Distress Preferred Shares: Debt Refinancing During COVID-19

Due to the current economic downturn, many corporations (Borrowers) may find themselves in financial difficulty and need to refinance their existing debt obligations with creditors (Lenders). Such Borrowers may be able to reduce their financing costs through the issuance of "distress preferred shares" (DPS). This method of refinancing generally does not adversely affect the Lenders, as they can receive equal or better after-tax returns on their investments without jeopardizing their security and priority. The Canada Revenue Agency (CRA) has previously issued favourable administrative views in respect of DPS structuring. Accordingly, Borrowers in financial difficulty should discuss the issuance of DPS with their Lenders.