Steel could be vulnerable to seeing certain debt instruments downgraded, Moody's said neither of the companies currently has an investment-grade rating.

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Moody's said it will not change any ratings until there is a decision from the Supreme Court and it is clear there is a final ruling in the case.

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About the Author
Real Estate Reporter

Janet McFarland is the real estate reporter for The Globe and Mail’s Report on Business, with a focus on residential real estate trends. She joined Report on Business in 1995, and has specialized in reporting on corporate governance, executive compensation, pension policy, business law, securities regulation and enforcement of white-collar crime. More

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