Finance Committee on April 2nd, 2008

[Jean-René Halde]

As I said at the end of my presentation, the delinquency rates or level of impaired loans in our portfolio have not deteriorated thus far. That is the good news, it is even very very good news. It really is better than we would have expected.

Here is what happens. We examine each account and, in some cases, as a precautionary measure, we take provisions. Will our provisions for bad risk increase this year? Probably a little.

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

A year or eighteen months ago, it was the weaker businesses in the forestry sector that had to lay off staff or cease operations. However, this year, we are seeing the same happen to far stronger business. For example, in my riding, Maibec, a solid, well-managed forestry business has been forced to shut down for three months.

Do you expect to be more affected by the economic slowdown in 2008-2009 than you have been so far? Perhaps you could give us an overview as to how much of your portfolio is tied to the manufacturing sector, as opposed to tourism and other sectors.

[Jean-René Halde]

Around 35% of our portfolio is in the manufacturing sector and around 12% is in tourism. Obviously, these are sectors that are under pressure at the moment. However, as I said earlier, delinquency rates have not deteriorated. By that I mean that the number of clients who are not paying their interest charges and whose portfolios are in difficulty, or whom we expect to face difficulties because of their financial results, has not yet changed. Honesty, it is better than we had thought it would be. With regard to forecasts for 2008, everybody is worried about what might happen in the United States. Obviously, we are concerned as well, but, with regard to forecasts, your crystal ball is every bit as good as mine. We are concerned, but we do not have any concrete information thus far.

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

I believe that, in the past, Quebec punched above its demographic weight, in that about 35% of your portfolio was in Quebec. Are Quebec and Ontario currently performing as well as western Canada across the board?

[Jean-René Halde]

I would have to look at the statistics for each region in order to give you an exact answer. I know that the main regions facing difficulties are, broadly speaking, the Atlantic regions, rural Quebec and Southern Ontario, that is to say the Windsor region, while western Canada is performing slightly better. The differences are not huge, but the regions that I have just listed are facing slightly more difficulties.

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

You must be pleased that you did not invest heavily in bank paper.

[Jean-René Halde]

We are very pleased. We have congratulated our treasurer.

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

I think that we should congratulate the BDC in general. Do you feel that this situation will have repercussions on your clients in years to come? I would like to come back to what has been said previously: some argue there will be a domino effect across the whole economy. Do you think that you will be affected by it?

[Jean-René Halde]

What concerns us is the state of the Canadian economy. Yes, the commercial paper situation is a factor, but there is also the issue of the U.S. market as a whole. Will the demand for Canadian products remain stable? There are a number of economic concerns. I do not think that we can blame everything on commercial paper. Obviously, it is of concern. Those who have invested in commercial paper have reason to be concerned. However, you have to look at the whole picture. Energy costs have risen and the Canadian dollar has rapidly appreciated. Furthermore, if we are to believe all that we read, the U.S. economy will probably slow down. It is the combination of all of these factors that is worrying.

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

I would now like to move on to a completely different subject. I believe that you still have a tourism sector program that allows for repayments to be increased or decreased depending on the time of year. I believe it is often done on a seasonal basis. Does that still exist? The appreciation of the Canadian dollar means that a lot of Canadians are now prepared to go to the United States whereas less Americans want to come here. We have seen the statistics. It was a record year: less and less Americans are coming to Canada for 24-hour trips.

Do you think that something needs to be done on this front? Red flags are going up in the tourism sector.

[Jean-René Halde]

Firstly...

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

Your clients in the tourism sector...

[Jean-René Halde]

To answer the first part of your question, we customize repayments in every industry. I told you earlier that our loans are very specific to the needs of the company. If necessary, if you work in a business that goes through cycles, like construction for example, we will tailor your repayments to your receipts. The sector having the worst time of it, if the delinquency rate is to be believed, is tourism. It is having greater difficulties than the others. Yes, we customize our repayments. We recently offered several of our clients an extension on the principal, that is, we asked them to pay the interest, but we allowed them to delay their payments on the principal for six months. This clearly helped a number of sectors that were under more pressure. The good news—I do not come with just bad news—is that only 17% of our clients took advantage of our offer. That is to say that 83% of our clients chose to keep to their normal repayment schedule. In that sense, it is good news. As you can suppose, the 17% were companies in the most vulnerable sectors.

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

Will it be more than 17% next year?

[Jean-René Halde]

Honestly, I do not know.

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

Thank you.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Del Mastro is next.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair, and thank you to the witnesses for appearing today.

Gentlemen, in November 2006 our government introduced our financial plan, which was called “Advantage Canada”. In that we talked about a couple of advantages that we were looking to create, one being a tax advantage and the second being an entrepreneurial advantage. That's where I see the Business Development Bank of Canada playing a key role as an arm of government.

In the 2008 budget we specifically set aside $75 million for the Business Development Bank to support the creation of the new privately run ventures. Specifically, it's a capital fund to support venture capital for growing companies. Can you talk a little bit about how this is good for Canadians, who it's going to benefit, and whether that fund is available in all regions of Canada and so forth?

[John MacNaughton]

I'd be pleased to answer that.

The $75 million that was earmarked is going to a fund that will be larger, because we will be seeking a third-party manager to invest their own capital and the capital of other interested parties. It's intended to be a late-stage fund, because one of the issues that was identified by the management of the Business Development Bank--and the board of directors encouraged them to seek a solution--is that very often Canadian entrepreneurs grow their businesses to a certain stage where they need financing of $30 million to $50 million. So they've had very good success in the start-up phase, but they now need money at a larger level. The number of parties in Canada that are there to provide that level of equity financing is small, and the amount of capital they have to support them is modest.

Very often, Canadian companies that look like they have the opportunity to become important national players, and even global players, are forced to sell to foreign buyers before they've fully exploited their proprietary technology or their differentiated strategy. So the intention of this fund is to provide late-stage funding so those companies don't have to sell themselves to foreign interests before they reach their more mature levels--and possibly never.

[Dean Del Mastro, Conservative, Peterborough, ON]

Last year we had a presentation before the committee where one of the presenters called the gap between conception and production “the valley of death”. That's the area you're going to assist with, so I think that's tremendous.

Will that supportive fund be available in all regions of Canada?

[John MacNaughton]

It will be. It's still in incubation and hasn't been launched yet.

[Dean Del Mastro, Conservative, Peterborough, ON]

You said it would be part of a larger fund. Can you give us some idea how much investment and potential employment you'll be able to leverage?

[Jean-René Halde]

The objective will be to create a private sector fund in the order of $400 million to $500 million. We would be the lead investor with $75 million, in the hope of raising additional capital.

There's just one point I want to add to John's presentation. All the companies we're talking about fit within the venture capital model, thus they're technology-oriented companies. There is a need, as John said, for late-stage investments.

[Dean Del Mastro, Conservative, Peterborough, ON]

Exactly. It's the high-tech form of economy that we want to create in this country.

In budget 2008 the government announced we were going to consolidate the BDC's debt into government debt. It was effective yesterday, April 1. Given the tight credit conditions of financial markets, and so forth, could you talk about the advantages of that move by the government?

[Jean-René Halde]

I'd be happy to. Obviously it allows us to borrow directly from the central...at quite reasonable rates. In the past, the Government of Canada guaranteed when we issued structured notes in international markets. But it does at least simplify the way we work. If today we wanted to borrow a six-month T-bill, we would get the 2.5% that would be available for the Government of Canada.