Finance Committee on June 9th, 2020

[Michael Denham]

They take care of the adjudication, the lending, all the customer relationships and then send to us once a month a kind of master file. Once we get that master file, we fund 80% of what they've done.

Right now, we're going to get this master file over the course of the next couple of weeks. That's why I say that, once that information starts to flow, we'll have more precision. I'd happily come back with the banks to talk about, at least for this first month, what the volumes look like.

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

If the banks are doing the actual lending, do you have in place conditions such as prohibitions on share buybacks, on dividend payments and on executive bonuses, as the EDC program does?

[Michael Denham]

These are for very small companies. These are loans that are up to $12.5 million. The vast majority of these are privately owned, entrepreneur owned, so most of those provisions are irrelevant for companies of this size.

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

You don't have those conditions.

[Michael Denham]

Not for this program, no.

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

You mentioned earlier postponement of payments for six months. This is outside of BCAP. I'd be interested in knowing about provisions around whether or not companies can provide for in-kind interest and whether there's interest forgiveness as part of the program, either through BCAP or any of the other programs that BDC runs.

[Michael Denham]

What we've offered, and the 37,000 examples I described, is just for interest deferral. On a case-by-case basis, we'll deal with clients who have repayment issues, but what's been offered, what's been taken happily so, is interest deferral.

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

Okay. Does that come with fees, penalties or compound interest charges?

[Michael Denham]

No, we've waived all the fees.

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

Okay. Please lead us through this. We did this a bit with EDC as well. Basically, the guarantee is through the BDC. I would say it's somewhat of a sweet deal for the big banks, of course. What they get is the socialization of the risk. Perhaps you can correct me if I'm wrong, but it doesn't appear that there's any cap on interest rates that the banks would charge.

What does BDC charge? Is it equivalent to the EDC guarantee fees of 1.8%? Are there charges to the banks, and are there any caps on fees and charges on interest rates that go to those businesses that are struggling to make ends meet?

[Michael Denham]

We don't charge anything. It's different from what EDC is doing. The way the program is meant to be designed, it's a loan that a bank would extend to a client. It's a client the bank sees as representing more risk than had been the case. It's a client who has tapped out their operating lines of existing facilities. The client needs more liquidity, needs more money, but left to their pre-existing risk appetite and processes, the bank wouldn't be able to do anything. By BDC stepping in and taking 80% of the loan, it gives the bank capacity and a means to extend more credit without taking 100% of the risk. The bank will adjudicate and decide on the loan based on how it lends, its underwriting, the requirement to adapt its risk sweet spot for the environment, and then once a month it can pass that loan to us to fund.

We're not involved day to day like EDC is. We're not really approving anything. The premise of our program is to get the banks to move out of their traditional risk-taking and take advantage of the massive reach, scale and speed that all these private sector financial institutions can deliver.

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

You can understand that with $5 billion in profits for the big banks so far in the pandemic, a lot of people are raising concerns about the amount of largesse that's been showered on our big banks without any types of conditions. You can correct me again if I'm wrong. I gather there are no caps on fees and charges or interest rates charged to those clients, even though it's Canada that is basically assuming the guarantee on the loan. It's very sweet for the banks.

Are you concerned about the milking of these businesses, windfall profit, when the risk is all assumed by Canadians, but there aren't any caps or conditions around fees and charges, and the gouging of those companies that are struggling to breathe, to make ends meet and need this type of loan?

[Michael Denham]

We are concerned. We meet with the big BCAP banks every two weeks to talk about the program and its operationalization. I welcome feedback from all of you and others as to how it's being used, whether folks are being gouged, whether it is delivering the policy goal to get credit moving very quickly. When issues come up that need to be tackled, we tackle them. We're getting better or more frequent reporting in place for every two weeks. We'll get much more granularity around volumes, pipelines, decline rates, etc. As I say, I'd be happy to come back with the banks to take you through that.

We're trying to be as vigilant as possible to make sure that, with the banks, this program delivers on the expectations that entrepreneurs rightly have.

[The Chair, Liberal, Wayne Easter]

Okay, we'll have to end that round there.

Before I go to Marty, on Peter's question, say, ABC company has a $4-million loan with one of the major banks. That loan is with them. You come in with the new scenario to get additional capital. Is that guarantee of the 80% only on the additional capital, or is it the additional capital plus the original loan?

[Michael Denham]

It's just on the new loan.

[The Chair, Liberal, Wayne Easter]

Okay.

[Michael Denham]

The notion of this isn't to guarantee commitments banks have made. It's co-lending; it's not a guarantee. We take 80% of the value of loan, but it's only for net new money.

It's designed to get new credit flowing, rather than protect the banks vis-à-vis existing credit.

[The Chair, Liberal, Wayne Easter]

All right. Thank you.

[Michael Denham]

I'm glad you addressed that point. It's very important.

[The Chair, Liberal, Wayne Easter]

Thank you for that.

We'll go to five-minute rounds, with Mr. Morantz first, followed by Mr. Fragiskatos.

Marty.

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

Thank you.

Mr. Denham, what I wanted to chat with you about today is what some have described as the deferral cliff. We had Mr. Siddall from CMHC on a couple of weeks ago who talked about this. He said there are something like 12,000 deferrals between insured and uninsured residential mortgages.

BDC is involved in deferrals, as we just heard a few minutes ago. You referred to them as postponements, but this deferral cliff that people are describing.... I'm not arguing that these programs shouldn't be in place, but I am concerned that the ultimate effect of this will be that we're essentially kicking the can down the road. Ultimately, this money is not forgiven—you're not in the business of grants, as you said, nor is EDC—and it's going to be owing. As a banker, if a loan is in default, at some point you're going to have to execute on your security.

I'm just wondering if there has been any thought or planning or discussion with government, as we move through the ebbs and flows of this crisis, as you describe them, about what happens when we get to that point in time where these deferrals are owing.

[Michael Denham]

It's a real issue—there's no question—because there have been deferrals from CMHC, EDC and BDC, and I think every chartered bank and credit union has offered deferrals. That is an awful lot of payments that have accumulated and that have to get paid out.

I do think, looking at ourselves, that we will organize the repayments around those deferrals to make them less burdensome, but that said, it's still going to be an issue for the economy to deal with. When I've had conversations about this with some of our companies we deal with, they've recognized that they are going to be building up obligations to repay in the fall, but given the choice of the obligation to repay in the fall or to not pay any interest for the next six months, it was an obvious decision for them to make.

I think the collective deferral of payments was the right thing to do, but I think you're accurate in saying that it's going to lead to a challenge that we will have to tackle in the months ahead. I think each institution will do what it thinks is right. I know that we will be flexible and understanding—we get it—but I think you're right to put this as an important issue.

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

Yes, I think it's going to be a big issue.

Just to continue, you talked about risk and how the effect of the program is to make banks a little more comfortable in their risk-taking, which seems to be the opposite of what banks would normally be doing. Under ordinary circumstances, some of these loans probably would never be made.

I understand the reason they're being made, but what I'm having trouble reconciling, interestingly, is that when we had Mr. Siddall before the committee, he talked about the possibility of tightening their underwriting policies. In fact, they went and did it. They just made that announcement. The thrust of it was that he essentially cited COVID-related vulnerabilities in the financial market.

There we have on one side a government entity basically pulling their reins back and saying that they're going to make it more difficult for people to qualify for loans, and on the other side, on the commercial side, we're having government say, “We have to make sure there's liquidity in the business market”. I'm just wondering if you could reconcile these two approaches for me as I've described them.

[Michael Denham]

I don't want to comment on what has been said at CMHC, but I know that from the perspective of small business, which is our bailiwick, demand basically stopped, as we all know, for many weeks, and it's only now coming back. Companies were having no revenues coming in and they had bills to pay. They had rent to pay, they had people to pay, they had utilities to pay and they had accounts receivable to pay.

Frankly, the first requirement was to make sure that we got liquidity moving so that they had some money coming in, albeit in the form of loans, that they could use to pay their obligations and keep their business going. I don't think there was any choice. Look around the world. There was no choice involved, other than to get credit moving so that companies had some cash coming in that they could use to keep their businesses going.

I don't think anybody should be second-guessing that, because that was and in fact remains the right thing to do given the lack of demand and traditional [Technical difficulty—Editor]

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

I agree with you.

Just on interest rates, I know BDC has a number of floating base rate facilities out there, as many of the banks do. We've had now the former governor of the Bank of Canada on committee saying he thinks rates are going to go up. We had the PBO, Mr. Giroux, and many others say the same thing. If interest rates do start to rise and then we have the debt cliff coming that we've already discussed, I'm just concerned about what's going to happen down the road when these bills start coming due.

Do you also consider that it's likely interest rates will rise, given that they probably have no other way to go? If you put your banking hat on for a second, if you were to look out a year from now, where do you think rates might be?