Finance Committee on June 9th, 2020

[The Chair, Liberal, Wayne Easter]

We can come back to Mr. Morantz, if he wants in.

Mr. McLeod.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you, Mr. Chair.

I want to thank the presenters for the information provided to us today. I really appreciate it.

I represent the Northwest Territories. Right now we have no COVID cases in the Northwest Territories. That's largely because we've closed all our borders to Yukon and Alberta. We've done a pretty good job of keeping ourselves locked in. It has really had an impact on our economy, though.

The government has done a pretty good job of supporting the different businesses, as we saw with the introduction of the northern business relief fund. That really helped us when we focused on the companies that fell through the cracks, but we're still hearing from companies that are very worried. Even though they have been able to access funding, loans and contributions, they still feel that in the long term they're going to struggle, because other parts of the world are opening up.

I'm referring to the tourism industry and the hotel industry. We're seeing destinations in Alaska, Iceland, Greenland, Sweden and Norway all opening up for travellers. We're going to see that in our country too, in Canada, and we need flexibility. We've seen some flexibility in the CEBA program that made sole proprietors and those with a payroll less than $20,000 eligible. I'm assuming there's been a big uptake on that.

Has there been any kind of recommendation, or any position, or any kind of thought on what will be needed as we go forward? Some jurisdictions and some regions will be closed for a longer period than others. I'm thinking that the north will probably be closed a lot longer than the southern part of Canada. I'm wondering if you could provide me with any kind of comment or thoughts on that.

[Mairead Lavery]

The area of tourism and hotels is not one that EDC has focused on a lot in the past with our exporting mandate. It's not a sector at which I would say we are sufficiently sophisticated.

I do know, participating as part of team Canada with both ISED and BDC, which are more involved in those sectors, that there are discussions around what the specific needs of those companies are, given that they are real estate-based and given that they are dependent on the flow of traffic, and what actually could be done.

That's one that I know my colleagues are working on but that EDC is less involved with.

[The Chair, Liberal, Wayne Easter]

Is that it, Michael?

[Michael McLeod, Liberal, Northwest Territories, NT]

That's it. Thank you.

[The Chair, Liberal, Wayne Easter]

Peter, I believe you had a quick question.

Mr. Julian.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Yes, thanks very much, Mr. Chair.

A lot of businesses have said that they have had difficulties accessing liquidity. Do you feel in any way that this program has had an impact on actually diminishing what the banks should be doing which is providing liquidity to a lot of businesses outside of these programs? Under this program, the banks basically get a guarantee, so for them it's a no-brainer. They get the guarantee. It's a sweet deal. They get the guarantee from EDC. They assume all the profit from that transaction. Very clearly, from all of our hearings, it has proven to be true that the banks are simply not providing supports outside of these programs, under which the federal government or Canadian taxpayer provides all the guarantees. They are not providing the supports. Do you feel this has had an impact in a negative way in that sense?

[Mairead Lavery]

We were very careful, Mr. Julian, when we struck the program to make sure that it was complementary and that it was bringing the private sector along. It's not a 100% guarantee that it is for new funding, and to actually get the guarantee the banks have to extend new credit and then they get, in the small case, an 80% guarantee and as we move up to the larger companies they get only a 75% guarantee. We've been very careful in the design of that program to actually bring the private sector along with us. That's one of the funding principles of EDC, which is to be complementary and commercial. By remaining commercial, we can ensure that we can step into commercial arrangements and then those that are complementary, making sure they are done with the private sector. We do not want to crowd out the private sector.

[The Chair, Liberal, Wayne Easter]

Thank you. We will have to end it there. We are at the designated time. That was good information.

On behalf of the committee, I want to thank Export Development for the work it does as a company and to thank the three of you for coming as witnesses today and answering our questions. We are an exporting nation, so you are a crucial cog in the wheel of the Canadian economy.

Thank you again for your presentations. I believe there are a couple of questions on which you can send the information back to the clerk.

With that, we'll suspend for a few minutes while the clerk arranges the next panel.

[The Chair, Liberal, Wayne Easter]

We'll reconvene. The meeting is called to order.

This is the second panel of meeting number 35 of the Standing Committee on Finance.

Pursuant to the order of reference from the House, we are meeting on the government's response to the COVID-19 pandemic. We're pleased to have with us, for the next hour and a half, from the Business Development Bank of Canada, Mr. Denham, president and CEO; Jérôme Nycz, executive vice-president, BDC Capital; and Karen Kastner, vice-president, partnerships and government relations.

Welcome, folks. If you could hold your remarks to 10 minutes or thereabouts, that'll give us ample time for the committee to go to questions.

I imagine, Mr. Denham, that you are leading the presentation and we'll go from there.

Welcome.

[Michael Denham, President and Chief Executive Officer, Business Development Bank of Canada]

Yes, Mr. Chair, and thank you very much.

I want to start by thanking all the members of the committee for your service and for the work you do, especially during these challenging times. Canadians are counting on solid leadership, and I'm very pleased that the committee members are providing it.

I also want to reiterate, Mr. Chair, that my two colleagues are with me. In particular, Jérôme Nycz, who is the EVP for BDC Capital, will answer detailed questions on our pandemic response as it relates to venture capital. I'll make sure that Jérôme has a chance to answer those.

I know that BDC doesn't require a long introduction, by virtue of our 75-year history and the fact that we have been mentioned a fair bit in the media since the start of the pandemic, but for the record, I just want to remind folks that BDC is Canada's only bank that focuses exclusively on entrepreneurs. We're a Crown corporation that reports to Parliament through the Minister of Small Business, Export Promotion and International Trade.

We operate at arm's length from the government as a lender and as an investor. In this sense, we complement rather than compete with private sector financial institutions, and we're not in the business of providing grants. We take on more risk than other financial institutions, and when times are tough, as they are now, we like to step up and we expect to step up. We also have venture capital and advisory offerings.

What I would like to do is describe the listening to entrepreneurs that we've been doing and share with you as well the direct and indirect measures that we've undertaken to help companies in response to COVID and also in response to the drop in oil prices.

We've done six surveys, both of clients and non-clients, basically once every two weeks since the crisis started. These are published on our website. Since the beginning of the pandemic, the sentiment has improved. Entrepreneurs are still quite concerned—don't get me wrong—but the sense of panic that existed initially has subsided as entrepreneurs have taken stock of the situation and the host of relief measures now available to them. Let me illustrate.

In response to the question, “How worried are you about the impact of COVID on your business?”, 83% were concerned at the end of March. That number is down to 69%, as of midnight. Similarly, on the ability to borrow, 36% were concerned at the start of April. That number is now down to 20% in May.

We're also seeing sentiments improving around several key business dimensions, including the ability to keep employees on payroll, at 47% then versus 65% now; ability to repay debt at 45% then and now at 60%; and, on keeping businesses open, 37% then versus 61% now. In fact, concern is growing more about the ability to meet demand and the lack of personnel to do so. Notwithstanding these improvements.... Don't get me wrong, because the level of concern in absolute terms remains very high, but I do want to highlight that there has been some limited progress made in terms of levels of [Technical difficulty—Editor].

On recovery, 76% of those surveyed feel ready to resume their activities, with 50% saying that it will be easy. The top lessons entrepreneurs have learned, which they have shared with us, are the importance of good cash flow and an emergency fund, as well as expense control. Looking ahead, 36% plan to reduce their expenses and 32% to broaden their offering, and 30% plan to sell online.

That's a summary of what we've heard in our extensive surveying of entrepreneurs.

Moving out of BDC's activities to our direct measures, we introduced a postponement of payments for up to six months free of charge for existing BDC clients with total loan commitments of $1 million or less. We've done almost 37,000 of these postponements, representing more than $800 million in cash flow benefits to our clients and $16 billion, or about half, of our existing loan portfolio. The volume of requests for these postponements continues to decrease. Now we're down to about 30 per day from a peak of 1,200 per day in late March.

We're also authorizing new direct loans, with an online financing loan of up to $100,000. We've drafted this to use a higher risk threshold than normal. We're accepting lower credit scores than had been the case, given the uncertain times, and we reduced our pricing.

We're also offering working capital loans for up to $2 million providing flexible payment terms and payment postponements for the first six months. We've reduced pricing on this product as well.

Application rates for these loans were tremendous early on. We received literally more online applications for working capital loans in the two weeks after announcing our first wave of measures back on March 18 than we typically do over a full year.

I'd also like to note that since this peak, demand has been normalizing, and seemingly in parallel with the improving sentiment of entrepreneurs, demand for online loans through BDC continues to fall. Notably, online financing applications are dropping gradually from about 80 per day, due to the Canada emergency business account and other emergency measures that have been made available for entrepreneurs.

Together, all told, we've authorized almost 10,000 direct loans for nearly $2 billion since our fiscal year started in April. Compared to our normal levels for these types of loans, this represents eight times more in terms of volume, and almost 14 times more in terms of the total value of the loans we've authorized.

Again, our debt solutions are intended to complement the other liquidity support measures that federal and provincial governments have introduced. Indeed, many SMEs have ended up opting for these solutions as they're sometimes preferred as the only solution they need.

To help early-stage tech companies in consultation with the CVCA, which is the Canadian Venture Capital and Private Equity Association, and Réseau Capital, we've put in place a bridge financing program—this relates to venture capital—to match a current financing round being raised through qualified existing and/or new investors into eligible Canadian VC-backed start-ups. The program is ideal for high-potential companies that have investor syndicates willing to support them. BDC invests alongside these syndicates.

To date, we have done about 23 deals totalling $45 million of investment. We originally announced the size of this bridge financing envelope to be $150 million, but based on the demand and the conversations we've had with VC-backed companies, we've increased the size of this program to $300 million based on this assessment of the market.

BDC also offers advisory services. At our advisory services, we want to make sure that Canadian businesses have all the information they need to cope, pivot and recover once the crisis is over. We're doing this primarily through bdc.ca—primarily free of charge—including advice for entrepreneurs in the form of tool kits and articles on their key performance indicators.

There have been just over two million sessions so far on bdc.ca, including close to 25% that have gone to specific COVID-related viewing pages. We will continue to make sure that businesses are aware of this free information that we're providing. Three new COVID-19-themed solutions are now available to address the most pressing issues. We've created a resource tool for entrepreneurs, summarizing federal and provincial COVID supports. This summary tool has been downloaded over 6,000 times.

BDC can't do it alone. Inspired by the experience of the 2008 financial crisis, we're also involved with our shareholder, EDC, and Canadian financial institutions in BCAP, the business credit availability program. The intent, as you all know, is to partner with private sector lenders to provide incremental credit into the system on market terms on a risk-sharing basis.

Only the banks, along with other commercial lenders, can provide the massive reach and the speed that the economy requires now. The speed comes from leveraging their existing banking relations to minimizing the time-consuming back and forth known as “know your client”.

Banks have a key roll to play in this program, as do credit unions. Small and medium-sized businesses can get support through a co-lending program for their operational cash flow requirements through BCAP. Eligible businesses can obtain up to $12.5 million through the program, which will be risk-shared 80% by BDC and 20% by the financial institution. This broadens our reach very significantly. This solution complements the EDC export guarantee program, which I know you discussed earlier today.

Our program launched on April 24. Eighteen financial institutions are now signed up, with dozens more in active negotiations.

Now, reporting on volume is dependent on the FIs and will involve a lag, so we don't have the volume information just yet, but I will be pleased, very pleased, to come back to this committee with the banks to report how the program is going.

Also, as part of BCAP, BDC announced a mid-market financing program to make additional credit available, up to $60 million per business until or before September, working closely with the companies of the primary lenders. That means loans are meant to be used to fund operational cash flow needs for a 12-month horizon, which will in turn ensure a degree of continuity of operations during this period of uncertainty.

It's structured as a junior loan, and it serves as a bridge, which is very light on cash flow to a point in time four years down the road. I'd be happy to discuss the mechanics with the committee when we get there. This facility will be launching in a couple of days. We're just finalizing now the legals with the bank and have included support for all sectors, including oil and gas, as previously announced.

Looking ahead to the fall, BDC will be there in the recovery, as we've been in the past, including during the credit crisis. We'll work with the government to make sure we share our market insights as the situation continues to evolve. Regarding loan offerings, we'll stay vigilant and continue to adapt to evolving needs as the economy ramps up. We'll ramp up in a commensurate way to help businesses invest and to help them grow. In particular, we can expect that Canadian businesses will continue to digitize and to adapt to the new reality, and we'll work to minimize the risks on their supply chains.

Thank you for your attention. I hope this lays a useful frame for our discussion.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Denham.

We will go to a six-minute round starting with Mr. Cumming, followed by Ms. Dzerowicz.

James.

[James Cumming, Conservative, Edmonton Centre, AB]

Thank you.

Thank you for appearing today. I was glad that we were able to get BDC here so we could hear how your programs are working.

You've described an incredible volume, some cash out the door and large application volumes. How have you adjusted your staffing levels to deal with that demand? What would be the comparable time of application to funding year over year, given the volumes you're experiencing?

[Michael Denham]

This is an ongoing challenge that we're dealing with, but we've been able to move people to our key loan processing bottlenecks. For example, as I mentioned, when the crisis first struck in late March, we received in a couple of weeks as many applications for loans on the online financing platform as we do in a year. That type of volume uptick is not something that any scenario or planning exercise would pick up.

We have moved people from parts of BDC that weren't as busy. We've trained them up very, very quickly. We have done our best to disaggregate the work so that we can simplify some of the tasks for these people. These folks have been stuck in to get the work done. Depending on where the queue is forming, we've done our best to simplify our requirements and move people to the bottlenecks to make sure we are moving as quickly as we can.

Frankly, to your question, when all this started in March, we did our best to respond, but again, it was such a huge uptick in volume that we weren't able to meet the service expectations of entrepreneurs. That frustrated them, and that frustrated us, but now we're getting back to a zone where service levels and turnaround times are getting back in line with what we've done historically, and we're picking up much less frustration from our clients.

It took us a while to get to this point. It was chaotic and, frankly, slow at the beginning, given the volume, but bit by bit we've made improvements, adapted and moved people, and I feel we're back in a good place right now.

[James Cumming, Conservative, Edmonton Centre, AB]

I spoke to one of your clients, one of the accounting firms here, and they expressed their frustration. The message to them is that, if they aren't an existing client, you just cannot take on any more applications. Is that the message that's going out until you deal with the backlog, or have you put processes in place that can deal with this emergency funding? Really, what we're talking about is emergency funding, and emergency to me isn't five, six or eight weeks. These companies need money, and they need it relatively quickly.

[Michael Denham]

I totally agree. You can imagine how much feedback I get from individual companies and entrepreneurs who don't feel as though they've been well served, but there was no priority given to current clients versus companies that don't currently work with us. When I look at the loans we've authorized since the crisis started, the number of new clients we're authorizing loans to is up significantly.

I'm not challenging what you were told, but the person from our side who said that to the individual you reference wasn't properly informed, because there is no priority given to current clients. Frankly, we're doing our best to satisfy the needs of all entrepreneurs with viable businesses who request help.

[James Cumming, Conservative, Edmonton Centre, AB]

Do you have actual measurables now of where you are in that loan application process? Believe me, I understand it when you have a peak in volume. I get it and I have empathy for that, but there should be some measurables. Were you at two months and now you're at six weeks? There must be some measurables that are in place now. What could I tell businesses to expect if they apply tomorrow?

[Michael Denham]

Again, it's depending on the type of loan and the complexity, obviously, but let's just keep to the online loans, which are unsecured loans below $100,000, for the sake of simplicity. Our turnaround times now from application to authorization are two weeks and shrinking. We still have these additional resources we've brought to bear. They'll continue to eat into the backlog, so our plan would be to get down to service levels of within a week, which is our norm, hopefully by next week or the following one. We're almost there, but not quite.

[James Cumming, Conservative, Edmonton Centre, AB]

You mentioned the mid-market financing program and the oil and gas sector financing programs. On your website, you characterize them as different programs, but you did mention them together. Are they dealt with as separate programs?

Also, you said “days”. We're often hearing that from the politicians. Days turn into months. In the oil and gas sector, it's been from the announcement politically.... It's been well over two months now. In fact, I think it's going on three months. Can you elaborate a bit on those two programs?

[Michael Denham]

Yes, and again, we're not pleased with the lag in timing, either.

They are one program. Our chief risk officer would be here with Jérôme, Karen and me right now, but he's actually in a room with lawyers from Gowling's and McCarthy Tétrault finalizing the terms of the contracts with the banks. It's the same solution from our side.

The only difference is that for E and P producers, oil and gas producers, it is important to get their reserve base bolstered. What you just heard from EDC in terms of their guarantee for their reserve base is actually an important first step to make sure that the immediate cash flow requirements are met for the oil and gas companies, and our junior loan comes on top of that as liquidity for the future. Once you get outside of oil and gas, you don't have the same sort of reserve base lending dynamic. Our traditional junior loan works on its own. It's the same product, but it's more hitched to EDC's guarantee for the reserve base for oil and gas than it is for the other sectors.

That's a complicated answer to your question, but I hope it's clear.

[The Chair, Liberal, Wayne Easter]

Thank you, James. You'll have another chance a little later on.

Next is Ms. Dzerowicz, followed by Mr. Ste-Marie.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Chair.

I want to say thanks to you, Mr. Denham, and to your team, for the important work that BDC is doing to support our businesses during this unprecedented time and to support our economy.

When this all started, the federal government was introducing a whole series of programs right away. We introduced the Canada emergency business account. We went to phase one, phase two and phase three, so it's been an iterative process. Do you think it's been a good and effective model in terms of putting this program into place?

[Michael Denham]

The one perspective I can give you on that is the effect it has had on entrepreneurs and the liquidity they need. From our surveys of entrepreneurs, for example, having access to that $40,000 has been very significant. One of the reasons why I think and we think that sense of panic has gone to a lower level of concern and there's much less demand now on us for online financing loans, etc., is that CEBA has provided a very important source of financing for the hundreds of thousands of clients and companies that have taken advantage of it. It's been a big source of pressure relief and an important source of liquidity. We see that through our surveys and the reduction in demand on BDC for loans.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you for that.

My next question gets into the data. I think you were talking about some of the surveys that you've been putting out, and I think you've given us some numbers as well.

Do you have an accounting of who is actually receiving loans and how much they're actually receiving? Is that publicly available data?

[Michael Denham]

It is. The loans we provide are direct loans. Of course, we track everything—who the clients are, what their credit scores are, what industry they're in and where they are located—but that is proprietary, private, confidential information between the BDC and the individual.