On Bay Street, bankruptcy advisers profit from economic pain – and charge $1,300 per hour

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In 2010, brothers Sam and Jasvir Johal started a used-truck dealership in Mississauga, and over the next decade their business grew at a blistering pace across Canada and the United States. As it expanded, Pride Group Holdings Inc. morphed into a conglomerate that offered new and used truck sales, leasing and financing, logistics, equipment maintenance, fuel sales and roadside rescue.

It was a wildly profitable enterprise. In 2021, amid the pandemic’s supply chain bottlenecks, privately held Pride made $123-million in profit, then topped that the following year with a profit of $183-million.

And then it unravelled. Consumer spending on goods slowed after central banks started hiking interest rates, triggering what is known as a “freight recession.” By early 2024, Pride had defaulted on more than 40 loans, and in March, the company filed for creditor protection with $2.1-billion in liabilities.

It was exactly what an industry of Bay Street advisers had been waiting for.

Until recently, business prospects for financial experts and lawyers who specialize in corporate insolvencies and restructurings had been slow. Throughout the pandemic, federal financial supports and ultra-low interest rates kept companies afloat, so there wasn’t much work to go around.

Corporate insolvencies are now climbing quickly, up 57 per cent year-over-year for the twelve months ending Sept. 30, according to the Office of the Superintendent of Bankruptcy. But what advisers really pray for are complex, hairy deals like Pride’s downfall.

Since the trucking company filed for protection under the Companies’ Creditors Arrangement Act (CCAA), 49 advisory firms have been hired to provide legal, financial and restructuring advice in Canada and the U.S. – and more than 125 advisers are now working on the case.

The volume of work will keep them busy for years, but the fees are the real thrill. Top lawyers and financial advisers at Bay Street law and accounting firms now routinely charge around $1,300 an hour for this type of work, according to court filings reviewed by The Globe and Mail.

For context, bankruptcy fees are in the top quartile of all fees charged by law firms, said Chuck Chandler, the chief executive officer of Boston-based Valeo Partners, which tracks legal fees globally.

And it’s not just lawyers who benefit. Court-appointed receivers and monitors who take control of companies now routinely bill about $1,100 an hour. These firms include KSV Restructuring, FTI Consulting and Alvarez & Marsal, as well as divisions of the four big accounting firms – Ernst & Young, PricewaterhouseCoopers, Deloitte and KPMG.

The sweetener: These fees are considered senior claims in a bankruptcy or restructuring, so the advisers get their cheques before anyone else gets repaid.

How did the fees climb so high? It’s a confluence of factors, according to five sources, each of whom have spent decades working as legal advisers, board directors and/or investors who specialize in distressed companies. The Globe is not identifying them because they were not authorized to talk publicly – and speaking frankly could limit their colleagues’ chances of securing insolvency mandates.

To start, bankruptcies and restructurings are extremely technical operations, so expertise matters – and there isn’t a lot of it to go around. Bankruptcy law is a specialized world that requires years of training, and senior advisers can only handle so many files at one time. Often that means they aren’t angling for business by cutting rates; sometimes the work just falls to whomever is free.

At the same time, a lender who wants to be repaid by a bankrupt company isn’t going to risk paying $600 an hour only to be outmanoeuvred in court by someone with more experience who charges $1,300 and is working for a rival creditor.

Wall Street’s influence also cannot be ignored. Because the U.S. economy is so much larger than Canada’s, companies that need insolvency advice there tend to have more assets, and those assets can be sold off to fund expensive advisory fees. After cryptocurrency exchange FTX collapsed, more than US$325-million was paid to advisers working on its wind-down in the first year alone.

And because Wall Street fees are so lucrative, Bay Street firms quietly argue they can’t charge too much of a discount relative to their American peers lest they risk a brain drain of experts to the U.S. – something that took hold early in the pandemic.

Technically, judges are supposed to serve as a check and balance on the system. Receiverships and restructuring under creditor protection are public endeavours, so judges must approve fees for monitors, receivers and advisers.

Yet they rarely, if ever, say no to fee requests, according to the sources. “Nobody has any control. Not even the judge,” said one.

In the U.S., for instance, bankruptcy advisers learned long ago to shop their cases around to different judicial districts. “There used to be judges who imposed fee caps. Philadelphia was famous for US$200-an-hour limits,” said Lynn LoPucki, a law professor at the University of Florida who has written books about high fees in the bankruptcy process. “The result was simply that Philadelphia didn’t get any cases.”

There is also an unspoken symbiosis between judges and insolvency advisers. The judges who approve the fees often come from private practice themselves – and sometimes go back to it after retiring from the bench.

Ontario Justice Frank Newbould used to be the head of the commercial list in Toronto, which hears complex insolvency and restructuring cases such as the cross-border Nortel Networks bankruptcy litigation, during which professional fees topped $755-million worldwide. After retiring in 2017, Mr. Newbould went back to private practice and occasionally pops up on insolvency matters. His hourly rate in 2021: $1,250, according to a court filing.

More recently, Justice Thomas McEwen, who spent 14 years on the Ontario Superior Court and was also head of the commercial list before retiring in 2023, has set up his own advisory firm, McEwen Resolutions, and has been hired in the Pride Group restructuring as a mediator. (Pride’s advisers have not yet requested fee approvals, so hourly rates aren’t disclosed.)

Mr. McEwen and Mr. Newbould both declined to comment for this story.

At times, the expertise these advisers provide saves companies. Montreal-based Groupe Dynamite Inc., which owns the Garage and Dynamite clothing banners, sought creditor protection during the pandemic but has since roared back to life and just went public on the Toronto Stock Exchange.

But sometimes, a company is too damaged to carry on, which means its advisers are feasting on a carcass.

In Pride’s case, the Johal brothers initially hoped to restructure and get back to business stronger than ever, but once the advisers got to work, they realized most of the company wasn’t salvageable. In August, an Ontario judge approved a wind-down.

The same was true for private debt manager Bridging Finance Inc., which had $2.1-billion in assets when it was thrown into receivership in early 2021. The circumstances of its downfall are different than Pride’s – the Ontario Securities Commission alleged fraud by members of Bridging’s leadership team, and a tribunal recently found them guilty – but Bridging was also wound down, and its 26,000 investors, many of whom were retail buyers, will lose an estimated two-thirds of their money.

A year ago, Bridging’s receiver and lawyers were paid $43-million for their first two years of work. Bridging’s investors, meanwhile, have yet to receive a cent of recovered money.