TORONTO, Dec. 17 /CNW/ - As a year of increased economic uncertainty
approaches, Bennett Jones LLP provides its forecast for Canadian business in
2009.
Short Term Economic Outlook Grim
Despite stimulative efforts of governments and central banks worldwide,
global growth in 2009 is likely to be less than 2% and 2010 only a little
better. Real recovery should take hold in 2011. Commodity prices are likely to
be weak through 2011 but recover strongly thereafter. Canadian and U.S. growth
will be negative in 2009 with very weak private investment and household
consumption. Assuming significant fiscal stimulus in both countries, growth
should begin to pick up in 2010 although the level of output in Canada is not
likely to recover to the mid-2008 level until end of 2010. Outlook for 2011 is
much brighter in Canada and the U.S. although unemployment will remain
elevated.
- David A. Dodge, O.C., Senior Advisor at Bennett Jones LLP, Former
Governor of the Bank of Canada
Credit Crisis Continues, Cash Still King
The current credit crisis should begin to ease by mid-2009 as a result of
massive infusions of liquidity by central banks and infusions of capital by
governments. Frozen capital markets should begin to thaw later in the year
although credit spreads will remain wide and credit conditions tough. Debt
will remain expensive and equity dilutive. Challenges in renewing credit
facilities, replacing bridge facilities and financing acquisitions or projects
will necessitate creativity with alternative sources of capital and the
structuring or restructuring of investments.
Insolvencies Up, Restructurings Down
2009 will bring more corporate insolvencies and restructurings.
Increasingly, however, troubled companies well-deserving of restructuring will
likely face break-up due to the dearth of liquidity, coupled with an extremely
competitive business environment. Even those restructurings that do proceed
will likely do so with less committed or DIP (debtor-in-possession) financing
and more of a lock-in for those already invested.
Renewed Focus on Risk Management
The financial sector meltdown and the global economic crisis have moved
risk management to the top of corporate and regulatory agendas. Companies must
carefully assess their financial exposure and exposure to third-party
providers, such as lenders, hedging counterparties, suppliers and technology
licensors who may themselves face financial crises. Businesses must be
prepared for all eventualities that could arise quickly: a liquidity crisis,
sale or reorganization, significant litigation or regulatory or internal
investigation. Data rooms, document retention programs, disclosure committees
and multi-disciplinary teams must be operational or available quickly.
Challenging Disclosure Issues
Publicly-traded companies will be increasingly challenged in managing
disclosure of a broader range of risks, including liquidity problems,
declining revenues and counterparty credit risks. Issuers face the
double-edged sword of avoiding premature disclosure, which could result in
undue loss or negative market impact, and tardy, incomplete or misleading
disclosure that could result in regulatory or civil liability. New rules on
executive compensation disclosure will also apply and reporting will be
required on transitioning to IFRS rules.
Increasing Pressure on Directors
Boards of directors and management will work at developing improved
processes to identify and assess risk. This will involve recognition that the
task is not for the audit committee alone, but involves full board and deep
corporate commitment. Boards will also look to ensure that adequate processes
are in place to support new requirements for CEO and CFO certifications of
internal financial controls. Watch for increased use of special committees to
address related-party and conflict transactions expected as a means of
survival in a world of limited options. Expect directors to insist on
contractual indemnification. And, look for increased pressure on insurance
procurement processes with the anticipated hardening in D&O insurance markets.
Vendor Beware
Bad times have illustrated that targets cannot rely on a buyer's
reputation to use best efforts to complete an acquisition. Expect targets to
focus on Material Adverse Change/Effect clauses and to draft more detailed
specific performance and damage remedy clauses. More attention will also be
given to how to secure completion obligations where the buyer is outside the
jurisdiction or without financial resources.
Market Meltdown Means More Litigation
Any market meltdown brings with it disappointed investors who will look
to their investment advisor for redress. Expect a huge increase in litigation
against brokers and dealers as investors come to fully appreciate the extent
of investment losses. Watch for more accounting manipulations and fraudulent
schemes to be discovered and ensuing litigation. Also look for more Securities
Act secondary market class action claims, which emerged in earnest in 2008, to
flourish in 2009.
Oil and Gas Sector Challenges
With wildly fluctuating commodity prices, the lack of liquidity available
to fund growth and increased uncertainty surrounding the environmental
obligations of energy project developers, Expect 2009 to pose a multitude of
challenges for oil and gas companies. Major oil sands projects will continue
to be delayed or downsized as proponents await the return of $100 oil and easy
credit, necessitating the renegotiation of supply arrangements. Junior
developers may well have to look for a way out. On the conventional side,
buyers and sellers will begin the year watching and waiting for the first
movers, but when the "new normal" arrives, look for significant consolidation
at the junior end of the market. And what about the larger Canadian
independents about whom take-over rumors persist? We'll have to wait and see.
Green Economy not to be Delayed
The arrival of the green economy will not be delayed by the economic
downturn. Increasingly, market-based solutions to environmental and social
issues will be sought, found and implemented. For example, the great
experiment with greenhouse gas emissions trading as a key element in the
climate change solution will finally get traction in 2009 and be ready to roll
in 2010. Beware potential new climate change rules in the U.S. which will make
life difficult for a number of Canadian businesses producing both primary and
manufactured products.
Increased Focus on Renewable Energy
Fossil fuels will continue to be critically important and in short supply
despite the economic slowdown, accelerating the pressures to move to renewable
energy and low carbon alternatives. Government-owned utilities will seek
additional renewable power sources and the need will be met by new private
renewable power developments. Geothermal, biomass and biogas based power will
gain momentum, augmenting the Canadian wind and solar power development
industries.
Income Trusts - Converts or Targets?
There will be more conversions announced of the approximately 200 income
trusts ahead of the 2010 tax "deadline". Conversion at today's depressed
market prices will help ease the churn in units which inevitably takes place
following conversion announcements, when yield oriented investors sell and
value-oriented investors buy. However, with more than half of the income funds
having a market capitalization of less than $150 million, declining
distributable income and the costs and risks associated with being a
publicly-traded vehicle, expect to see more income funds acquired.
REITs - Real Estate in Trouble?
The market value of REITs has plummeted as the property market has
fallen, capitalization rates have risen for many property types, credit
spreads have increased and leverage has declined. Existing strategies
regarding financing and acquisitions and dispositions of properties may no
longer be feasible. As REITs rethink their strategies, expect to see
divestitures of assets and significant consolidation.
Attractive Technology Opportunities
Innovative technology start-up companies will find it difficult to obtain
private investment. Some promising technologies will therefore become
available at favourable prices through acquisitions, licensing or other
transactions. Private placement investment at the seed capital and venture
capital stages, where available, will be able to extract more value in
exchange for investment.
More "User Friendly" Competition Law
On the heels of this year's report of the Competition Policy Review
Panel, look for the government to streamline the merger review process to
include greater convergence with the timing of U.S. antitrust review, allowing
most transactions to be cleared in a 30-day preliminary phase. Pricing
practices like price maintenance, predatory pricing and price discrimination
will likely be de-criminalized. A weakened economy may also result in more
flexible review of mergers that increase efficiency and allow industries to
undertake necessary consolidation.
Less Red Tape for Foreign Investors?
Also in response to the Competition Policy Review Panel, watch for the
government to increase the general review threshold for foreign acquisitions
of Canadian businesses, likely from $295 million to $1 billion. However, the
cultural sector will probably be excluded. The government may also shift the
onus from the foreign investor to the Minister of Industry to establish that a
proposed acquisition is not in Canada's interest.
Trade Diversification: the New Mantra
Recession will lead to more international trade disputes as demand and
pricing decline and international competition intensifies. Chinese exports in
particular will be targeted. Expect more WTO and NAFTA complaints by Canada as
the government seeks to protect Canadian companies' access to foreign markets
in a more protectionist international environment. Weakened U.S. demand and
retrenchment in Canada's manufacturing sector will give increased focus and
urgency to bilateral and multilateral trade initiatives.
More Interest in Islamic Finance
Expect the Islamic financial sector, which still enjoys relatively
high-liquidity, to play a larger role in international finance. Some portion
of that sector's excess liquidity should find a home in Canada, as a result of
Islamic investors diversifying their investment portfolios and capital-hungry
Canadian businesses making greater attempts to tap into this available pool of
funds.
Pension Underfunding Concerns
Concern over deficits in defined benefit pension plans will continue to
be front and centre, as many businesses deal with crippling funding costs
resulting from the market meltdown. There will be continued pressure on
governments to provide relief from solvency funding requirements. Expect
pension governance and disclosure to emerge as a key area of focus.
"New Deal" for Infrastructure
Canada has evolved into one of the world's most vibrant markets for
public-private partnerships (PPP) in infrastructure. Mature provincial
agencies are tackling an infrastructure deficit of over $125 billion, domestic
and international proponents have committed to the market, and PPP is now
recognized as a viable alternative for many projects. As governments announce
fiscal stimulus packages with infrastructure as a key component, the pipeline
for PPP activity promises to be robust, although financing structures may
evolve in response to tighter credit markets.
About Bennett Jones LLP
With offices in Calgary, Toronto, Edmonton and Ottawa, Bennett Jones is a
leading business law firm founded and focused on principles of professional
excellence, integrity, respect and independent thought. Our firm's leadership
position is reflected in the law we practise, the groundbreaking work we do,
the client relationships we have, and the quality of our people.
For further information: Marisa Cunningham, Communications Specialist,
Bennett Jones LLP, t: (416) 777-6505, e: cunninghamm@bennettjones.com
