SUPERIOR COURT OF JUSTICE - ONTARIO
COMMERCIAL LIST
COURT FILE NO.: CV-11-9532-00CL
DATE: 20120125
IN MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT , 1985, c.C-36 AS AMENDED
AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF CRYSTALLEX INTERNATIONAL CORPORATION
BEFORE: Newbould J.
COUNSEL:
Markus Koehnen, Andrew J.F. Kent and Jeffrey Levine, for Crystallex International Corporation
Richard B. Swan, S. Richard Orzy and Emrys Davis, for Computershare Trust Company of Canada
David R. Byers, for Ernst & Young Inc., Monitor
Alex L. MacFarlane and Ryan Jacobs, for Tenor Special Situations Fund LP
Robert Frank, for Forbes & Manhattan Inc.
E N D O R S E M E N T
1On January 20, 2012 I extended the stay of proceedings contained in the Initial Order to March 23, 2012 and granted Crystallex's financial advisor Skatoff and Company LLC the benefit of the administrative charge against the assets of Crystallex.
2I also heard on that day a motion by Crystallex for approval of bridge financing from Tenor Special Situations Fund LP ("Tenor") pending a longer term DIP facility. The Noteholders proposed a competing short-term bridge facility. I approved for reasons to follow the bridge facility with Tenor.
3The Noteholders [1] also moved by cross-motion for an order directing Crystallex to revise its DIP auction procedures in certain respects, including directing Crystallex to receive and consider a DIP financing proposal by the Noteholders without the necessity of the Noteholders signing a non-disclosure agreement. I reserved judgment on the cross-motion of the Noteholders.
4The Noteholders also requested an order requiring Crystallex and the Noteholders to attend mediation before a judge of the Commercial List prior to the conclusion of the DIP auction process. I declined to make such an order. Imposing mediation on parties who appear far apart in their objectives and on someone who does not wish to participate is of little value and in this case would be a waste of resources and time, both of which are in short supply. A concern raised by Mr. Skatoff, the financial advisor to Crystallex, is that by participating in a mediation before approval of the DIP financing, Crystallex would look like it was trying to achieve a result outside of the DIP financing auction process and create a significant risk that potential financiers would conclude that it was not worth their time and energy to make a bid for DIP financing. It cannot be said that this risk is not real. Of course, if both parties wish mediation before a judge of this court they can easily have that organized.
5The bridge financing sought by Crystallex is really short-term DIP financing. At the time of the Initial Order, Crystallex hoped to fund itself until a DIP facility was in place by selling its mining equipment which has a book value of approximately US $10.1 million. However, the international broker marketing the equipment advised Crystallex that the equipment could be sold either by way of a short term auction which would likely generate a liquidation price or a longer term sale of individual pieces that would generate a higher price. Rather than selling it at liquidation prices, Crystallex sought short-term bridge financing.
6With the approval of the Monitor, Crystallex hired an investment advisor Skatoff and Company LLC on December 28, 2011 to assist in obtaining DIP financing. Skatoff is an independent advisory firm focused on debt advisory services, financial restructuring advisory services, financing advisory services and M&A services. Based on Skatoff's recommendation, and with the approval of the Monitor, a DIP financing auction process has been instituted and is well along. This auction process is severely criticized by the Noteholders.
7When bridge financing became desirable, Crystallex discussed the matter with Mr. Skatoff who eventually negotiated with three parties. Two firm offers were received, one from Tenor and one from the Noteholders. A proposal from a third lender was received and although negotiations with that lender by Mr. Skatoff took place, a number of outstanding issues led Mr. Skatoff to the belief that that proposal could not be finalized in time.
8The Tenor proposal is to lend $3.125 million repayable by April 16, 2012 with interest at 10% per annum. Tenor and Crystallex were negotiating a DIP financing before Crystallex's CCAA filing and Tenor is owed US $356,000. As part of the bridge financing, Tenor agreed that it would compromise its pre-filing claim at CDN $125,000, to be paid at the time of the repayment of the loan. Mr. Skatoff analyzed the impact of Tenor’s willingness to surrender its claim as part of its bridge financing offer under three scenarios: (i) Crystallex equity is assumed in the money and therefore the Tenor claim should be fully-valued; (ii) Crystallex unsecured claims are assumed worth 59.25% of the claim amount per the latest indicative Bloomberg pricing for the Crystallex bonds; and (iii) Crystallex unsecured claims are worth zero. The total cost of the Tenor proposal is between $84,000 and $440,000, and if the Bloomberg pricing on the bonds is used, is approximately $229,000.
9The Noteholder proposal is to lend $3 million to be repaid by April 15, 2012 with interest at 1% per annum. It appears there would be no legal expenses charged [2] . Thus it is a cheaper proposal then the Tenor proposal. In Mr. Skatoff’s view, it is below market
10Mr. Skatoff, however, advised Crystallex that even if the Tenor pre-filing claim was worth zero, and thus the extra costs were over $400,000, the cost difference should not determine which bridge financing should be accepted. He recommended that the Tenor offer be accepted because any benefit to Crystallex from the lower cost of the Noteholder proposal would likely be offset by significant countervailing factors and would cost Crystallex far more in the long run.
11At the root of the concerns of Mr. Skatoff is a concern regarding the effect on the DIP auction of the bondholders’ position on the proposed non-disclosure agreement and on the bridge financing. His concern is that the Noteholders’ objective may be to defeat the larger DIP financing process so that they can ultimately impose financing terms on Crystallex that would be materially less attractive than he expects would be available if the DIP financing auction process proceeds as planned. His view is that the bridge financing is the first of two essential and integrated steps that Crystallex is pursuing to address its financing requirements and that taken together, the cost of the bridge financing and the longer-term DIP financing will be less than if the bridge financing proposal of the Noteholders is accepted. Mr. Skatoff’s affidavit of January 19, 2012 is compelling. [3]
12The board of directors of Crystallex considered the offers of Tenor and the Noteholders and concluded that it was in the best interests of Crystallex to accept the Tenor proposal. They took into account the advice received from Mr. Skatoff as well as other considerations. This was a business judgment protected by the business judgment rule so long as it was a considered and informed judgment made honestly and in good faith with a view to the best interests of Crystallex. See Re Stelco Inc . (2009), 2005 (ON CA) , 9 C.B.R. (5 th ) 135 (Ont. C.A.) regarding the rule and its application to CCAA proceedings. I see no grounds for concluding that the decision of Crystallex to prefer the Tenor bridge financing proposal is not protected by the business judgment rule or that I should not give it appropriate deference.
13Mr. Byers advises that the Monitor had lengthy discussions with Mr. Skatoff and that Mr. Skatoff's affidavit is consistent with what the Monitor was told by him. He also advised that the Monitor has no basis to say that the business judgment exercised by the Crystallex board of directors was unreasonable.
14Whether Mr. Skatoff is correct in his concerns, it seems to me that the relatively minor extra cost involving the Tenor proposed bridge financing for at most a few months must be weighed against the risk of harm to the longer-term DIP financing auction process, and that for the sake of that process, it is preferable not to run the risks that Mr. Skatoff is concerned about.
15In the result, I approved the bridge financing proposed by Tenor.
Noteholders cross-motion
16The Noteholders cross-motion requests changes to the terms of the DIP auction process that has been carried out to date.
17In the Initial Order, it was ordered that Crystallex had the right to pursue all avenues of interim or permanent financing, subject to prior court approval. It was particularly provided
Without limiting the foregoing, the Applicant may conduct an auction to raise interim or DIP financing pursuant to procedures approved by the Monitor and using such professional assistance as the Applicant may determine with the consent of the Monitor. If such approved procedures are followed to the satisfaction of the Monitor then the best offer as determined by the Applicant pursuant to the approved procedures shall be afforded the protection of the Soundair principles so that it will be too late to make topping offers thereafter and such offers will not be considered by the Court.
18The bid procedures that have been used by Crystallex have been approved by the Monitor. They include tight deadlines. The deadline for a participation package (executed NDA by the potential bidder, the potential bidder’s financials and other information) to be delivered to Skatoff was January 13, 2012. The final date to be designated as a qualified bidder was January 20, 2012, the bid deadline is February 1, 2012, the date targeted to determine the successful bidder is February 6, 2012 and court approval in Canada is targeted for February 15, 2012 and in the U.S. for February 21, 2012.
19The bid procedures also refer to a "Lender Back-end Entitlement", which contemplate the possibility of the DIP lender obtaining an equity interest in Crystallex up to 49%, to which the Noteholders are also opposed.
20On January 19, 2012, three of the funds of the Noteholders submitted a term sheet to lend $10 million repayable by October 31, 2012 at an extremely favourable interest rate.
21The Monitor held discussions with representatives of the Noteholders to obtain their views on the bid procedures.
22When it became clear to the Noteholders that Crystallex was not waiving the necessity of a NDA in order for the Noteholders to be a qualified bidder, the Noteholders took the position that there was no need for them to sign a NDA.
23It is apparent that what the Noteholders oppose in the NDA are its standstill provisions.
24Mr. Mattoni in his affidavit asserts that standstill provisions may be appropriate in mergers and acquisitions, but that this is a simple loan for interim financing. I think he misstates the situation by referring to it as a simple loan for interim financing. It is anything but a simple loan.
25The NDA and its provisions are part of the bid procedures that were established by Crystallex pursuant to the Initial Order with the consent of the Monitor. I see no reason why the Noteholders should not be required to sign the same NDA as any other potential bidder on the DIP financing who wants to be qualified.
26The Noteholders requested an order that their bid as submitted on January 19, 2012 be acted on as is and that Crystallex and its financial advisors should be required to consider it without a NDA.
27In the circumstances, if the Noteholders wish to be considered as a qualified bidder, they will be required to sign a NDA.
28As stated, the Noteholders object to the $35 million size of the DIP facility sought by Crystallex.
29In my view these objections are premature and it is not necessary for me to consider their strength at this stage.
30Regarding the size of the proposed DIP facility, the bid procedures state that Crystallex’s objectives include DIP financing in an amount of not less than $35 million net of commitment fees and financing costs with an outside maturity date of not earlier than December 31, 2014.
31If Crystallex has not already notified the qualified bidders of the clarification, it is to do so immediately.
Monitor’s activities
32The Crystallex motion sought an order approving the activities of the Monitor Ernst & Young Inc. as set out in the first report of the Monitor. I have reviewed the first report and am satisfied with the activities of the Monitor and approve them.
Newbould J.
DATE: January 25, 2012
1The Noteholders in question hold approximately 77% of the outstanding Notes
2Mr. Skatof assumed that the Noteholder proposal would involve legal expenses of the same amount as the proposal from Tenor, but it appears from the terms of the Noteholder proposal that no legal fees are included in its terms.
3At the opening of the hearing on January 20, 2012, counsel for the Noteholders requested an adjournment to cross-examine Mr. Skatof. I refused the adjournment. The affidavit was required, at least in part, in light of the motion served by the Noteholders on the evening of January 18, 2012 seeking to revise the DIP auction procedures. Mr. Skatof is completely independent of Crystallex and, in light of his experience and obvious expertise, it seemed highly unlikely that any cross-examination would result in his views being substantially changed. A feature of CCAA proceedings is that it is real-time litigation that does not permit of leisurely steps. I was also concerned with the view that might be taken by the marketplace of delays and the effect on the DIP financing auction process.
