Finance Committee on April 30th, 2009

[Brian Rodd]

Yes, that's right. I also read the article in the Globe and Mail this morning. What we feel we bring to the table is a structure. It's proven. It has worked for 20 years.

The issue that the BDC sees with us is that it will never get to AAA and it will probably never get to AA. But it's an actual structure that works. It's one that the large companies are used to using and have had good success with over the years.

The AAA mandate given to the BDC is where we run into the roadblock, because we could be dispersing funds under a well-tied-together program with the BDC by the end of next week.

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

As we found at this committee, the analysis of credit, the credit rating, is a bit more art than science. So the second choke point appears to be AAA as opposed to something less than AAA.

If you enter the marketplace through BDC, do you effectively expand the pool of credit and therefore go below AAA, thus giving GE a little bit of marketplace competition?

[Brian Rodd]

Not necessarily. We're sort of in different markets. Our focus is on retail consumers across the country and getting the money out to them. It's a different piece of the puzzle than GE has. So I don't think that would be the case.

But on the other side, we could certainly get money out to the street and generate sales in the dealerships extremely quickly with everything already in place.

[The Vice-Chair, Liberal, Massimo Pacetti]

Okay.

[Joseph Campbell]

It would be more direct competition than the actual retail marketplace. We looked at the numbers yesterday. In real simple numbers, if we look at the retail automotive sector, the finance rates to the consumer are virtually unchanged in the last 15 months. If you go in to buy a car, new or used, and the dealership is not subsidized by the factory, you're going to pay somewhere around 8.5%. In looking at our model and the cost efficiencies we have, assuming that the cost of funds would be in the neighbourhood of 2.5% from the facility, we could have it to the consumer at 5.5%, or save them about $50 a month on a normal car payment.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. McKay.

Mr. Carrier, you have five minutes.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Good morning, madam; good morning, gentlemen.

I would like to ask the GE Capital people some questions.

In your presentation, you mentioned that you raise funds mainly by issuing commercial paper guaranteed by banks.

Could you tell me again about the problems you have encountered recently? Are they due to the fact that banks were hesitant to guarantee the kind of commercial paper that, likely, you were presenting to them for approval? Is that the bank reaction; are they more careful now when they are asked to guarantee these loans?

[Jean-François Bertrand]

The conduits we're using to issue commercial paper in the asset-backed market are sponsored by banks, but not guaranteed by banks. So they don't have a word to say in terms of credit. In fact, it's more the investors on the street that are not there to buy the paper from the conduit sponsored by the banks. The banks help structure the deals, but they do not decide whether to invest in our paper. Someone else is buying it. The reputation of the ABCP market has been tarnished by the non-bank ABCP that is creating the issue.

On top of that, you also have the fact of the global recession that is affecting those types of structured transactions. There was also, we think, a lack of transparency in that market in the past. There is now more disclosure than ever in that market by issuers, and the financial structures have been adapted to meet international standards. The industry has been auto-regulated. Now most of the conduits are rated by two, or even four, credit agencies, so it should bring confidence over time. But for the time being, we don't access as much money as we used to, and we think it would be important for the government to help as proposed in our document.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

You are recommending that the Bank of Canada focus its intervention on non-bank finance companies.

When you say intervention, are you suggesting that the ways in which these funds are issued have to be managed differently, since they were based on credit rating agencies' evaluations that misled investors into thinking that they were sound? Are you taking that position because you are negatively impacted by this non-bank paper that you are now feeling the effects of? With your wide knowledge of financial markets, is that what you are recommending?

[Jean-François Bertrand]

We can see that the industry has improved and is a little more transparent than before, but we think that we can go further. As our document recommends, we want more transparency in the amounts issued, so that the market is more aware of what is happening. It is a little like the Canadian bond market, where there is more information. Things are a little foggy and we think that they should be clearer.

We feel that the Bank of Canada could temporarily intervene in the markets that are suffering more than others from the current recession. It could intervene directly in those markets like any other investor. It would do its own homework: it would assess the quality of the paper being issued, have funds available to buy on the secondary market and thereby improve the liquidity of the system in the targeted sectors.

We feel that, since the non-bank financial industry is more affected than others, intervention should primarily be made there. The asset-backed commercial paper, the non-bank asset-backed commercial paper, the ordinary commercial paper and the term notes issued by those companies should be supported a little more. I am not just speaking on behalf of GE Capital Canada, I am saying this on behalf of the industry as a whole.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Carrier.

Mr. Wallace, you're next.

I want to let the witnesses from the recreational vehicle and marine areas know that the last time the vehicle retailers were here, Mr. Wallace bought two cars. So if you get a chance make a pitch, he's good for two boats and two recreational vehicles.

[Voices]

Oh, oh!

[The Vice-Chair, Liberal, Massimo Pacetti]

Mr. Wallace, you have five minutes.

[Mike Wallace, Conservative, Burlington, ON]

Thank you for that, Mr. Chair, and thanks for sharing that with the nation.

I'll try to go fairly quickly because I have a number of questions. I will start with TAG first, if I may.

If I understand the relationship, TAG owns Securcor, or they're two separate companies, but you look after the securitization of the leases they produce. Is that right?

[Brian Rodd]

Yes. We're a totally independent company--we call it a gatekeeper--on behalf of the private funders. Our role is to audit, do due diligence, inspect, and verify--

[Mike Wallace, Conservative, Burlington, ON]

On them.

[Brian Rodd]

On them as well as 33 others.

[Mike Wallace, Conservative, Burlington, ON]

Okay. One question is, has the organization, TAG, considered doing things other than automotive leasing, in terms of floor plan leasing of other industries?

[Joseph Campbell]

No, because our model, as far as Tricor, is to have the originator having skin in the game, and our partners all understand it. So it's an economic model.

[Mike Wallace, Conservative, Burlington, ON]

So even with Textron leaving the marketplace and GE maybe shrinking up a little bit in terms of what they're doing, you haven't seen that as an opportunity for you guys at all.

[Joseph Campbell]

No. That would be a different business model from the one we have.

[Mike Wallace, Conservative, Burlington, ON]

A couple of days ago the department released a paper on leasing and what we should be doing on it. Have you commented on that yet?

[Joseph Campbell]

Not yet, no.

[Mike Wallace, Conservative, Burlington, ON]

Those comments are due May 8, so I'd appreciate you having a look at that and seeing what your pieces might....

Tell me if I'm wrong, but I believe a chartered bank is not allowed to lease automotive vehicles. Is that not correct? Why would you want to get into the chartered bank business?

[Joseph Campbell]

Well, it's in order to provide funding for our dealers to be able to lease the cars. The dealership is still going to be involved in the leasing.