Finance Committee on June 9th, 2020

[Michael Denham]

Again, based on the work that our chief economist research function does, we do not anticipate increased rates in the 12 to 18 months that lie ahead.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

That's interesting.

[Michael Denham]

I think that would be the prevailing view of most lenders, most financial institutions.

[The Chair, Liberal, Wayne Easter]

Thank you.

We'll turn now to Peter Fragiskatos, followed by Mr. Cooper.

Peter.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you, Mr. Chair.

Apologies in advance to the translators. I have lost the Internet connection in my office here, so I'm working off my phone, and I hope they can hear me. If they can't, please let me know.

If I can ask the question, sir, you said that BDC, and I'm quoting now, focuses “on the companies that represent some risk but can pay back the loan.” Can you define what is understood by “some risk”? How is that measured?

[Michael Denham]

If you look at our provisions, our allowances, and you look at the level, the percentage of investment grade companies we lend to, we take four times more risk than the chartered banks on average. We look at the ability of companies to repay. We look at their cash flows, their scenarios, etc., and we just have an ability.... We're able to put in the time and make the effort to understand the expected cash flows and underlying assets of these companies.

We take more risk. We take more losses as a result, but the combined effect is that we can stay responsible, maintain the capital we need and have the acceptable level of financial return.

[Peter Fragiskatos, Liberal, London North Centre, ON]

How would you say the current situation we find ourselves in compares to previous difficulties, say the post-2008 situation?

[Michael Denham]

The big—

[Peter Fragiskatos, Liberal, London North Centre, ON]

Just to clarify, I'm talking about BDC's role in terms of restart, recovery and helping businesses.

[Michael Denham]

What's fundamentally different, as you would all know, is that there was a massive credit crunch and credit crisis back in 2008-09. Our role was to, in many ways, inject some capital to support the banks. We put in place a number of secure securitization facilities because the alternative lender markets had basically fallen apart.

The issue now is different in the sense that the banks are functioning; they're robust. The efforts that so many people have made over the past number of years made sure they had the right capital base and continue to play their key role in times of stress like now. All of those efforts have paid off. The banks have the capital base in place. They're able to lend. Overall lending amounts, as you know, are up 20% or 30%. It's a fundamentally different crisis because Canada now has, again, a rock-solid set of financial institutions through which credit can flow to get to companies.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Are there any lessons learned from previous situations? If it's not 2008, perhaps there's something else in terms of a playbook, or there's not. Is this truly completely unique from BDC's perspective? It sounds like it is.

[Michael Denham]

This situation is unique, but the one thing that we've learned in times of economic crisis, whether it was then or now.... We've been very active out in the oil patch since 2015 with the price environment.

The lesson that we've learned is that we shouldn't hesitate to step up. We shouldn't hesitate to adjust the levels of risk we take. We shouldn't hesitate to put in place new financing envelopes. We shouldn't hesitate to put in place new solutions because that is what a development bank is meant to do. We've learned to not hesitate. Jump in; step up. Do what's needed to make sure that credit continues to flow and companies are in a position to take advantage of the credit to invest, grow and fund their working capital.

[Peter Fragiskatos, Liberal, London North Centre, ON]

To what extent are you engaged with other development banks globally in terms of comparing strategies, of comparing notes, if you like?

[Michael Denham]

Highly, and actually, to your point, we recognized a number of years ago that there were key learnings we could get from other development banks. We formed and created a group, a federation, if you will, of development banks around the world. It's called The Montreal Group, since it was our idea.

That brings together the French development bank, the British Business Bank, Finnvera in Finland, the Mexican development bank, BNDES in Brazil and the Chinese, India, the Italians and the Spanish, etc. We get together regularly, but we also have just regular discussions through that to compare notes on what to do and what's being done in times like these. Certainly, the development bank in France, which is called Bpifrance, is quite similar to what we do. There's been a massive amount of exchange and learning on an ongoing basis since the crisis started.

[The Chair, Liberal, Wayne Easter]

Thanks, all of you.

We'll go to Mr. Cooper, who will be followed by Annie Koutrakis.

Michael.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

Thank you, Mr. Chair, and thank you, Mr. Denham.

Mr. Denham, you provided some results, a survey of BDC members, indicating some reason for optimism. You've provided some additional statistics, which are good news, but I think you'd admit that the one sector that probably is not all that optimistic at this time is the oil and gas sector.

You've acknowledged in your testimony today that in terms of the rollout of liquidity support it has been imperfect, or not as good as it could be, having regard for the fact that this is an emergency situation in which the oil and gas sector, more than any sector, is in dire, dire straits. We know that the announcement for liquidity support was back in mid-April. I was on the website today. There are very few details.

Now, you've said that good news is on the way in a matter of days. Can you clarify exactly what oil and gas companies can look forward to? When will be the day that they will finally be able to apply for this much-needed support?

[Michael Denham]

Thank you for the question. We have been slow getting to market and operationalizing this solution.

We've been frankly quite steadfast with respect to providing support over the years more to the SMEs that provide services to the oil and gas sector. Again, back in 2005, as I mentioned, when prices plummeted, we put in place an extra $1.2 billion, I think it was, in a financing envelope with different levels of risk to make sure in the days of that aggressive price decline that SMEs had access to the funding they needed. We get the importance.

Again, I anticipate that on Thursday or Friday of this week, or on Monday, we'll be issuing a press release and putting all the details on our website of the specifics of the junior loan financing program we're offering. Again, it's for loans between $12.5 million and $60 million. For E and P companies that need more than that, the right place for them to go is the LEEFF facility that has been set up.

As for the way this is structured, again, it's delivered through the banks because of the knowledge of the clients they have and the quality of due diligence they can provide. The basic structure is that it's a junior loan. What it means, really, is that companies pay back nothing just for the first year, and then for years two, three and four, interest payments on the principal. That principal payment is just meant to be paid in one shot as a bullet in year four.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

Right, understood, and I appreciate that, Mr. Denham. It's good that the details will be announced on Thursday, Friday or Monday. In terms of the application process, when would that be?

[Michael Denham]

Again, we're insisting that companies learn about the program through us and apply to the program through their bank and the lead arranger. All the lead arrangers have been heavily involved in discussions so far. The banks would make it operational quickly. If an E and P were to call me to say, “What do I do?”, I'd say, “Go talk to your bank, here's the program and tell them what you need.” That will lead them through the bank to us.

Again, we're trying to move as quickly as we can because we recognize that every day and every week count.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

Right, and what would the processing time be?

[Michael Denham]

It's a good question. It would be weeks. It depends on the complexity of the company, and it depends the specifics of their asset base. Again, there is so much expertise that the banks have around these companies that we're going to be able to short-circuit a lot of the traditional diligence and underwriting because of the role the banks are going to play.

[The Chair, Liberal, Wayne Easter]

Jérôme is looking rather anxious. Did you want in there, Jérôme? Okay.

Go ahead, Michael. You have time for another question.

[Michael Cooper, Conservative, St. Albert—Edmonton, AB]

You're saying it could be several weeks—and I understand, obviously, depending upon the complexity of the specific application—but the bottom line of what you're saying is that the oil and gas sector can't look forward to seeing liquidity for another three weeks to a month in most instances.

[Michael Denham]

You know the sector better than anybody.

What really matters to the E and P companies, frankly, is getting their borrowing base firmed up. With the decline in prices, there's a real risk that the borrowing base gets firmed up at too low a price and asset value, so it's the EDC guarantee that is much more time sensitive and urgent, because that's what's essential to get the borrowing base bolstered up at an acceptable price.

For most clients we talk to about the liquidity we can provide, which they want, they need and they'll get, the top priority for them is to get their borrowing base firmed up with their bank, so that's where the EDC solution is required, but we don't play a role. We're ready, but I frankly don't think that the junior loan we're providing is going to be a critical path for most E and P companies. It's the borrowing base and the guarantee that they need first.

[The Chair, Liberal, Wayne Easter]

Thank you.

We'll go to Ms. Koutrakis, and then we'll go on to Mr. Ste-Marie.

Annie.