Finance Committee on June 11th, 2009

[The Chair, Conservative, James Rajotte]

I call to order the 35th meeting of the Standing Committee on Finance. Pursuant to Standing Order 108(2), we are continuing our study on measures to enhance credit availability and the stability of the Canadian financial system.

We have with us here today two organizations. From the Business Development Bank of Canada, we have the president and CEO, Mr. Jean-René Halde. From Export Development Canada, we have the senior vice-president, financing products group, international trade, Mr. Stephen Poloz.

Gentlemen, thank you for coming in again. This is your second appearance before the committee with respect to our study on access to credit. The main reason for bringing you back is that members wanted an update on how the measures specifically in the budget are proceeding. You'll find a lot of interest in both of your organizations on how that's going along.

We'll start with your opening statements. We'll start with the BDC first, please.

[Jean-René Halde, President and Chief Executive Officer, Business Development Bank of Canada]

Thank you, Mr. Chairman.

Good morning, and thank you for inviting me back. I will keep my comments short and to the point.

When I was here in March to discuss business access to credit, you may recall that I reported that in response to the credit crisis, we increased our traditional lending and that we would soon be sending our annual report to the Minister of Industry for him to table in the House. While I cannot yet speak to the specific numbers in the report, it will show that we have increased our lending portfolio by more than $1 billion in the last fiscal year, an increase of some 11% compared to last year.

You may also recall that I mentioned two new initiatives. The first was the Business Credit Availability Program (BCAP). The second was the Canadian Secured Credit Facility (CSCF). These two initiatives are up and running and available to the market. I will first describe the BCAP and then the CSCF.

BCAP is a program in which BDC, EDC, and private sector financial institutions are participating to help ensure that at least $5 billion in loans and credit support is made available to creditworthy businesses whose access to financing would otherwise be restricted. It's best understood as a program of greatly enhanced referrals between BDC, EDC, and banks to collaboratively finance creditworthy clients. For us it also means offering new financing possibilities to Canadian businesses.

How we do it for each business depends on the need. For larger corporations we're now participating in syndicates to replace departing lenders. For mid-market sized loans, financial institutions are sharing an increasing number of commercial mortgage deals on a pari passu basis with BDC. When mortgages are small, where it's not efficient or cost-effective to have the paperwork, we purchase a 50% interest in the mortgage portfolios. The original lender maintains and manages the relationship with the client and collects and remits payment to BDC. This is much simpler for the client. There's one registration, one agreement, one negotiation, one payment, and it provides much-needed capital for commercial development projects.

You should also know that we've completed the work to create a new operating line of credit guarantee. Its aim is to support Canadian businesses who are constrained by reduced access to working capital credit and to share the risk with other banks. In line with BCAP's objectives, it provides incremental financing to creditworthy companies by preventing reductions in operating lines of credit or enabling fast-growing businesses to gain access to a larger operating line of credit.

The new BCAP collaboration is working well, entrepreneurs are getting more opportunity to make their case, potential deals are being referred, and businesses are benefiting. Through BCAP specifically, we at BDC have provided more than $600 million in new financing to Canadian businesses since February.

In terms of the Canadian secured credit facility, also in the budget, the government asked us to establish and manage this facility, which has an allocation of up to $12 billion. Its primary objective is to stimulate economic activity in Canada by supporting sales and leasing of vehicles and equipment through BDC purchasing term asset-backed securities. A second and very important objective is to promote renewed investor confidence in the Canadian term asset-backed securities market, as well as in vehicle and equipment financing more broadly.

The CSCF is now up and running. We've already allocated close to $11 billion to two distinct groups. First was the large enterprise tranche with $10 billion. Following a price discovery process in early May, we sent commitment letters on May 15 to fifteen eligible originators who have AAA securitization experience. The minimum transaction size for these transactions was $300 million.

Second was the small enterprise tranche. This was for $1 billion. We recently sent the allocation letters and will be sending formal commitment letters today, June 11. In the second tranche, originators need not have securitization experience. The minimum transaction size is $100 million and the maximum is $300 million.

The second tranche completes our first allocation. We anticipate a second round of allocation in August. In that round we expect to allocate the remaining amount available, which will be at least $1 billion. With these allocations now in place, we expect the first cheques will reach the market in a few weeks.

In sum then, BDC is proactively helping business gain access to credit. We're increasing our regular lending and still investing in our technology companies and venture capital funds. We're also doing the two things that the government asked us to do: participate actively in BCAP and establish and manage the CSCF. Through BCAP we've provided Canadian businesses with $600 million in new financing in slightly more than four months. Through the CSCF we are allocating $12 billion to restore liquidity and confidence in the term asset-backed securities market. Our people understand the importance of what's happening in the economy and, I believe, have risen to the challenge.

Thank you for your time, and I will be happy to respond to your questions.

Thanks for your time. I'll be happy to respond to your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

Now we'll go to EDC for their presentation.

[Stephen Poloz, Senior Vice-President, Financing Products Group, International Trade, Export Development Canada]

Thank you, Mr. Chairman.

We're very pleased to have this opportunity to report to the members of this committee on our progress in helping Canadian businesses access more credit.

Since our president last met with you in March, the volume of demand for our credit insurance, in particular, has grown at a swifter pace than we've ever experienced in EDC's history. By the end of April, for example, we had already exceeded the number of new credit insurance transactions that we had for all of last year.

As you are aware, Export Development Canada supports Canadian businesses by providing market expertise and financial tools to help them expand their business internationally and reduce their credit risks. Our services are more important than ever during this credit crunch, when traditional financial institutions have limited flexibility.

On the financing side, in particular, EDC provides loans and lines of credit to foreign companies buying from Canada; loans to help Canadian companies invest in projects or operations abroad; guarantees to banks, making it easier for them to lend to exporting companies; and equity financing, either directly to Canadian firms or through private equity funds.

Importantly, EDC's credit insurance not only protects firms against the risk of non-payment but also acts as security that allows their banks to extend their borrowing power.

We do all this directly and in partnership with private sector financial institutions. And we do it on commercial terms, without annual appropriations from Parliament.

Thanks to prudent financial practices in better times, EDC was able to step into an expanded role in the second half of 2008, taking on the most business in our corporate history. We served over 8,300 Canadian companies last year, and that was an 11% increase over 2007. EDC facilitated $86 billion in exports and investments, an increase of over 23% since 2007.

As you know, the government also turned to EDC to help address gaps in the domestic credit market. It boosted EDC's share capital, with the possibility of injecting more capital if needed, and broadened our mandate and scope of activity for a two-year period. The government also raised the limit for our Canada Account from $13 billion to $20 billion. This account is used to support transactions in the national interest. EDC facilitates these transactions.

For example, as of May 31, EDC had about $12 billion in loan commitments under the Canada Account, including about $8 billion in financing for General Motors and Chrysler to assist them as they restructure.

Importantly, our domestic activities are being done in cooperation with the private financial sector and BDC. In April and May, EDC established new arrangements with Canada's major credit insurance providers, and with banks and surety companies, to collaborate on domestic credit insurance and domestic bonding through reinsurance or guarantees.

We expect these arrangements to add about $3 billion in new financial capacity to the domestic market to help Canadian companies get through the recession.

Let me outline basically how it works. EDC provides reinsurance or a guarantee on part of a transaction amount. The bank or the insurer reserves, therefore, less of its own capital to take on new risk, and it can then provide more credit to Canadian companies, either existing ones or new ones.

In addition, EDC and BDC are working with Canada's banks to add financing capacity to the market through the Business Credit Availability Program, the BCAP. Together, we are providing loans at market rates to businesses with viable business models whose access to financing is restricted.

We also meet regularly with representatives from the Department of Finance and the Bank of Canada to share information and search for more effective ways to collaborate.

Let me now provide a snapshot of EDC's activity in the first four months of this year. Our financing and insurance volumes for Canadian companies reached $22.5 billion. That's just above what we did for the same period last year. Credit insurance is by far our most important financial tool, at $16.4 billion in this period. It was nearly five times our financing volume. Our export business volume in emerging markets reached nearly $5.6 billion in this period. That's tracking about the same as our results at the same time last year, in spite of the more troubled economy we face at this time.

There were a couple of highly challenged sectors. EDC served 446 forestry companies in this period, for a total business volume of $2 billion. Nearly half of our customers in the forestry sector are from Quebec. In the automotive sector, EDC's commercial business reached a volume of nearly $1.4 billion in this period. Receivables insurance took up almost $1 billion of that amount.

Overall, we've served 600 more customers to the end of April than we did for the same period in 2008, with some 7,100 companies so far this year. This compares to the 8,300 customers I mentioned earlier for all of last year. This barely takes into account our new domestic transactions that are just now coming on stream. Seen against the 22% forecasted decline in Canadian exports this year, this strong demand for EDC's services I think is even more noteworthy.

Finally, I'd like to give you a sketch of our latest developments. On March 18, for example, EDC committed up to $40 million in the $180 million renewal of a syndicated facility for New Flyer Industries Inc. This Winnipeg-based company manufactures transit buses with a focus on energy-efficient vehicles. The syndicate of lenders included Scotiabank and Bank of Montreal.

Just last week, we announced that we were providing $57 million in debt refinancing to Clearwater Seafood, a Canadian icon in the seafood industry with well-established markets around the globe. The financing will be provided by EDC and BDC, along with GE Capital Solutions and the Nova Scotia government.

These are just two examples of how EDC is making use of the additional flexibility granted in this year's budget.

By the end of May, we had signed nearly $100 million in loans under our temporary domestic powers, and there's more than $700 million in the pipeline so far. The take-up on our domestic bonding, reinsurance, and guarantees by both surety and banking partners in Canada on behalf of their customers was almost $19 million, but there is more than $900 million currently in the pipeline under review. On the domestic credit insurance side, we're still in the process of completing the various partnership agreements, but we expect take-up to be strong.

As you can see, EDC is working hard to help Canadian companies through this economic downturn. I'd also like to reiterate that we operate in the commercial sphere, just like a bank or insurance company. We do not provide subsidies of any kind to any industry. Our customers must have viable business plans to show that they can honour their financial obligations.

As we move through 2009, we will continue to provide more companies with the additional access to financing that they need to survive and compete beyond this recession. Always we are focused on the benefits that we provide to Canada. In 2008, for example, EDC helped generate 4.4% of Canada's total GDP and supported 572,000 Canadian jobs.

Thank you. I welcome your questions.

Thank you for your attention. If you have any questions, I would be pleased to answer them.

[The Chair, Conservative, James Rajotte]

Thank you very much for your remarks.

We'll start with questions from members, beginning with Mr. McCallum for seven minutes.

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

Thank you, Mr. Chair, and thank you to both of you for coming back.

You'll remember, Monsieur Halde, that I was somewhat critical the last time you were here. I kept asking, of the extra billions of dollars you have, how much has actually gotten out the door. I'd like to return to that topic. If I understand you correctly, there's more than $5 billion authorized in additional credit support, and so far you've gotten $600 million out the door. That's just a little over 10%. Is that a fair or unfair representation?

[Jean-René Halde]

I think that's a slightly inaccurate perception. What was said in the January budget was that BDC, with EDC and with the financial institutions collectively, would put out $5 billion through the BCAP. Of that amount, since the budget, we've put out--between February 1 and May 31--$578 million, and by now we're well in excess of $600 million, given today's date.

So that we're clear, the $5 billion was a mix of the financial institutions and us basically referring business to each other, helping each other out, and so on. This is not all about BDC doing $5 billion.

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

The $600 million is correct for BDC?

[Jean-René Halde]

The $600 million is correct.

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

But what you're saying is that the $5 billion is not exclusively BDC.

[Jean-René Halde]

That's correct.

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

If we turn to EDC, there's the statement, “By the end of May we had signed nearly $100 million in loans under our temporary domestic powers...” Is that $100 million a part of this business credit availability program?

[Stephen Poloz]

Yes, it is. Thank you for the question.

As I mentioned in my remarks, we have between $800 million and $900 million altogether. Most of that is in a pipeline that is not yet signed. That's a process that takes sometimes weeks, or sometimes a month or two.

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

It's fair to say, then, that out of the business credit availability program, in money out the door so far we have $600 million from BDC and $100 million from EDC. Is that a fair statement?

[Stephen Poloz]

I would say it's not a fair statement, because we have authorized considerably more than that; we just haven't actually signed the final legal documents with the companies.

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

Talking about money actually out the door, it is a fair statement. Is that right?

[Stephen Poloz]

It's a fair statement on the financing front; however, we also have other tools at work. There's the bonding facility and the reinsurance facility for accounts receivables insurance, which works triangularly through the customers' banks. They get more capacity that way.

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

If we're just talking about BCAP--the business credit availability program--and we're talking about how much money has actually gotten out the door, then I think you're agreeing that it's correct to say $600 million for BDC and $100 million for EDC.

[Jean-René Halde]

That's as of May 31.

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

Yes.

[Jean-René Halde]

Mr. McCallum, that is correct, but to be added to that are the dollars from the financial institutions--because this is a program between all three parties--that they should be reporting. I suspect they'll be reporting that in the report to Parliament at some point.

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

May 31 is an interesting date, because it's approximately 120 days from the budget, and that's the date on which Mr. Flaherty said the money should be out the door. You're telling me that as of that date, out of the $5 billion there was $600 million from BDC, $100 million from EDC, and some unknown number from private banks?

[Jean-René Halde]

That is correct. I don't know their number. However, I believe that will get reported, because I believe the finance department was trying to track that.

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

I'll turn to the Canadian secured credit facility if I have a little more time.

It certainly sounds impressive that $11 billion out of $12 billion has been allocated, but then I'm reading that not one cheque has yet been sent out. It says the first cheques will be delivered in a few weeks, but none of that money is out the door, shall we say. Is that a fair statement?

[Jean-René Halde]

Again, it is and it isn't. The key is to change the behaviour of the auto dealers and the equipment dealers. At this point in time, having received on May 15 a letter from BDC formally committing to writing a $1 billion or $1.5 billion cheque, those companies should be, as we speak, telling their dealer network that they can go back and lease, loan, and be aggressive, because they know that once they put those bundles of leases and loans together in an asset-backed security, they have us as a purchaser. As we speak, they are busy putting the security together, having this credit enhanced properly and having this go through the rating agencies. The behaviour, hopefully, is changing as we speak.