Evidence of meeting #24 for Finance in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was market.
A recording is available from Parliament.
President, George's Marine and Sports, National Marine Manufacturers Association Canada
Do you mean they're shy to enter into this floor plan?
President, George's Marine and Sports, National Marine Manufacturers Association Canada
The inherent risks, obviously, are to the financial stability of the company, carte blanche. As our floor plan costs increase and the downward pressure on the economy happens in the top end, margins have shrunk, which means our overall profitability has virtually disappeared. So the risk is to the viability of the company itself.
With regard to banks, and this is something we've been talking about, as the floor plan interests go up, we've often wondered if the chartered banks will enter back into the floor plan business as the profitability is there for them.
NDP
Jim Maloway NDP Elmwood—Transcona, MB
I've spoken to GM dealers in Winnipeg in recent weeks and I didn't get any indication from them that their floor plan arrangements were in jeopardy or that the rates were tripling. Do you have any comments on that, Joseph?
President, Tricor Automotive Group
When you look at the floor plan as compared to the consumer side, it has a distinctly different risk scenario. As different people have pointed out, inherent in the floor plan and what made it work was the put-back to the factory.
I'll speak to the auto side. In essence, the banks used to take a lot of comfort in that if a dealer went out of business, they went in and grabbed the inventory and put the inventory back to GM, Ford, Chrysler, Toyota, or whoever it was. They would be reimbursed one hundred per cent. There was no risk on that side of it. The only risk they had to deal with was the dealer not doing his portion.
Obviously, the current economic climate does not give the banks a lot of comfort; a GM or a Chrysler may or may not be there to take back the inventory. That's what's driving the floor plan crisis. We were asked last week to meet with some finance members who were beginning a study on it to understand what is driving it, but that's one of the key components driving the interest rate increase. A number of our dealers have seen their interest rates on floor plan borrowing increase significantly as well in the last 90 days.
NDP
Jim Maloway NDP Elmwood—Transcona, MB
Dealing with the issue of the rates tripling in a month, it seems to me that there's some profit-taking going on here or some gouging. I liken it to the trends in the insurance business where the markets go soft and people compete for business. The rates go down and are slashed in half in no time, and then all of a sudden markets tighten up and there's just no capacity out there. Rates double and triple and there are huge profits at the end of the day. Then, of course, the cycle starts again.
Is that what we're looking at here in the financing business? Does that happen?
President, Securcor Corporation, Tricor Automotive Group
In our current model, I think there definitely is some of that, because in our model there is only one funder left funding, and that's Sun Life insurance company. The other funders have gone away. There is opportunity there to look at risk, and they can put some nice words around it, but at the end of the day, your rate has gone up three times as well in the last year. There is some of that, but there is very little liquidity out there right now.
President, GE Capital
I'd just like to comment on your point. The reason we're here, in part, is to talk about the cost of capital, and our access to capital, as a non-bank financer, has gone up dramatically. If we look at, for example, the financial companies' unsecured CP paper, we're looking at spreads that are 40 basis points higher than what they were. Looking at the commercial paper market in general, it is down in range from 45% in terms of just availability.
Jean-François, you have some of the numbers, so maybe you want to comment.
That's why. There's just lack of liquidity out there, so there's far less money available to go around, and it is also much more expensive. That translates through, obviously, when we look at the range of risk that we have to finance in the marketplace.
Do you want to add to that?
Senior Vice-President, Capital Markets, GE Capital
Yes. The ABCP market, the asset-backed securities market, if you include non-bank and bank paper, decreased by 55%. It was the largest market for funds in Canada, to get short-term funds for everybody, so it's important. It's $63 billion that has vanished over the last few months, and the spreads are wider by 30 to 100 basis points in that market.
There's also a mid-term notes market. Net new bond issuance was down by $10 billion in Q4 of 2008. Recently we saw a bit of improvement, but it's not related to non-bank financial companies; it was the rest of the market that improved. So it's our view that there's a segment of the financing market that probably needs support from the Bank of Canada, as was mentioned in the document they published last week.
NDP
Jim Maloway NDP Elmwood—Transcona, MB
Ms. Anghel, I have a question for you. You mentioned that if we could just free up some credit, your problems might alleviate themselves in the export of the boats to the United States, but the question is, what's the U.S. landscape like? Is that not ground zero, where the real problems are? Are there people down there to buy the boats?
Vice-President, Government Relations and Public Affairs, National Marine Manufacturers Association Canada
That's a very valid point. Production is down anywhere from 35% to 50%, and there are plant closures as well as shutdowns for a couple of months at a time. However, I think there's still a good opportunity for Canadian manufacturers, as they have unique products.
There is a huge flood of boats sitting on dealer lots in the States. I agree with that, but I think there's a good opportunity to just continue to stimulate the Canadian aspect of it and get Canadians into the dealerships buying boats from here, and to make credit available for the floor planning so that old product is not sitting on the floor and the dealer is unable to bring in new product due to lack of financing.
Canadian Recreational Vehicle Association
Can I just answer a question about the risk of floor plan? Traditionally, banks were involved, and have always been involved, in automotive financing, and I guess it's because of the size of the Canadian market. They've been touching some of their recreational vehicles in the past, but the market has always been less attractive as a size, and that's why specialized organizations like GE and Textron and in the past Bombardier Capital were more involved in floor planning the recreational vehicle.
So right now the risk in that industry is obviously that you get a buy-back agreement from the manufacturer, as Joseph was saying. The finance company will not take the risk of the product, but will take the credit risk. Currently, with what's going on in the industry, there is a lot of struggling with the manufacturer as well. So with your buy-back agreement, when it's time to price the deal, you have to take into consideration the value of the organization behind this buy-back agreement.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
Thank you, witnesses.
Thank you, Mr. Wilcox, for your reality check. Nothing like knowing you're still going to be in business, but it's going to cost you triple what it was before.
The choke point here appears to be BDC. The article Mr. Menzies referred to in the Globe and Mail talks about a Mr. Allan being hired, formerly of Coventree, and as I recollect Coventree, they were one of the non-bank sellers of asset-backed commercial paper. I don't know whether they created this mess in the first place, but they certainly were participants in this mess. So, ironically, the government is in the situation of having to turn to the originators of asset-backed commercial paper to be able to get into the business of asset-backed commercial paper, because clearly the expertise doesn't lie within BDC.
Tricor, I know you want to become a bank, and that ain't happening any time soon. What's not clear to me is how you will access BDC's funding under this Canadian Secured Credit Facility, and if in fact you do, do you provide serious competition to GE?
President, Tricor Automotive Group
Let me start with the first part. The strategy for the bank, we recognize and realize, is a long-term strategy. That's going to take months to do. A parallel route is to access the current credit facility in the interim on two separate tracks independent of each other. We're hoping to be able to access the credit facility on our own through our finance company, similar to how we're using Sun Life and Securcor right now to fund our contracts, to give us the liquidity we need to turn it around, to put consumers in cars immediately, and to get the inventory moving off our dealers' lots.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
Wouldn't that be cheaper money than you get from Sun Life right now?
President, Tricor Automotive Group
Yes. I'm assuming it would be yes. With the spread we're having at Sun Life and the numbers we've heard from, indicative of what appears to be the money that is going to be coming out of the credit facility, yes, it would be much less expensive--
Liberal
John McKay Liberal Scarborough—Guildwood, ON
Why wouldn't the government just give the money or give a credit to Sun Life?
President, Tricor Automotive Group
That's an option as well, except if you do that, you're going to put an additional cost in that'll have to be passed on.
President, Tricor Automotive Group
But yes, that's one of the options we have tabled.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
So you're trying to get directly what you can't get indirectly?
President, Tricor Automotive Group
Either way, it is what we're open to; we're working to solve it both ways.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
Is there any impediment in your mind to the speed with which this could be done from the standpoint of the government? The government has effectively admitted on the front page of the Globe and Mail that this is all new territory, and they're working with that limitation.
So where is the problem? From our standpoint, the recession is now and you need responses now. You need to be able to sell the vehicles now. You need to be able to move the credit now. So where's the choke point from your viewpoint?
President, Tricor Automotive Group
I'm going to let Brian answer it in more detail, but in my opinion it is a matter of the BDC not having a road map to start with and having to develop it. It's a matter of their saying here's one that's already there, as opposed to trying to recreate the wheel from scratch. Taking what's there would eliminate the choke point.
