Finance Committee on April 30th, 2009

[Mike Wallace, Conservative, Burlington, ON]

A straight loan to them. Okay. I appreciate that.

For our friends from GE, I've heard, and it's been talked about before, that Textron has left the business of floor plan financing, leaving you folks basically the only ones in the game at this point. It has been mentioned before, the secured piece that's out there, which we're promoting, that's coming--but not available as yet--includes automotive, equipment leasing, but it does not include RV and marine at this point. They're excluded. I believe it's because of the rating of the businesses in terms of their credit ratings.

As GE, what are you hoping to accomplish through this facility when it comes? What is it that you're looking for? I know you talked about the British model and about another fund they have, but what do you need from us? If we get this facility up and running, how quickly can you, will you, have access to that? Will you be able to use that money fairly quickly? Where are you with--

[Elyse Allan]

Let me make one comment, and I'll turn it over to Jean-François.

The first thing, and I think it's important, is that it's in our best interest as well as the market's that we have more competition. I know there's been some comment, and people might say it's great that Jeff has only us to call on. At the end of the day, a healthy economy is based on a diversified source of financial lenders. So it's in everyone's best interest that we have other people in the marketplace. We can't do it all, and neither can the banks, so the loss of some of these other financial companies is in fact not in anyone's best interest. So it's important that we have a healthy economy.

In terms of this specific facility, yes, we can use it. As Jean-François has mentioned, we have been negotiating specifically with BDC since day one to help them in any way we can, to help structure it and help put it in place.

Jean-François, you might want to talk about how we use it.

[Jean-François Bertrand]

Basically, we have one of the largest existing programs in the ABCP market right now. When the market shut down for new originations, a lot of our clients experienced a decrease in terms of the offering, in terms of the availability of credit on our side. The fact that this facility will be up and running pretty soon will enable us to have more money to offer to our clients. On top of that, it will be easier; it will reduce the number of risks in the origination. Right now the market is so volatile, it's pretty tough to originate today and think you are going to make some money with your transactions. The rates are so volatile. When you're in business, for any good corporate citizen to make some money out of the transaction, the environment is very bad.

So just the fact that we know the money will be there will help us. We have money. We can borrow across the border, from the States, but it's not an efficient way to do business, for all the tax reasons I mentioned earlier. We are also asking the government to revise those rules that make it so expensive to borrow across the border.

[Mike Wallace, Conservative, Burlington, ON]

I have one final question to the marine or the RV sector.

To the marine folks, thank you for coming.

Almost all your dealers use floor plan financing to finance the boats that are on the shop floor during the season--and the season is now, I understand. You borrow the money so you can buy the boats from the manufacturer to put them on the floor. You get 90 days, or whatever the term is, to hopefully sell them before you start paying interest on that loan. With only GE in the game, what is actually happening in the industry right now?

[Sara Anghel]

Some of the dealers were probably able to think ahead, knowing at Christmas that this was coming, so some of them have scaled back on the amount of inventory they've taken. They've shrunk down quite a bit. Others maybe didn't plan for that. I'm sure Jeff could, if he'd like, give us an example of his case.

I think the biggest issue is that they really need to get the product moved off the floor, the 2008 models, to be able to purchase more 2009 models from the manufacturers and get them moving.

I also want to just make one point. We've gone through similar scenarios down in the States, and the U.S. Treasury has actually committed to include marine dealer floor plan financing in the next round of the bailout packages and credit availability in the U.S.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Wallace.

Ms. Martha Hall Findlay, five minutes.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you very much, Mr. Chair.

Thank you very much, everybody, for being here.

A special welcome to the RV guys. Having spent ten months two years ago in a very big red one, I will put a plug in to say that it is the best way to travel and it is the best way to get to see a country and to get to know people. So there you have it. Welcome.

There's an underlying issue here. Certainly following on some of the media reports this morning, one of the big challenges we have, clearly, in terms of credit was attempted to be resolved with the involvement of the BDC. It was good in terms of the way it sounded at the time, and there was a lot of support for whatever we could be doing in terms of easing the credit situation. One of the really big problems we've encountered, though, is that the BDC simply hasn't been able to get this moving. It seems rather astounding to us that we're this far along and we just see an announcement today that the BDC has taken on somebody to help them figure this out.

We have a certain concern, in opposition, that it's taken this long for the BDC. And I understand your comment that people are trying really hard, and this is not to take away from that, but it's a bit of a concern, when there are so many jobs at stake, that it has taken so long for somebody at the BDC to say, “We actually don't know how to do this properly because we've never done it before.” Add a concern that we now have, as my colleague mentioned, the hiring of Mr. Allan, who was at Coventree, and who was clearly involved in the asset-backed commercial paper fiasco that happened not too long ago.

I'm actually asking you for advice. Are there entities? Are there people? We've heard certainly from some of the other people in the auto sector pointing to entities like Wells Fargo, for example, who know what they're doing, or apparently do. I'm throwing it open. We're looking for help, all of us, in terms of a non-partisan thing. The government needs some help; BDC needs some help. Do you have any ideas? Do you have any recommendations for helping BDC right now in getting this credit facility out and getting things moving?

[Brian Rodd]

I don't really have a recommendation in that regard. We'll take money from anybody.

[Voices]

Oh, oh!

[Brian Rodd]

We're not that smart as people, so we like to keep it simple. The model we've been working with since 2000 is exactly what the BDC needs to roll the money out. It's proven; it's documented. All the bells and whistles are in place by lots of Toronto law firms to make sure it does work, and we have the testimonials of our partners who have been using it for up to nine years.

So that model works perfectly, and it can go very quickly to customers like Joe at Tricor and to any number of other customers we have across the country. The issue is the rating issue. They're working within the box of a AAA rating and it is not rated. We rate it internally, but it's not formally rated by any agency. And we don't see the value in it being A-rated, because we understand the details and what's actually in the things we're buying.

So it is there.

[Elyse Allan]

I'm just going to supplement that. I think it's in everyone's best interest to keep the BDC effort moving forward, as opposed to distracting it at this point. I think we're very close. I think we feel they've been learning and open to trying to build capacity and understanding the infrastructure necessary to do so. At this point, I think we want to bring it over the finish line with some comments, as we suggested, as did one of the other witnesses, with respect to broadening it a bit beyond the AAA rating.

So I think there might be some changes around the broadening of the program that could be helpful, but I think at this point it's in everyone's best interest to keep it going forward.

[Martha Hall Findlay, Liberal, Willowdale, ON]

And you'll understand some skepticism on the reliance on AAA rating, given what we've seen in the past. I'm not sure we're at all convinced that the rating process has been sufficiently improved to give us that comfort, so the fact of reliance on AAA rating and not allowing a greater level of flexibility is of concern.

Being in this now, we want to get it to some solution, but my question was, how do we help them do that? I, personally, have some concern about having somebody with Mr. Allan's background on it, but we have to help BDC move it forward.

Thank you.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Ms. Hall Findlay.

Mr. Kramp, you have five minutes.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you, Mr. Chair, and good morning all.

It's been stated that there are really only two major non-bank floor plan lenders that are U.S.-owned. The two issues are the cost of money and/or the availability of it, and they both have to be factored in at some point.

My question is for either Mr. Bertrand or Ms. Allan. Is it only the Canadian tax laws that are denying some possibility of an infusion of capital from the U.S. parent? Or, as Mr. Maloway has suggested, is it that the market itself is going to demand every bit of seed capital available to them? What is the truth here, or are both of these statements true?

[Elyse Allan]

A number of issues have contributed to it. One is our ability to access capital. As Jean-François mentioned, our access to capital through our traditional fundraising mechanisms--commercial paper markets and the asset-backed paper market--has declined considerably over the past six months, and the price of that funding has gone up. So both of those things have created a perception of failure in those markets for us to bring the liquidity out to all the other people who need it.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

If we were to change the tax laws to make it more attractive to invest those dollars here, would that capital be available from the U.S. market?

[Elyse Allan]

Tax changes would certainly help. We are staying very active in the market and bringing that financing over the border, but it costs us that much more. So when we hear about cost of capital, certainly one of the additional contributors to the cost of capital is the tax implications of us having to bring the funding.

We've always had a policy of raising capital locally in order to finance locally. Now, because of the lack of capital locally, we have to bring it across the border, and because of the thin capitalization rules on the items we mentioned, it costs us that much more.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Can you give us some kind of figure on that so we know what we're dealing with here?

[Jean-François Bertrand]

It's around 75 basis points.

[Daryl Kramp, Conservative, Prince Edward—Hastings, ON]

Thank you.

Mr. Rodd, GE suggested adopting the Bank of England's approach to this because it provides flexibility and is simple and confidential. You say you are now operating with a system that would offer that.

The one concern that stands out here is an exit strategy if things go well or don't go well. I'd like both Mr. Bertrand and Mr. Rodd to discuss what they mean by an exit strategy and what their plans are for that.

[Brian Rodd]

There are two parts to that question. First, we're financing different products than GE. We're very much involved in small town car loans and car leases across Canada that have anywhere from a three- to a five-year term.

If we were to invest $100 million into a portfolio, there would automatically be an exit strategy because that portfolio would run out over the next two to three years. This is a very short-term gap fix to allow other insurance companies to come back into the market. As Ms. Allan said, being the only one in that market is not a good thing; we want competition. And competition has to come back into the market at some point.

The minister has said he wants a short-term gap fix, and we could do this very quickly. There's an automatic exit strategy. If we said this was a 60-day program or a one-year program, at the end of it they would automatically amortize. These consumer loans are diversified across the country, so the credit risk is geographically diversified. The credit profile is extremely good, as Mr. Campbell can attest to in his portfolio.

[Joseph Campbell]

The key thing here with our debt, as Brian said, is that there is an exit strategy, because you're not technically loaning us the money. We've already loaned it to consumers who are coming to you with a consumer contract saying that's what you're purchasing.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Kramp.

I have a quick question for GE. The credit crisis affected you in two ways: in the existing business, because all of a sudden, in July or sometime in the fall, you reported devastating losses or an increase in your losses, so that affected your ongoing business; and obviously, your going-forward business was affected because you weren't able to get new financing.

But what happened with the previous business? If you had good assets and not these toxic assets, for lack of a better term, you should have been able to roll with your money if you matched your assets with your liabilities in terms of maturities. Correct? So you didn't necessarily have to go to market if you had your liabilities matching your assets.

Am I missing something? Something happened with your assets where you took heavy losses, if I'm not mistaken.

[Elyse Allan]

We actually ended up with a very good and strong profit for the capital business at the end of the year.

Perhaps I can have Jean-François talk a little bit more specifically about the asset matching.

[Jean-François Bertrand]

Basically, because we are matching the maturities of our liabilities with the assets at maturity, we have to borrow constantly in order to match those maturities. That is what creates the issue of having to go to market frequently. Because the market shut down for some period of time, it created a lot of pressure and the market was a bit more--