BFI Canada Income Fund - MRRS Decision
Headnote
Mutual Reliance Review System for Exemptive Relief Applications -- business acquisition report requirements - issuer granted relief to permit it to exclude expenses incurred on extinguishment of notes issued by a holding company acquired by the issuer from the calculation of the issuer's net income from continuing operations for the purposes of the required income test in section 8.3(2) and the optional income test in section 8.3(4) of NI 51-102.
Applicable Rules
National Instrument 51-102 - Continuous Disclosure Obligations.
January 20, 2006
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
NEWFOUNDLAND AND LABRADOR, NOVA SCOTIA,
NEW BRUNSWICK, QUEBEC, ONTARIO, MANITOBA,
SASKATCHEWAN AND ALBERTA
(the Jurisdictions)
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEW SYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
BFI CANADA INCOME FUND (the Filer)
MRRS DECISION DOCUMENT
Background
The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) for an order, pursuant to section 13.1 of National Instrument 51-102 -- Continuous Disclosure Obligations (NI 51-102) permitting the Filer to exclude the Extinguishment Expense (defined below) from the calculation of the Filer's net income from continuing operations for the purposes of the required income test in section 8.3(2) of NI 51-102 and the optional income test in section 8.3(4) of NI 51-102 (the Requested Relief).
Under the Mutual Reliance Review System for Exemptive Relief Applications
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) this MRRS decision document evidences the decision of each Decision Maker.
Interpretation
Defined terms contained in National Instrument 14-101 -- Definitions have the same meaning in this decision unless they are defined in this decision.
Representations
This decision is based on the following facts represented by the Filer(s):
1. The Filer is a limited purpose trust formed under the laws of the Province of Ontario pursuant to a declaration of trust. The principal office of the Filer is located in Toronto, Ontario.
2. The Filer is a reporting issuer in each of the provinces of Canada where such concept exists and is not on the list of reporting issuers in default in any of those jurisdictions.
3. Pursuant to its declaration of trust, the Filer may issue an unlimited number of units (the Units), of which 52,912,628 Units were issued and outstanding as at December 1, 2005.
4. The Units are listed and posted for trading on the Toronto Stock Exchange.
5. The Filer has two wholly-owned subsidiary entities: 4264126 Canada Limited (BFI Canada Newco) and Ridge Landfill Trust (Ridge Trust).
6. BFI Canada Newco is a holding company that owns most of the Canadian and U.S. operating companies of the BFI Canada group of companies (collectively, BFI Canada). None of BFI Canada Newco or any of its subsidiary entities is currently a reporting issuer (or equivalent) in any province or territory of Canada.
7. BFI Canada Newco owns IESI Corporation (IESI), a holding company and indirect majority-owned subsidiary of the Filer. IESI was acquired by an affiliate of the Filer on January 21, 2005 pursuant to the Transaction, as defined below.
8. IESI owns the Filer's U.S. operating companies. The Filer's main U.S. operating companies are IESI LA Corporation, IESI DE Corporation, IESI NY Corporation and IESI PA Corporation, each of which own landfills located in the United States.
9. BFI Canada Newco also owns BFI Canada Holdings Inc. (BFI Canada Holdings), a holding company and indirect wholly-owned subsidiary of the Filer. BFI Canada Holdings owns most of the Filer's Canadian operating companies. The Filer has four main Canadian operating companies as follows: BFI Canada Inc., which operates collection and landfill assets, BFI Usine de Triage Lachenaie Ltd., which operates a landfill and an energy plant, Enterprise Sanitaire F.A. Ltée., which operates a large residential waste collection company, and Twin Oaks Environmental Ltd., which operates collection assets and a transfer station.
10. Ridge Trust is a holding entity that owns, through Ridge (Chatham) Holdings L.P. and Ridge (Chatham) Holdings G.P. Inc., a landfill located in Canada. None of Ridge Trust or any of its subsidiary entities is currently a reporting issuer (or equivalent) in any province or territory of Canada.
11. On November 28, 2004, the Filer, certain of its affiliates and IESI entered into an agreement which provided for, among other things, the combination of the business carried on by BFI Canada Holdings with the business carried on by IESI and its subsidiaries (the Transaction).
12. The Transaction was funded in part from the offering of 15,583,334 subscription receipts, exchangeable for Units of the Filer, for proceeds of approximately $374,000,000 (the Offering), as described in the Filer's prospectus dated December 20, 2004 (the Prospectus).
13. On June 12, 2002, IESI issued approximately US$150 million principal amount of 10¼% senior subordinated notes due 2012 (the Initial Notes) by way of private placement. In December 2002, IESI filed a registration statement under the United States Securities Act of 1933, as amended, to register new 10¼% senior subordinated notes due 2012 (the IESI Notes) and to offer to exchange the IESI Notes for the Initial Notes. The IESI Notes were guaranteed by all of IESI's subsidiaries. IESI used the proceeds from the offering of the IESI Notes to repay amounts under its then outstanding term loan and revolving credit loan portions of its former credit facility.
14. In connection with the Transaction, IESI agreed to make a tender offer and consent solicitation, on commercially reasonable terms, using a portion of the net proceeds from the Offering, for all of the IESI Notes. The completion of the tender offer and consent solicitation for the IESI Notes was a closing condition of both the Transaction and the Offering. Also, the completion of the Transaction was conditional upon the closing of the Offering.
15. Subsequent to the closing of the Transaction, the Filer retired the IESI Notes and incurred $34,620,000 of expense on extinguishment (the Extinguishment Expense).{1} The Extinguishment Expense, albeit a condition of the Transaction, was not recorded in the acquisition equation included in the consolidated financial statements of the Filer and as such was recorded by the Filer as "financing costs" in its consolidated financial statements for the three months ended March 31, 2005 and, accordingly, is included in the consolidated financial statements for the nine months ended September 30, 2005. The inclusion of the Extinguishment Expense in the Filer's net income from continuing operations for these periods reduces the Filer's net income to a negative amount for those periods.
16. IESI's tender offer and consent solicitation for the IESI Notes was disclosed in the Prospectus as a condition of the Transaction, and an estimate of the amount of the Extinguishment Expense was included in the Filer's pro forma consolidated financial statements in the Prospectus.
17. The Filer's indirect acquisition of IESI pursuant to the Transaction, for total consideration of approximately $620,000,000 and the assumption of approximately $470,000,000 of outstanding debt, constituted a "significant probable acquisition" by the Filer during the course of the Offering pursuant to National Instrument 44-101.
18. After the closing of the Transaction, on May 12, 2005, the Filer filed a Business Acquisition Report on Form 51-102F4 with respect to the Transaction and with respect to the acquisition on January 4, 2005 of the assets of the Ridge landfill (the Ridge Landfill) located in Chatham, Ontario, as required by section 8.2 of NI 51-102 (the Business Acquisition Report Requirement).
19. The Filer's net income from continuing operations, as reported in its financial statements for the year ended December 31, 2004, does not include the results of operations from the Ridge Landfill or IESI. Management believes that such financial statements do not therefore reflect the magnitude of the Filer's net income from continuing operations for the purposes of the calculating the required income test prescribed by section 8.3(2) of NI 51-102. Similarly, management believes that the financial statements for interim periods after the completion of the Transaction, up to and including March 31, 2006, and for the year ending December 31, 2005 do not fully reflect the magnitude of the Filer's net income from continuing operations as -- while they include the results from the Ridge Landfill and IESI operations -- they are offset by the one-time Extinguishment Expense. As such, management believes that these statements would not be an appropriate basis for calculating the required income test prescribed by section 8.3(2) of NI 51-102 or the optional income test set out in section 8.3(4) of NI 51-502.
20. Including the Extinguishment Expense in the Filer's income from continuing operations causes net income for the twelve months ended September 30, 2005 to be negative, and is expected to cause the Filer's net income for the twelve months ended December 31, 2005 to be far below the actual magnitude of the Filer's net income from its operating businesses.
21. As the Extinguishment Expense was recorded by the Filer in the three months ended March 31, 2005, the significance tests for any acquisition by the Filer during any period in 2005 or the three months ended March 31, 2006 will include the Extinguishment Expense. The Extinguishment Expense will not be included in the Filer's net income from continuing operations for periods after March 31, 2006. Management believes that including the Extinguishment Expense when calculating the required or optional income test for any period in 2005 or the three months ended March 31, 2006 does not accurately reflect the magnitude of the Filer's net income from continuing operations.
22. The Extinguishment Expense was contemplated by the Transaction and paid entirely from funds raised to finance the Transaction, including the proceeds of the Offering and drawings from a new credit facility entered into by IESI concurrent with the completion of the Transaction. Despite its inclusion in the Filer's income from continuing operations pursuant to Canadian GAAP, Management believes that the Extinguishment Expense is transactional in nature and therefore should not properly be considered an expense of continuing operations incurred in the ordinary course of business. The Extinguishment Expense was incurred solely to facilitate the Transaction, as described in the Prospectus and indicated in the Filer's pro forma consolidated financial statements in the Prospectus, which include an estimate of the amount of the Extinguishment Expense.
23. Management believes that it would be appropriate, upon application of the required and optional income tests with reference to the Filer's financial statements, to exclude the Extinguishment Expense (or gross up the Filer's income for the same amount) for the purpose of calculating the required or optional income tests. On that basis, management believes that the Filer's consolidated financial statements and the income test calculations would more accurately reflect the magnitude of the Filer's net income from continuing operations.
24. If the relief sought hereby is granted and the Filer completes an acquisition that is determined to be a "significant acquisition" upon the application of the asset test, the investment test or the income test (as calculated excluding the Extinguishment Expense) pursuant to sections 8.3(2) or 8.3(4) of NI 51-102, the Filer will, within 75 days, use its best efforts to file a Business Acquisition Report on Form 51-102F4, including historical financial statements of the acquired business and pro forma financial statements of the Filer, in satisfaction of the Business Acquisition Report Requirement.
Decision
Each of the Decision Makers is satisfied that the test contained in the Legislation that provides the Decision Maker with the jurisdiction to make the decision has been met.
The decision of the Decision Makers under the Legislation is that the Requested Relief is granted.
{1} The Filer also recognized a future income tax asset amounting to approximately $13,900,000 relating to the Extinguishment Expense which has been recorded by the Filer as a recovery of income tax. The income tax recovery related to the Extinguishment Expense was recorded by the Filer in the three months ended March 31, 2005 and, accordingly, is included in the consolidated statement of operations for the nine months ended September 30, 2005.