In the Matter of a Proposed Arrangement of Xplore Inc. and 16029167 Canada Inc.

COURT FILE NO.: CV-24-00721451-00CL

DATE: 20240606

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: IN THE MATTER OF A PROPOSED ARRANGEMENT OF XPLORE INC. AND 16029167 CANADA INC.

BEFORE: Kimmel J.

COUNSEL: Rob Chadwick / Bradley Wiffen/ Erik Axell for the Applicants, Xplore Inc. and 16029167 Canada Inc.

Linc Rogers / Kevin Wu, for Stonepeak Falcon Fibre Inc.

Lance Williams / Ashley Bowron, for Credit Suisse

Kevin Zych / Jesse Mighton, Ad Hoc Lenders Group

HEARD: June 3, 2024

ENDORSEMENT

The Preliminary Interim Order

[1] On June 3, 2024 I signed a Preliminary Interim Order made under s. 192(4) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (“CBCA”), for reasons that I indicated would be provided in an endorsement to follow. These are the reasons.

[2] Capitalized terms not otherwise defined in this endorsement shall have the meanings ascribed to them in the Preliminary Interim Order or in the Affidavit of Geoff Lowe sworn May 31, 2024 in support of this motion. The factual matters detailed in this endorsement come from the Lowe Affidavit.

[3] Although some interested parties, including a committee representing a majority of its secured lenders and an affiliate of its primary equity holder, were given advance notice and appeared at the hearing on June 3, 2024, the Preliminary Interim Order was sought on an ex parte basis. The Applicants were concerned that unsecured creditors, including service providers, might take unilateral steps with potential negative consequences for some Xplore Entities and their customers between the time they received notice of this preliminary interim motion and the time it took the Applicants to get to court.

[4] The Preliminary Interim Order granted, among other things, a stay of rights and remedies against the Xplore Entities arising by reason or as a result of this Application having been made, their involvement in these proceedings, or any resulting default or cross-default under any of the Credit Agreements, Satellite Agreements or Surety Indemnity Agreements to which the Xplore Entities are party (the “Stay”).

[5] The Preliminary Interim Order contains full come back rights for all interested parties by motion to be made on seven days' notice.

[6] The Preliminary Interim Order also preserves the ability of the Xplore Entities to pivot to a Companies’ Creditors Arrangement Act, RSC 1985, c C-36 (“CCAA”) proceeding if a transaction cannot be effectuated under the CBCA, although the CBCA is the preferred route at this time.

Background to this Application

[7] Xplore Inc. is incorporated in New Brunswick but it operates out of Ontario. It is the intermediate parent of a group of affiliated privately-held telecommunications companies (collectively, the “Company” or the “Xplore Group”). The Xplore Group is dedicated to providing fast and reliable broadband internet access and related services to residences and businesses in rural communities across Canada (the “Business”).

[8] Founded in 1998, the Xplore Group has grown to become Canada’s largest rural-focused broadband service provider, employing 1,085 employees and providing internet access to more than 300,000 subscribers across Canada. The Company provides internet access to customers over three technology platforms: (a) fixed wireless (the “Fixed Wireless Business”); (b) satellite (the “Satellite Business”); and (c) fibre to premises (the “Fibre Business”).

[9] The provision of internet services in rural Canada is a capital-intensive business. Over the last two years, Xplore Inc. has experienced a material decline in its EBITDA and free cash flow. Xplore Inc.’s current EBITDA is insufficient to satisfy its debt servicing costs, which constrains Xplore Inc.’s ability to access the liquidity needed to operate its Business and capitalize on growth opportunities.

[10] Xplore has approximately $1.7 billion in Secured Debt. The principal challenge facing the Company is that Xplore Inc.’s existing capital structure is no longer conducive to the long-term success of the Company given the liquidity and capital that is necessary to support and grow the Business.

[11] The Company has been reviewing its strategic options. This strategic review has been led by an Independent Committee of the board of directors formed in August 2023. The Company has engaged in extensive negotiations with a committee representing a majority of its secured lenders (the “Lender Committee”) and with its primary equity holder with a view to creating a more sustainable long-term capital structure for Xplore.

[12] The Company's immediate liquidity issues prevented it from making $44 million in interest payments under its First Lien Term Loan and Second Lien Term Loan when they came due on March 28, 2024. The Company has entered into standstill arrangements with its Secured Lenders.

The Recapitalization Transaction and the Arrangement

[13] The intention of this proceeding is to give effect to a comprehensive recapitalization and investment transaction (the “Recapitalization Transaction”) to be implemented pursuant to an arrangement under s. 192 of the CBCA (the “Arrangement”).

[14] The Applicants anticipate that the Recapitalization Transaction will be structured to substantially deleverage Xplore Inc.’s capital structure and reduce its annual interest expenses. It is expected to provide Xplore Inc. with the liquidity and financial flexibility it requires to operate its Business and pursue its long-term growth objectives while ensuring that it has the committed funding needed to complete government-sponsored internet projects.

[15] The framework of the Recapitalization Transaction has been agreed to in principle between the Company, lenders holding a majority of the obligations under Xplore Inc.’s First Lien Credit Agreement and Second Lien Credit Agreement, and Stonepeak Falcon Fibre Inc. (“Stonepeak Fibre”), an affiliate of Xplore Inc.’s controlling shareholder, Stonepeak Falcon Holdco LP (“Stonepeak”). The parties are working to advance and finalize the definitive documentation to implement the Recapitalization Transaction and the Arrangement.

[16] Upon finalizing the terms and definitive documentation, the Applicants intend to bring forward a motion in these proceedings for a further interim order authorizing the Applicants to call and hold one or more meetings of security holders to vote on the Arrangement and, subject to receipt of necessary approvals, a motion for a final order approving the Arrangement under s. 192(3) of the CBCA.

[17] The Company has determined that the Satellite Business is no longer economical given the decline in subscribership and the substantial fixed costs under the Satellite Agreements in their current form. However, there is significant government engagement and concern about maintaining internet services to rural areas in Canada so any transition away from the Company’s Satellite Business would have to happen in an orderly manner.

[18] Xplore Inc. has also been reviewing strategic options to address challenges in its Satellite Business. Xplore Inc. is engaged in discussions with certain Satellite Providers with a view to achieving consensual modifications to the Satellite Agreements that reflect the current circumstances of the Satellite Business. During this period of negotiation with its Satellite Providers, the Company has not been able to pay its unsecured obligations under the Satellite Agreements.

[19] The Company recognizes that the Satellite Agreements, the unsecured obligations and indebtedness thereunder need to be addressed, if not on a consensual basis then perhaps as part of the Restructuring Transaction and Arrangement or by some other process.

Urgency

[20] In light of recent developments in its negotiations with Satellite Providers, Xplore Inc. is concerned that the Satellite Providers could discontinue services or take other unilateral action under the Satellite Agreements that could disrupt Xplore Inc.’s ability to service the approximately 80,000 rural customers of its Satellite Business. One of the Satellite Providers (servicing approximately 40,000 rural Canadian customers) has threatened to suspend service if past amounts due totalling USD $8.8 million are not paid. Xplore does not have the liquidity to pay amounts past due to Satellite Providers at this time.

[21] The Stay is needed to maintain the status quo while the negotiations continue towards definitive agreements for the Recapitalization Transaction and with the Satellite Providers.

Analysis

[22] On an application for approval of the Arrangement under s. 192 of the CBCA, the Applicants must satisfy the Court that (a) the statutory requirements under the CBCA have been fulfilled; (b) the Arrangement is put forward in good faith; and (c) the Arrangement is fair and reasonable.

[23] On an interim motion (or, as in this case, a preliminary interim motion) the court generally limits the analysis to:

a. the Applicants’ compliance with the statutory requirements of the CBCA; and

b. the Applicants’ good faith in putting forward the Arrangement.

See Concordia (Re), 2017 ONSC 6357, 53 C.B.R. (6th) 46, at para. 24, citing Re 8440522 Canada Inc., 2013 ONSC 2509, at para. 41 [Mobilicity] and 45133541 Canada Inc., Re, 2009 QCCS 6444 [Abitibi], at para. 53.

The Statutory Requirements

[24] The statutory requirements of the CBCA for the approval of an arrangement require the Applicants to establish that:

a. the Arrangement constitutes an “arrangement” within the meaning of s. 192(1) of the CBCA;

b. the Applicants are not “insolvent” within the meaning of s. 192(2) of the CBCA;

c. it is not practicable for the Applicant to effect a fundamental change in the nature of the Arrangement under any other provision of the CBCA; and

d. the Applicants have given the Director appointed under s. 260 of the CBCA (the “CBCA Director”) notice of this Application.

a) The Arrangement

[25] It is anticipated that Xplore Inc. will be continued as a corporation under the CBCA prior to the Applicants seeking a final order approving the Arrangement.

[26] The intended Arrangement is to effect a proposed Recapitalization Transaction. The Recapitalization Transaction is expected to involve, among other things, the exchange of the existing Secured Debt for equity, the issuance of new debt and the cancellation of the existing equity interests. The Arrangement will impact the obligations under the First Lien Credit Agreement and the Second Lien Credit Agreement (collectively, the “Secured Debt”) and the existing equity interests in Xplore Inc.

[27] The Secured Debt falls within the definition of a “debt obligation” as “other evidence of indebtedness or guarantee of a corporation” and thus constitutes a security for purposes of the CBCA. Canadian courts have granted orders under s. 192 in a number of cases where the primary purpose was the compromise of debt, including where such arrangements affected debt obligations under term loans or other debt instruments. See Concordia. at paras. 28–32; Re Sherritt International Corporation, 2020 ONSC 5822, at paras. 27–29; and Abitibi, at para. 69.

[28] The exchange of the Secured Debt for property, money or other securities of Xplore Inc. or one or more affiliated entities falls within the broad definition of “arrangement” under s. 192 of the CBCA.

[29] Under s. 192(1) of the CBCA, an “arrangement” includes a number of possible transactions, such as an exchange of securities of a corporation for property, monies or other securities of the corporation or for property, monies or securities of another body corporate. The definition of “arrangement” is not limited to the transactions listed in s. 192(1). The essential characteristic of an arrangement is a “fundamental change which could not be otherwise achieved under the CBCA” (see BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 S.C.R. 560, at paras. 124–25; and Re Fairmont Hotels & Resorts Inc., [2006] O.J. No. 5591 (S.C.), at para. 5; Concordia, at paras. 26–29; RGL, at para. 25).

[30] In the particular context of a debt restructuring, the goal of s. 192 of the CBCA is to “provide a broad procedure aimed at facilitating the restructuring of corporations.” Abitibi, at paras. 61 and 120; RGL Reservoir Management Inc. (Re), 2017 ONSC 7302, at paras. 26 and 49.

[31] The Applicants have indicated that they might also seek to address, as part of the Arrangement, Xplore Inc.’s Satellite Agreements under which the Company leases satellite capacity, if consensual modifications to those agreements cannot be achieved on a contractual basis. Whether there is a transaction structure under the CBCA that can work to address the Company's concerns about its Satellite Agreements or any other contractual arrangements is an issue for another day.

[32] At this early stage of a Preliminary Interim Order, the court can only evaluate whether the anticipated Arrangement that the Applicants will seek to have approved if the Restructuring Transaction is finalized could constitute an “arrangement” within the meaning of s. 192(1) of the CBCA. The Applicants intend to structure the Restructuring Transaction so that it does meet this requirement and they have provided an outline of the intended steps that could constitute an arrangement. The court need not go further than this for now. Other cases have granted this type of preliminary interim order in anticipation of an arrangement not yet finalized: See e.g., Concordia and 12178711 Canada Inc. v. Wilks Brothers LLC, 2020 ABCA 313, 82 C.B.R. (6th) 167 [Calfrac].

[33] For purposes of the Preliminary Interim Order, I am satisfied that the proposed Arrangement falls within the category of “arrangement” contemplated by s. 192 of the CBCA.

b) Solvency

[34] Canadian Courts have held that the solvency requirement under s. 192(3) is satisfied where (a) at least one of the applicant companies is solvent, or (b) where the applicant will be solvent after the arrangement is implemented. See Concordia, at paras. 33–35; Re Essar Steel Canada Inc., 2014 ONSC 4285, at paras. 36–39; Mobilicity, at para. 53.

[35] The Company's intention is that the Recapitalization Transaction will significantly reduce Xplore Inc.’s funded indebtedness and provide it with the liquidity to pay its liabilities as they become due, such that following completion of the Recapitalization Transaction, Xplore Inc. will not be insolvent within the meaning of s. 192(2) of the CBCA. But that will depend on the specific terms of that transaction, yet to be finalized.

[36] In the meantime, 16029167 Canada Inc. ("ArrangeCo") does not have any liabilities and is solvent. That is sufficient to satisfy the solvency requirement under s. 192(3) of the CCAA for purposes of this Preliminary Interim Order.

c) Impracticality of Using Other CBCA Provisions

[37] In Mobilicity (at para. 63) this court affirmed that the impracticability requirement may be satisfied in cases where the implementation of complex or multi-step transactions can be accomplished “far more efficiently by means of a plan of arrangement”.

[38] Courts have adopted a low threshold of impracticability. The test is one of “practicability” and not “impossibility” (see Essar Steel, at para. 40; Mobilicity, at paras. 61–62; and Re Masonite, 2009 CanLII 40563 (ON SC), 56 C.B.R. (5th) 42 (Ont. S.C.), at para. 25).

[39] It is contemplated that the Recapitalization Transaction will include the exchange of the obligations under the Credit Agreements for new debt, equity and/or other securities of Xplore Inc. or one or more affiliated entities. Under the Credit Agreements, such an exchange cannot be completed without the consent of 100% of the lenders outside of an Arrangement. Given the number of different lenders under the Credit Agreements, while the Lender Committee represents a majority of the lenders, it may not be feasible to obtain the unanimous consent of all lenders on the accelerated timeline on which the Applicants wish to implement the Recapitalization Transaction.

[40] In addition, any alternative transactions that would entail additional time and cost and reduce efficiencies are inconvenient and less advantageous and, thus, impractical. It would be more practical and efficient to proceed by way of the Arrangement if one materializes within a reasonable time.

d) Notice to the CBCA Director

[41] The Applicants provided notice to the CBCA Director on May 29, 2024 in accordance with s. 192(5) of the CBCA. On May 30, 2024, the CBCA Director wrote a letter indicating that “the staff of the Director has determined that the Director does not have standing to review or take a position on this application, as there is no arrangement to be reviewed at this time. The Director's "no position" response is a function of the preliminary nature of this motion, but the notice having been to the CBCA Director is sufficient to satisfy the last of the s. 192 CBCA statutory requirements.

The Applicants’ Good Faith

[42] The Applicants are preparing and negotiating definitive documentation to implement the Recapitalization Transaction and the Arrangement. These are in furtherance of the valid business purpose to reduce the Company’s outstanding indebtedness and its annual interest costs, improve its capital structure and put the Company on a strong financial footing in order to execute on its business plan moving forward.

[43] The reduction of indebtedness to strengthen a company’s financial position and balance sheet is a valid business purpose for an arrangement. An application is considered to have been brought in good faith when there is a valid purpose for the arrangement, such as this. See Concordia, at para. 40.

The Stay of Proceedings

[44] The court has jurisdiction under s. 192(4) to grant a stay of proceedings. Examples of cases in which stays have been granted include: Concordia, at paras. 43–50; Mobilicity, at para. 70; Abitibi, at para. 113; Essar Steel, at para. 48; RGL, at paras. 45–46. These cases also establish that the court can grant a stay of proceedings in respect of obligations that are not subject to the proposed arrangement, such as in this case, the Stay which extends to obligations to unsecured creditors such as the Satellite Providers.

[45] The principal purpose of the proposed Preliminary Interim Order is to grant the Stay in favour of the Xplore Group. The Stay is intended to provide stability while the Applicants negotiate and finalize definitive documentation with respect to the Recapitalization Transaction and pursue the implementation of the Arrangement. Stays have been granted in other cases for this purpose.

[46] In Calfrac (at para. 12) the Alberta Court of Appeal noted that “stay provisions are an important mechanism to give the corporate entity an opportunity to put forward a proposal that will find favour with creditors and other stakeholders – to afford a reasonable but not indefinite amount of breathing space to negotiate with stakeholders and to provide an even playing field for stakeholders during that process.”

[47] In granting a broad stay in Abitibi (at para. 115), the Court found that the stay was in the interests of all stakeholders of the applicant and its affiliates and “aimed at avoiding a cascade of potential cross-defaults or a panic reaction of some because of the delicate situation the [applicants] now face.”

[48] The Stay is necessary here to prevent the exercise of rights or remedies that could disrupt the Business and operations of the Xplore Entities, cause a suspension or termination of customer internet access (for example, in the Satellite Business) and/or adversely impact the Company’s ability to complete fibre projects that are critical to long-term value. It addresses potential cross-defaults. It extends to some third party obligations, both monetary and non-monetary. In all of these respects, it has been tailored to address the specific concerns in this case.

[49] To ameliorate some aspects of the Stay:

a. From and after the granting of the Preliminary Initial Order until such time as the Satellite Agreements are amended, terminated or addressed through the Arrangement, Xplore Inc. has indicated that it intends to pay to the applicable Satellite Provider the net profit (revenue less direct and allocated costs) earned by Xplore Inc. from subscribers whose internet services are provided by the Satellite Provider. This will be less than the contractual rate, but Xplore Inc. does not have the liquidity to pay the contractual rate at this time.

b. Other than in respect of the Credit Agreements and the Satellite Agreements, the Company intends to continue to satisfy all of its obligations in the ordinary course, including obligations to trade creditors and employees.

[50] It is the intention of the Applicants that the First Lien Lenders and the Second Lien Lenders under the Credit Agreements will continue to be governed by the terms of the Standstill Agreement and the Limited Waiver and Amendment Agreements during the pendency of the CBCA proceedings.

[51] While the Stay is not time limited, the come back provision in the Preliminary Interim Order leaves open all available challenges to the Stay that an interested or affected party may wish to make in the future. As well, to ensure that there is accountability, the court has directed the applicants to return on a case conference to be arranged to take place within 60 days of the Preliminary Interim Order if they do not expect to be filing a motion for an interim order for authorization and directions to call and hold one or more meetings of security holders to vote on the Arrangement before then.

[52] That case conference should be arranged in the normal course through the Commercial List Office, to be before me if my schedule permits. All parties entitled to notice under paragraph 4 of the Preliminary Interim Order shall be served with notice of the case conference and the zoom hearing link and the Applicants’ Aide Memoire. The Applicants shall file an Aide Memoire by no later than 2:30 p.m. on the day before the case conference that provides an update to the court on the status of the Restructuring Transaction and the Arrangement and the Applicants' intentions with respect to the next steps in these proceedings.

[53] I previously advised the applicants when I signed the Preliminary Interim Order on June 3, 2024 that I was satisfied that the Preliminary Interim Order is appropriate in the circumstances. It will serve the intended purpose of preserving the status quo as the Applicants work to advance and finalize the terms of the Recapitalization Transaction and to return to court for an Interim Order and to ultimately seek approval of the proposed Arrangement.

KIMMEL J.

Date: June 6, 2024