Finance Committee on April 2nd, 2008

[The Chair, Conservative, Rob Merrifield]

I see the time is 3:30. We have enough members and we have our witnesses with us, so I'll call the meeting to order.

We want to first thank our witnesses for coming.

Our meeting is pursuant to Standing Order 108(2) and the adoption of the motion on February 11, 2008, on the study of the annual report and business plan of the Business Development Bank of Canada.

We want to thank our two witnesses for coming. They are from the Business Development Bank of Canada. We have John MacNaughton and Jean-René Halde. It is good to have you here with us.

We will open the floor up to you, and then we'll intervene on the question and answer portion of the meeting. The floor is yours.

[John MacNaughton, Chair of the Board of Directors, Business Development Bank of Canada]

Thank you, Mr. Chairman, members of the committee. We're pleased to be here.

As you know, the BDC reports to Parliament through the Minister of Industry, but given your committee's interest and role in supporting entrepreneurship, we welcome this opportunity to be here today.

Together Mr. Halde and I will speak to the four points in your motion of March 12. Then we'll welcome any questions you may have.

BDC is Canada's business development bank. Our mandate is to promote entrepreneurship by providing term financing, subordinated financing, venture capital, and consulting services, with special consideration for small and medium-sized enterprises. Put simply, BDC supports Canadians who are creating and growing their small and medium-sized businesses. Many of these endeavours are, by their nature, quite risky. As such, they often fall outside the risk appetite of most private sector financial institutions.

I'm going to begin with your motion's first point, BDC's most recent corporate plan.

In our 2008-12 plan, we state that we will continue to provide innovative small-business financing with special attention to those startups, innovators, fast-growth companies, and manufacturers and exporters that are facing lower financing approval ratios than other companies.

We'll also develop our services of support to the growing number of entrepreneurs who will be retiring and selling their businesses to other young entrepreneurs. We will help Canadian companies to become more globally competitive. We will invest in our consulting services. Our goal is to provide small businesses with quality advice at reasonable prices.

In venture capital, we'll support the commercialization of Canadian R and D. More specifically, we'll invest in new-technology companies, nurture our portfolio of growing companies, and act as a catalyst to help attract greater private sector investment in the commercialization of research in Canada.

We'll do all of these things while maintaining our patient, long-term view of client relationships. Finally, we'll do all of the above in a financially sustainable way. We will be profitable, and we will continue to pay dividends to the Government of Canada.

The motion's second point asks us to discuss our most recent annual report.

Fiscal 2007 was very successful. We've now reached 27,000 entrepreneurs across Canada. Last year we authorized close to $2.6 billion of loans, for an average loan size of $285,000.

Our total portfolio stood at $9.8 billion. Most of this, $9.1 billion, was in loans. It also includes $148 million in subordinated financing and $505 million in equity investments in venture capital. We also started 2,400 consulting mandates.

Our return on common equity was 8.5%. In June of last year, we paid the government a $21.5 million dividend.

Fiscal 2008 ended just two days ago. We anticipate reporting another successful year, as well as another dividend payment.

I speak with confidence when I speak of the BDC, and I do so for many reasons, notably the excellence and dedication of its leadership team and employees, the rigour of its internal controls, its risk management expertise and systems, and the high quality of information that it provides to me and my colleagues on the board of directors.

I'll now turn it over to our president.

[Jean-René Halde, President and Chief Executive Officer, Business Development Bank of Canada]

Thank you, John.

Good afternoon, members of the committee.

We will now turn to the third point in the motion: the range of BDC's services and the nature of its relationship with private sector financial institutions.

Our 1,700 employees work from 94 offices across the country, from St. John's to Victoria to Whitehorse, and we partner with other organizations to reach entrepreneurs who do not live in cities and towns. Every day, about 600 BDC employees visit hundreds of small businesses. These client relationships are an unparalleled source of information about Canada's small business community and their competitive market.

The small business competitive environment is very complex. To master it, entrepreneurs need support from advisors, accountants, lawyers and bankers. To meet financial needs, they seek finance sector partners. BDC is one of these. It is important to understand that because we do not offer operating lines of credit or chequing accounts, 100% of our clients have dealings with private sector financial institutions. This means that BDC always works with other financial institutions.

Our involvement in riskier projects is evident in the types of financing we did in fiscal 2007. For example, we financed more than 1,400 loans to start-up companies, more than 5,000 loans to clients who considered themselves in expansion mode, and close to 1,000 loans to aspiring entrepreneurs who are taking over the ownership of companies from the existing generation.

We often “de-risk” projects. Let's take an example: the financing of a new mid-size hotel. In these instances, we help the entrepreneur with two large risks. The first is a construction risk: will the building be built on time and on budget? Next is a market risk: will the hotel attract the expected number of guests and revenue? When the hotel succeeds, the entrepreneur often chooses to refinance it with private sector financing where he or she can often get cheaper rates since the project has been “de-risked” by BDC.

Prepayments constituted almost $1 billion of our portfolio last year.

One of our key competencies is evaluating and pricing risk. We have a sophisticated pricing model to ensure we're compensated for the risk we take. This ensures that we remain commercially viable.

Cyclical financial markets can sometimes make it hard for entrepreneurs to secure project financing. Because BDC takes a patient, long-term approach to development, we're able to minimize the impact of such cyclicality on entrepreneurs as well as on other financial institution partners. For example, last autumn, when the financial markets tightened their credit in response to the asset-backed commercial paper problem, we became an even more attractive alternative.

Sometimes financing gaps correlate to industry sectors or geographical regions. We do not use blanket exclusions on project proposals in troubled industry sectors or economically depressed places. We will consider any solid project proposal regardless of the industry sector or region in which it is found.

In venture capital, the support we provide high-technology companies shows that for each dollar we invest, more than $4 is invested by other investors. We provide small business with high-quality consulting services at prices they can afford.

You should also note that when we are tailoring our response to a request for financing, we do not always know if another financial institution is also considering the same request. Clients are not obliged to tell us, and often they do not. On occasion we find ourselves offering financing to an entrepreneur who is also considering an offer from another financial institution. Ultimately it is they, the entrepreneurs, who should decide which offer best meets their needs.

In closing, I'll speak to the motion's point about financial market volatility and our financing requirements. We have never held, and we have no exposure to, the non-bank asset-backed commercial paper, the source of much of the financial market volatility. The very little asset-backed commercial paper we do have is backed by the five chartered banks. As far as our clients are concerned, financial market volatility is but another source of competitive strain for them to manage as they steer their companies through globalization, the rise in value of the Canadian dollar, rising energy prices, the difficulties in finding qualified employees, and the threat of an economic slowdown.

In these days of regular worrying reports of economic uncertainty, I am pleased to report that the delinquency rates or levels of impaired loans in our portfolio have not deteriorated. This would indicate that thus far at least our clients are holding steady. But obviously, 2008 is not over yet. We're keeping a very prudent eye on the situation.

Thank you for your time. We would be pleased to answer your questions.

[The Chair, Conservative, Rob Merrifield]

Thank you very much. We appreciate your presentation to the committee.

We'll now open it up to the question-and-answer portion.

We'll start with Mr. McKay. You have seven minutes.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Thank you, Chair.

Thank you both for your testimony.

I want to ask a few questions about the asset-backed commercial paper. You said you don't have any exposure to the non-bank asset-backed commercial paper. Does that mean there is exposure to the bank asset-backed commercial paper?

[Jean-René Halde]

We don't feel that is an exposure, for two reasons. One, I believe everyone is comfortable with the solidity of the bank-backed asset-based commercial paper. Second, we're down to $85 million, and within seven days we'll be down to zero. We feel quite comfortable with our present position.

[John McKay, Liberal, Scarborough—Guildwood, ON]

That's on your bank-backed asset paper.

[Jean-René Halde]

Yes. We have no non-bank asset-backed commercial paper.

[John McKay, Liberal, Scarborough—Guildwood, ON]

This has had a huge ripple effect throughout the financial markets, as you well know. I'm wondering how that has impacted you in terms of lending patterns and security you accept for loans.

[Jean-René Halde]

We probably saw a slight increase in some files last fall that we might not have seen otherwise. Our lending practices have basically not changed. Obviously we're quite careful in terms of the way we lend. There have not been major changes, though probably we have seen a few more files come our way than otherwise would have been the case.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Can you categorize the files? Is there a pattern in the files?

[Jean-René Halde]

Quite candidly, no. There are the usual sectors you would know would be under some level of difficulty—the tourism sector and the manufacturing sector are under some difficulty—so clearly those sectors are under some pressure.

[John McKay, Liberal, Scarborough—Guildwood, ON]

You have a close working relationship with the five chartered banks—

[Jean-René Halde]

We do.

[John McKay, Liberal, Scarborough—Guildwood, ON]

—and their exposure to asset-backed commercial paper is uneven, shall we say. Have you noticed any differential among the banks, in terms of them in effect backing you up?

[Jean-René Halde]

We complement other financial institutions, and from where we stand there's really been no change. We have clients coming our way who in recent months may have come because other institutions were somewhat more risk averse, but there's no pattern.

[John McKay, Liberal, Scarborough—Guildwood, ON]

When you de-risk a loan—that's the reason for your existence—

[Jean-René Halde]

That's correct.

[John McKay, Liberal, Scarborough—Guildwood, ON]

—that's what you're there for—when customers come to you, and other sources of financing are cut off to them by virtue of this asset-backed commercial paper issue, does that enable you to charge a bit more of a risk premium?

[Jean-René Halde]

I'd hate to comment on whether or not we get a lot more because of the asset-backed commercial paper, but the way we work--and it's been the same for a long time--is we price for risk on a project-by-project basis, so we will evaluate each project one-on-one and we will price it accordingly.

[John McKay, Liberal, Scarborough—Guildwood, ON]

You'd have to think you're seeing better quality risk, given that people who are being turned down by the banks, can't do a straight deal with the banks, are now having to come to you and, if anything, your risk would be diminished. Is that a fair observation?

[Jean-René Halde]

I don't think we've noticed something that would be as dramatic as what you've just said.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Okay.

Those are all the questions I have. Thank you.

[The Chair, Conservative, Rob Merrifield]

Okay, thank you.

Monsieur Crête, you have seven minutes.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you very much for your presentation. On a number of occasions in the past, the BDC has come up with innovative means of supplementing funding in my region, amongst others.

Your brief states that, last year, your return on common equity was 8.5% and that you paid the government a $21.5 million dividend. I imagine that it will be more difficult to achieve such results in fiscal 2008.

In your daily work, are you noticing the effect of the slowdown in the manufacturing sector in Quebec and Ontario, particularly in Quebec? How is it affecting your clients?