Finance Committee on April 30th, 2009

[The Vice-Chair, Liberal, Massimo Pacetti]

Order, please.

Good morning to everybody. Thank you for appearing.

We're here, pursuant to Standing Order 108(2), for a study on measures to enhance credit availability and the stability of the Canadian financial system.

I'll provide the witnesses with five minutes. Perhaps you can keep it to five minutes, and I'll try to indicate that you have a minute left when you're making your presentation. If you can stick to the time allotted to you, it would really be appreciated; the members will want to ask questions.

I have a list of witnesses here, and we can start with the Tricor Automotive Group.

Mr. Campbell, I think you're ready, so go ahead.

[Joseph Campbell, President, Tricor Automotive Group]

Bonjour, and thank you, Mr. Chairman.

On behalf of the over 6,500 employees who work for the dealerships that make up the Tricor Auto Group, I want to thank you and the committee for your efforts in addressing the gaps currently in the credit markets that are imperilling our industry.

My name is Joe Campbell, and I am president of the Tricor Automotive Group. I am joined today by Mr. Brian Rodd, who is president and CEO of Securcor Financial Group.

Let me begin with some background on Tricor and who we are.

Tricor represents over 100 franchised automobile dealerships from coast to coast in Canada, with annual sales of over $4 billion. Most of you will have a Tricor dealership in your riding. Tricor is your local dealership, from which many of you would have purchased or leased your new or used car over the last number of years. Tricor represents all the major automotive brands, both domestic and imported.

Tricor's business plan was and is based upon a unique model of individual accountability and risk management. It is this model of accountability that has resulted in an industry-leading track record that includes the successful operation of a reinsurance company for over 20 years and the successful operation of an auto management company, Tricor Automotive Group,

Otherwise known as TAG, for the last 10 years, the successful operation of our own finance company, Tricor Lease and Finance Corporation, or TLFC, has generated over $250 million in loans over the last eight years while maintaining a delinquency rate well below industry norms. This accomplishment has been achieved despite these difficult economic times.

Securcor is a Canadian-owned and managed financial services company that provides complete compliance verification between private securitization funders and the originators. In addition to serving in this compliance capacity for TLFC since its inception, Securcor has overseen and managed the origination of over $2.5 billion in auto and equipment leasing financing.

The questions before the committee today are, how did we get to where we are, and how can we help the committee solve the credit availability problem? The current credit crisis has permanently changed the playing field for dealers when looking to help their consumers finance their transportation needs. Captive finance companies and other private funders are no longer operating efficiently, and chartered banks have been unable to fill the void created.

Despite the fact that the Bank of Canada has significantly lowered the prime lending rate, its actions have not resulted in lower borrowing costs at the consumer level. Tricor is presently in the process of applying to become a chartered bank or financial institution. We believe this strategy is part of a longer-term plan to fill this gap in automotive financing in Canada. To fill the gap in the short term, however, we are working with the Department of Finance and the Business Development Bank to find solutions. The best and quickest solution would be for Tricor to make use of the credit facility that the federal government recently made available. In order to be able to make use of the facility, we need the flexibility and an understanding on the part of BDC to understand how the fundamentals of the automotive lending sector work. This understanding primarily involves recognition that with the dealerships accountable, and therefore everyone who is involved in the transaction having their interests properly aligned, risk can be mitigated and the operation can achieve and maintain success over the long run.

Essentially, what we have described and what we are asking the BDC to do is it to copy the key components of the only private model that is still successfully operating, albeit with constricted volumes, in today's credit environment. Please recognize that we are not trying to replace the bank and the critical role they play in automotive lending, but are simply trying to fill the lending void left by the reduced capacity in the market.

Our proposal, we believe, offers the best public policy solution to what is taking place in the market, not only in the short term but in the long term as well. Tricor understands how credit markets, automotive consumers, and car manufacturers interact and what the best conditions are for keeping the marketplace liquid and functional. Tricor has a vested interest in making good-quality loans, the way the marketplace should always work. We are taking risk with every loan and we understand how to mitigate that risk.

The federal government wants to jump-start the automotive sector in Canada, and Tricor, due to its efficient cost structure, with access to the credit facility, will be able to offer a less expensive source for automotive financing and leasing for the Canadian consumer immediately.

Mr. Chairman and members of the committee, thank you and merci beaucoup.

Mr. Rodd and I are looking forward to your questions.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you. You fell within the time slot; I appreciate that. Members will appreciate that as well.

The next group is GE Capital.

Ms. Allan, please.

[Elyse Allan, President, GE Capital]

Thank you very much.

My name is Elyse Allan. I'm president and CEO of GE Canada. I'm joined by my colleague, Jean-François Bertrand. Thank you for giving us the opportunity to appear before the committee.

GE is known for many things. One of them is providing light, and I hope we can provide some light to the challenges of commercial lending in the current environment.

Worldwide, GE has more than 300,000 employees in more than 100 countries. Our business units range from financial services, aviation, energy, lighting, and appliances, to health care, NBC Universal, rail, and more.

We've been in Canada since 1892. GE Canada generated $6.7 billion in revenue in 2008. We have over 9,000 employees, $24 billion in assets, over 15 major manufacturing facilities, and over 100 sales and service sites.

GE Capital Canada is one of our units. It is the largest non-bank commercial lender in Canada. GE Capital Canada lending and leasing division's head office is in Montreal. We have 600 employees at 23 offices across Canada.

GE Capital Canada provides financing to over 60,000 Canadian companies, most of which are small and medium-sized. GE Capital Canada provides lending and lease alternatives to bank financing. We help companies invest in new technology and equipment. We consolidate debt and we provide vendor and franchise financing. In 2008, our asset-based financing for new business activity in Canada was $10.9 billion.

Our 60,000 customers are in a broad range of industries: transportation, aerospace, construction, forestry, manufacturing, automotive, hospitality, and franchise finance. We also have a specialized unit to finance and manage truck and vehicle fleets.

In short, Canadian companies rely on GE Capital Canada to finance their operations, invest in new technology, and employ Canadians.

Jean-François, please.

[Jean-François Bertrand, Senior Vice-President, Capital Markets, GE Capital]

My name is Jean-François Bertrand and I am senior vice-president of capital markets with GE Capital Canada.

In order to explain how the credit crisis has affected us, it is important for you to understand how we finance our Canadian operations. GE Capital Canada issues unsecured commercial paper, medium term notes and asset-backed commercial paper. Some of this is issued in Canada and some on international financial markets.

The current crisis has reduced our ability to raise funds. The market in asset-backed commercial paper is down 55%, or $63 billion, since 2007. Rates for this paper are extremely volatile. The cost of issuing secured commercial paper has become prohibitive.

The market for unsecured financial corporation commercial paper is also affected, dropping 45%, or $20 billion, since 2007. GE Capital Canada's ability to issue unsecured commercial paper has dropped significantly since July 2008. Since 2003, GE Capital Canada has issued almost $15 billion in medium term notes since 2003, but we have issued none since July 2008.

With the dramatic drop in traditional sources of local financing, GE Capital has had to make use of cross-border intercompany loans in order to meet the needs of its Canadian clients. Unfortunately, long-term use of loans of this type is not sustainable because of the Canadian tax rules to which they are subject.

Loans from our American affiliates are subject to what are known in Canada as thin capitalization rules. These rules limit deductions for interest on money borrowed from American parent companies to a two to one leverage ratio, making this a very costly source of financing. By comparison, Canadian banks typically have what is considered a conservative leverage ratio ranging from 16 to one to 20 to one.

[Elyse Allan]

GE Capital Canada is clearly an important part of the financial infrastructure of Canada. We applaud the Government of Canada for the initiatives they have taken to strengthen this financial infrastructure that is so crucial to small and medium-sized Canadian businesses--the $12 billion secured credit facility, the amendments to the EDC mandate, and the injection of capital into EDC and BDC.

But more needs to be done. As with everything in the current economic crisis, good policies need to also be matched with good timing. We believe the secured credit facility needs to be operational in the second quarter of 2009 if we are to ensure that the capital will be available to finance Canadian business operations and investment.

Also, the facility should not be limited to only AAA-rated tranches. It should also be open to investment-grade tranches. Prior to the current crisis, investment-grade tranches were being purchased on the market. Recreating the normal market for all investment-grade tranches will allow financial companies like GE to extend more financing to those companies that are not AAA and are in fact the most vulnerable in the current crisis.

Secondly, we believe the Bank of Canada should target its intervention on non-bank financial companies, where the breakdown in the commercial paper market has had its greatest impact. The Bank of England's new asset purchase facility is actually an excellent precedent, as it creates new liquidity in the market, assures confidentiality, and provides a clear exit strategy to the bank.

Third, and finally, Canada should revise the current thin capitalization rules to make it easier for financial services subsidiaries of international companies to access related-party capital. The debt-to-equity ratio should be increased from a leverage of 2:1 to at least 10:1, as this would provide Canadian financing institutions access to additional capital, which, in turn, would finance Canadian companies.

Thank you.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you.

The next group is the National Marine Manufacturers Association Canada.

Ms. Anghel, you have seven minutes.

[Sara Anghel, Vice-President, Government Relations and Public Affairs, National Marine Manufacturers Association Canada]

Thank you very much.

Good morning members of the committee, Mr. Chair, and ladies and gentlemen. My name is Sara Anghel, and I'm here representing the National Marine Manufacturers Association of Canada. I am joined today by Mr. Jeff Wilcox, president of George's Marine and Sports.

National Marine Manufacturers Association, which I'll refer to from now on as NMMA, is the leading association representing the recreational boating industry in North America. NMMA member companies produce more than 80% of the boats, engines, trailers, accessories, and gear used by boaters in North America. The association is dedicated to industry growth through programs in public policy, market research and data, product quality assurance, and marketing communications. We represent 100 members in Canada and another 1,600 members in the United States.

In 2006 we conducted an economic impact study that told us that the recreational boating community has a $26 billion impact on Canada's economy and produces close to 375,000 jobs, directly and indirectly. This includes close to 7,000 well-paying manufacturing jobs. In 2006 nearly six million Canadians took to the water in a boat. These boaters have a $6 billion impact on tourism through travel, fishing, trailering, angling, and other tourism-related activities in Canada. We also see many of our American friends taking to our waterways as they have 4.3 million boats in the eight Great Lakes states.

Of those six million boaters in Canada, 80% have a household income of less than $100,000 per year, and 95% of all boats in use and sold each year are less then 26 feet in length--trailerable boats. Boating is solidly middle class, and it is middle-class workers making and selling boats for the middle class.

These strong economic figures will no doubt be smaller this year and next due to the significant slowdown in the economy. Our industry is usually the first to suffer and the last to come out of recession, because our products are non-essential to consumers.

As we know, normally functioning capital markets began to seize up in early 2008 in the U.S., causing commercial paper markets to fail to operate effectively as investors pulled away from lending to all but the most credit-worthy organizations. Lenders traditionally active in consumer and dealer financing began to pull back or exit the recreational marine dealer inventory/floor plan lending segment.

Floor plan financing is a source of financing that permits a retail dealer to buy goods from manufacturers on a wholesale basis and finance pending resale. The products purchased become the security for the loan that is repaid when the merchandise is sold.

The total marine industry floor plan market in North America is approximately $3 billion to $4 billion.

Here in Canada, 2008 was a relatively good year; however, the availability of floor plan financing is making the 2009 season very difficult. Textron, a financial lending company, exited the market in February of this year, leaving GE Commercial Distribution Finance Canada as the sole floor plan lender for the marine industry. Textron represented nearly 30% of the marine inventory finance business in Canada. At the same time, GE is expected to reduce its wholesale marine lending due to current market conditions and the credit health of marine dealers.

As floor plan lenders leave the market, the lack of readily available alternative credit sources poses major risks to marine manufacturers and their dealer networks. As a result of the credit crisis, the marine industry's distribution chain is now in serious jeopardy, already costing jobs, which will threaten more jobs.

Due to contract requirements, manufacturers in many cases are required to buy back or repurchase inventory from a dealer that goes out of business, creating a severe negative feedback loop that drains key capital from already struggling manufacturers. Excess inventory on the market as a result of liquidation, credit inaccessibility, and low demand means less production, fewer Canadian manufacturing jobs, and closures.

I urge you to consider and include the marine industry in your decision in the same way you consider automobile dealer financing. Relief to help stabilize the floor plan lending market and ease the flow of credit is crucial. Government needs to get the banks to begin stimulating the economy by expanding their leverage.

To be more specific, the following solutions are proposed.

First, increase the amount of insurance that Export Development Canada currently provides on exported goods from 90% to 100%. If the insurance were increased to 100% and it were made easy for lenders to access, this would provide a solution for boats being exported to the U.S. by Canadian manufacturers.

Two, implement a similar government-backed program for boats shipped within Canada by Canadian manufacturers. This could be done by expanding the mandate of Export Development Canada or by increasing the roles of the Business Development Bank of Canada.

A federal government loan guarantee program for floor planning will increase liquidity, attract new lenders, and increase existing lender participation to marine dealers. This will keep manufacturers and dealers in business and secure many of the 375,000 jobs our industry produces across Canada. In addition, stimulating retail customer-level financing will help move products and allow new products to enter the market, thus keeping our manufacturers working.

GE cannot do this alone in our industry, and, as I mentioned, currently they are the only available financing for our industry. We urge the BDC to work to assist GE, who will in turn be able to assist Canadian manufacturers, dealers, and, more importantly, assist middle-class jobs. Our retail buying season is March to July. We need to act now to prevent further declines.

l'd like to now turn it over to Jeff to give you a brief outline of how this issue affects a local business here in Ontario.

[The Vice-Chair, Liberal, Massimo Pacetti]

Mr. Wilcox, I warn you that you have less than a minute. If you would, just summarize your highlights.

[Jeff Wilcox, President, George's Marine and Sports, National Marine Manufacturers Association Canada]

Thank you.

My name is Jeff Wilcox. I'm president of George's Marine and Sports.

Over the past 10 years that I've managed this company, we've taken it from a $100,000 dealership to nearly $14 million. I have been president of the company since 1999 and have been employed with it since 1985. During my tenure I've seen a number of changes to both credit at the consumer's end and to wholesale credit.

These times, however, have now created some of the most challenging set of parameters I have ever seen in how small businesses run. In business, we've seen interest rates rise and fall many times, but never have we seen a change this dramatic on both the wholesale and retail side. Not only have our credit providers changed the game plan in mid-stream, but so have the retail lenders, causing pressure from below and above.

Our main floor plan lender is GE. In the past month we have seen our rates nearly triple and credit availability tighten beyond anything I've seen in the past. We have seen rates this high in the past, but never with margins on products this low. Given the current economic status, our margins on our products have declined by over 40% as a result of dealers trying to keep market share. Combined with the increased flooring costs and the decrease in margins, profitability will be next to impossible without cutting costs dramatically.

The most likely cost will be to our employees. Given that we employ highly trained people, it will be a very difficult decision, but one that we may be forced to make.

In addition to the wholesale problems that we are experiencing, retail lenders are also changing how they do business. They have increased their requirements for available credit beyond what some of the consumers are able to maintain, making it virtually impossible for a mid-income family to receive credit. In some cases, clients who would have received credit a year ago and are currently working with very little debt have been denied.

These two factors are now forcing small businesses like mine to restrict business operations and directly reduce our workforce in order to remain in business. George's Marine and Sports will most likely not look the same after this current recession ends, nor will we return to where we once were.

Thank you.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you.

We'll go to the Canadian Recreational Vehicle Association, with Mr. Hanemaayer.

[Jeff Hanemaayer, Senior Vice-President, Canadian Recreational Vehicle Association]

Thank you for seeing us today.

I'm Jeff Hanemaayer. I'm the vice-president and a director of the Canadian Recreational Vehicle Association, CRVA. It's a non-profit industry association representing manufacturers and suppliers to the Canadian RV industry.

I'm not a financial expert, but I am joined by Pierre Major. He's the president of Textron Financial Canada's floor plan division. However, he's here not representing Textron Financial Canada, but instead basically as an expert in the field of floor plan financing in Canada.

The Canadian RV industry is valued at about $3.5 billion. That doesn't include revenue generated by campgrounds or other economic impacts that result in the tourism sector as a result of RVing. RV ownership hit a record level in 2008, with 14% of Canadian households owning an RV; that equates to over a million RVs in Canada.

RV retail sales in Canada in 2008 reached a record high of almost 58,000 new units, both motorized and towable. Although the credit crisis has reduced retail demand from record levels, demand currently remains reasonable by historic standards—this despite the fact that retail lending standards have become more strict, resulting in more willing buyers being left without retail financing.

Retail financing is still reasonably available to diligent RV dealers for credit-worthy customers. The bigger problem the industry has is that although retail sales are reasonable by historic standards, floor plan financing for dealers has become much more difficult to acquire and maintain. Survey results from members of the RV Dealers Association of Canada cite the lack of floor plan financing as their number one concern for 2009. Without adequate floor plan financing, dealers are not able to maintain an appropriate number of RVs to maximize their sales and profits.

Reduced dealer floor plan availability has been caused by three things: as mentioned earlier, the exit from RV floor plan business by Textron Financial Canada, which is one of only two major non-bank floor plan lenders in Canada, both of whom happen to be U.S.-owned; reduced lending by the other one; and the last would be minimal interest from Canadian chartered banks to increase their lending.

We have a few suggestions to improve availability of floor plan lending to the RV industry.

One would be to modify the Canada Small Business Financing Act: first to include RV dealer floor plans—RV dealers sell big-ticket items for small margins, so we need to revise the eligibility to include businesses with annual sales over $5 million; second, to revise what is eligible for financing to include RV inventory; and last, to increase the loan limits beyond the recently increased current limit to $1 million.

A second suggestion is to broaden the BDC's mandate to include RV dealer floor plan.

A third is to modify the Canadian Secured Credit Facility to include RV dealer floor plans; currently, the facility only allows for loans for vehicles and equipment.

The last is to encourage Canadian chartered banks and other lenders to increase RV dealer floor plan lending. The big banks already benefit from retail RV lending, which has a lower risk than other forms of consumer loans. They provide floor plan to a small number of dealers with whom they've had a long-term relationship; however, they are reluctant and are risk-adverse to offering new floor plan lending.

Finally, with the only other remaining non-bank floor plan lender being U.S.-based, their Canadian businesses may not be their first priority. The Canadian industry, already affected by one U.S.-based lender leaving the market, would be less vulnerable if there were other major, Canadian-sourced lenders.

Thank you.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you.

Members, you have seven minutes.

I'd like to remind the witnesses that the members have seven minutes for questions and answers. If you keep your answers brief, the members get to ask more questions.

Mr. McCallum, you're first up, with sept minutes, s'il vous plaît.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you very much.

Thank you to all the witnesses for coming today.

One of the recurring themes we've been concerned with is the slowness in the development of the Canadian Secured Credit Facility and the difficulties we had in getting answers from BDC as to when it would get the money out the door. The crisis is now, and if these facilities and additional lending only happen in 2010, it will conceivably be too late. I think some of your comments today reinforce these concerns.

So my first question would be to the recreational vehicle group. Why would the Business Development Bank exclude you? I don't quite understand that. And why would the Canadian Secured Credit Facility exclude you? What do they have against recreational vehicles?

[Voices]

Oh, oh!

[Jeff Hanemaayer]

As the CSCF is currently written, it does not include the RV dealer floor plan as a form of a loan that can be used for the asset-backed securities. It only includes loans and leases for vehicles and equipment. It does not include RV floor plan inventory.

[John McCallum, Liberal, Markham—Unionville, ON]

But is there a rationale for why that should be? What would they say if they were here and asked why they don't include you?

[Jeff Hanemaayer]

It was the legislation that did not include the RV floor plan. That's where it's excluded. It wasn't included in the original legislation. So I don't know if it's a choice. I'm not sure which particular issue you're addressing, though. With regard to the CSCF, it was simply that RV floor plan is not included in the qualifying types of loans.

[John McCallum, Liberal, Markham—Unionville, ON]

Okay. In terms of the CSCF, my understanding is the Prime Minister first mentioned the idea around Christmas time. The budget is now, I believe, about three months old, today is the fiftieth day since the budget received royal assent, and I'm not sure we're nearly there yet.

Ms. Allan, you talk about hoping this might occur in the second quarter. Before, we'd been told May. Do you have any idea on the timing of when this money will actually be flowing?

[Elyse Allan]

I would simply say that certainly our negotiations are moving forward very quickly. Since things got started, which they have, we've been working very well. We're doing something that hasn't been done before, and I think everyone appreciates that. It is moving forward and we are hoping and anticipating that it would be in the second quarter.

I'll ask Jean-François, who's involved in that, if he has additional comments.

[Jean-François Bertrand]

Yes. I would just add that it's a new mandate for the BDC. It was something new for them, and they work very professionally with us. We can't wait to have the money, but they do their best, I think.

[John McCallum, Liberal, Markham—Unionville, ON]

It sounds like a bit of a slippage to me when you move--not you, the government--from saying May and now we're told second quarter, which goes until the end of June.

In terms of restrictions, again to Ms. Allan, you're saying there's a restriction because the program is limited to AAA, and prior to the crisis, BBB and upwards were eligible. Can you explain--

[Elyse Allan]

Yes, that's correct.

[John McCallum, Liberal, Markham—Unionville, ON]

--why that is a problem and whether you think changes should be made?

[Elyse Allan]

Yes. It's in some ways a minor change, but it could be important in that it would extend who would be eligible for this program. So you're right, traditionally you'd be able to work down through all levels of credit from AAA and below, and right now it is specific to just triple AAA. We would like it extended. It would increase, obviously, the amount of financing and possibly go to people who are more vulnerable than those who are just triple AAA.

Jean-François.