Judge rejects Hudson's Bay proposal in creditor protection case

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TORONTO — An Ontario judge has rejected a Hudson’s Bay restructuring agreement, increasing the likelihood that lenders may seek to push the company into receivership.

In a written decision issued Saturday, Ontario Superior Court judge Peter Osborne said he declined to approve the agreement because it is “neither necessary nor appropriate at this time.”

The agreement wouldn’t have just given the embattled department store an April deadline to rescue its remaining stores but would have also handed increased power over the company’s creditor protection process to the retailer’s senior secured lenders — the Bank of America, Restore Capital and Pathlight Capital.

The agreement would have imposed a weekly budget on the business Hudson’s Bay would have regularly had to report to the lenders — companies whose loans are backed by collateral, thus allowing them to seize the retailer’s assets to cover unpaid debt.

If Hudson’s Bay reached a deal for the business with a new buyer, the agreement would have also required approval from the lenders.

Osborne said he was “reluctant” to approve the agreement in part because the budget wasn’t submitted to the court or other stakeholders to review and would have granted the lenders with rights and protections “to the exclusion of other stakeholders.”

He also said the monitor appointed by the court to help guide Hudson’s Bay through its creditor protection proceedings is sufficient to balance the lenders’ rights with those of other stakeholders.

Osborne’s decision marks the latest milestone in the creditor protection proceedings that have engulfed Canada’s oldest company since it admitted on March 7 that its financial difficulties were so significant it had been deferring payments to landlords and suppliers.

As part of those proceedings, Hudson’s Bay began liquidating this week all but six of its 80 Hudson’s Bay, 13 Saks Off Fifth and three Saks Fifth Avenue stores. The six that have so far been spared are split between the Greater Toronto and Greater Montreal areas. The company has also negotiated room to add or remove more stores from the liquidation.

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The restructuring agreement was fraught because some saw it as one of the only things holding back Hudson’s Bay lenders from asking the court to put the retailer into receivership.

Receivership is a process where a third party is given control of a company’s assets to repay creditors.

Lawyers representing Hudson’s Bay and the senior secured lenders did not immediately have any comments on Osborne’s Saturday endorsement.

Many of the lenders argued in favour of the agreement in court last week.

“We don’t want to fight. We don’t want to bring a receivership application,” Linc Rogers, a lawyer for Bay lender Restore Capital, said Thursday.

“We are looking at this court and saying there is a better path forward.”

However, landlords like Ivanhoe Cambridge, Oxford Properties, Cushman and Wakefield, Morguard, RioCan Real Estate Investment Trust and KingSett Capital argued the best path forward was to not approve the agreement.

They preferred the company rely on another process already playing out that will see Hudson’s Bay entertain bids from potential buyers for its entire business or its assets.

David Bish, a lawyer for Cadillac Fairview, which owns 16 of the properties Hudson’s Bay has department stores in, felt accepting the restructuring agreement will hamper any way forward for the retailer by effectively putting control of the future of the company into lender hands.

“They aren’t incentivized to restructure. They are incentivized to liquidate,” Bish charged in court Thursday.

Rogers, who represents lender Restore, disagreed.

“We are asking for protection,” he said. “We are not asking for a reward.”

At one point, he even offered to amend the agreement to give Hudson’s Bay an additional few weeks to avoid liquidation of the six stores, saying his client was “prepared to assume additional risk” to diffuse the situation.

“We are not looking to pick fights,” he said. “We are looking to resolve issues.”

For its part, Hudson’s Bay argued in favour of the court approving the agreement, but its lawyer said it wasn’t the kind of arrangement his client coveted.

The agreement lacked the time, number of stores and latitude Hudson’s Bay would have preferred, Ashley Taylor said.

“It was not a very satisfying outcome,” he told the court Wednesday.