Metropolitan Toronto Police Widows and Orphans Fund et al. v. Telus Communications Inc.

75 O.R. (3d) 784

[2005] O.J. No. 2309

Docket: C39540

Court of Appeal for Ontario,

McMurtry C.J.O., Goudge and Blair JJ.A.

June 8, 2005

Application for leave to appeal to the Supreme Court of Canada was dismissed with costs January 26, 2006 (Fish, Abella and Charron).

Corporations -- Borrowing -- Securitization -- Company redeeming series of bonds using proceeds from transaction involving securitization of its accounts receivable -- Redemption violating "no financial advantage covenant" in Trust Deed which prohibited redemption by application, directly or indirectly, of funds obtained through borrowings having interest cost to company of less than rate on bonds -- Securitization constituting hybrid transaction having characteristics of sale and borrowing -- Entire transaction should be looked at in determining whether it violated no financial advantage covenant -- Proceeds of securitization transaction comprising funds indirectly obtained through borrowings for purposes of no financial advantage covenant.

The predecessor of the respondent (the "company") redeemed a series of bonds using the proceeds from the securitization of its accounts receivable. The securitization transaction consisted of the following. The company sold, assigned and transferred to a special purpose vehicle ("SPV") all of the company's rights, title and interest in a rolling portfolio of accounts receivable, up to a certain value. The SPV then issued commercial paper to the capital markets, backed by the security of the purchased receivables, to raise the funds that were advanced to the company in exchange for the transfer of the purchased receivables. The company's cost of raising the funds (the "Purchase Discount") was passed through directly to the company on a monthly basis, and paid by the company. The Purchase Discount was payable as long as there were outstanding amounts still owing to the SPV. The holders of the redeemed bonds contended that the redemption violated a "no financial advantage covenant" ("NFAC") in the Trust Deed under which the Bonds were issued, which prohibited redemption "by the application, directly or indirectly, of funds obtained through borrowings having an interest cost to the company of less than 11.35 per cent per annum". The Purchase Discount was less than 11.35 per cent. The trial judge found that the Securitization Transaction did not breach the NFAC. The bondholders appealed.

Held, the appeal should be allowed.

The trial judge was correct in characterizing the Receivables Purchase Agreement as a "true sale" of the company's accounts receivable to the SPV. The lack of any right of redemption in the receivables on the part of the company was particularly compelling. However, that finding was not dispositive of the appeal. In determining whether the proceeds applied to redeem the bonds were obtained "indirectly" from borrowings, the securitization transaction had to be looked at as a whole. It could not be compartmentalized and the conclusions flowing from an analysis of only one aspect of the transaction applied, without more, to the NFAC. A securitization transaction has a hybrid nature. It is part sale and part borrowing. It is a sale with an economic function: to raise borrowed funds. These characteristics cannot be isolated one from the other in considering whether the proceeds of the transaction, as applied to redeem the bonds, constituted funds obtained indirectly through borrowings. While there are other benefits to the originating corporation, at its heart, the rationale underlying a securitization transaction is to [page785] enable a corporation to raise capital from the public in the financial markets at a lower cost than the corporation would be able to obtain through more conventional methods of financing. The assets do not become "securitized" until they have in effect been transformed by the SPV into negotiable securities and issued to the public in the financial markets. The transaction is not completed until the funds borrowed from the public are transferred to the originating company in payment of the purchase price for the assets. Such proceeds comprise "funds indirectly obtained through borrowings" for the purposes of the NFAC.

The Purchase Discount was strictly a flow through to the company of the interest cost payable by the SPV on borrowings made by it through the issuance of commercial paper. Given the structure of the securitization transaction, it was sophistry to suggest that the company did not bear an "interest cost" in relation to the matter. The NFAC required that the interest cost be an interest cost "to the Company". It did not require that it be an interest cost "of the Company". The company paid the interest costs related to the transaction, and those costs were less than 11.35 per cent.

APPEAL from the judgment of Ground J. [2003 259