Fisheries Committee on June 11th, 2009

[Blaine Calkins, Conservative, Wetaskiwin, AB]

Does anybody else want to comment?

[Craig Thompson]

I would agree with that.

[Blaine Calkins, Conservative, Wetaskiwin, AB]

I have one more question, Mr. Chair, and then I'll turn it over to Mr. Allen, who I think has some questions.

From my perspective, we understand that there are challenges in the industry. We clearly get that, and I want to congratulate BMO particularly. And Mr. Conrod, I think you've spoken eloquently on behalf of the Royal Bank, as well as providing the flexibility for fishermen. I know that the same thing happens for farmers out in Alberta, where I'm from, and it certainly is appreciated.

But from an overall policy perspective, we've heard two concerns. When I'm talking about policy, I'm talking about government policy. I heard you say that one of the issues the bank has is putting evaluation or a mechanism in place to determine the value of a licence so that it provides some groundwork, obviously, to go forward from a lending perspective. Also, obviously there's a wide range of licence values, depending upon location. Those are two things that I think are going to be very beneficial for the committee to hear about.

From another perspective, for example, we've recently announced billions of dollars to go into EDC and BDC to backstop and to broaden loan portfolios. What other policy directives could we do as a government and could the Department of Fisheries and Oceans engage in that would make the industry seem more creditworthy in the eyes of financial institutions? Is there anything else other than those two things that you've identified so far?

[Marion Wrobel]

Let me answer that by talking about the things the industry has been doing with the government, both individually and collectively, through the CBA. The government announced a number of extraordinary financing frameworks in the previous budget, including the BCAP. We've been working within the CBA with our members, the Department of Finance, and the crown financials to understand how they want us to report our initiatives, how we are working with the various crown corporations, and how we report those initiatives to the government for its own quarterly reporting.

When it comes to policies with respect to the fisheries, or economic policies in general, our members work within the existing environment. It's up to Parliament and the government to initiate those policies. Within that framework and environment, we work with our members. Our banks work with their customers to make sure they have access to the best possible credit. In more specific instances, like policies related to the fishery, it's up those participants and stakeholders who understand the industry to make the suggestions on what the policy should be like. We will work within the framework that Parliament makes available to us.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Thank you, Mr. Chair.

I want to ask three questions in three different areas: trends, risk assessment, and the arrangements you're making with the fishers now.

BMO said it has $142 million out there and RBC has $202 million. That's 5% to 6%. Can you tell me what the trend has been over the last six years? How has that number changed, gone up or gone down, over the last six years?

The second question is on risk assessment. You're on a 4.16 average now, as opposed to 5.75 in December 2008. How does that compare? How does that spread compare with the prime at those two points in time? I'm hearing from the forest industry that institutions will make them loans but that their risk premiums have gone up. A lot of people are concerned that you're willing to lend, but the risk profile is rising.

The third question has to do with the perception of local decision-making. You talked about bankers being armed with discretionary limits. RBC said the same thing—that lending decisions are made by bankers right in those communities. How do you counter the perception that those people will go into the local communities but that all the decisions are made in Toronto, Halifax, or the regional office, and they are just a small fish in a big pond?

[Marion Wrobel]

I'll answer the second question and leave it to my colleagues to answer the first and third.

Let's look at the cost of credit and that cost in relation to the Bank of Canada benchmark. The Bank of Canada benchmark, since its peak in the fall of 2007, has fallen by 425 basis points. Bank prime has fallen by 400 basis points. It's about 95% of that. That's a very close correlation. Any borrower with a fixed prime-plus contract, or in some cases a prime-minus contract, has seen a 400% basis point reduction in his loans. There have been some readjustment in some instances.

As the financial markets are starting to work a little better, we've moved into a fairly serious recession. Loan losses and loan loss provisions have gone up. In some cases, loans that were prime plus 1% are now prime plus 2% or 3%. On balance, the cost of credit to businesses has fallen. It has not fallen in all cases by 425 basis points, because in many instances it's more expensive for financial institutions to raise capital funds. In some cases, the cost of raising funds has not fallen as rapidly as the Bank of Canada benchmark. But I think when you take into account all of those factors, on average, the cost of lending to the business community has gone down.

[Peter Conrod]

Perhaps, Mr. Chair, I'll take a moment to address the three issues.

In terms of the trend in the fishing industry, the demand for credit in the fishing industry has been slower than the demand for credit in other industries. My business loans are up 9.7% year over year. Our growth in our fishing industry exposure would be less, but that would primarily reflect demand.

The second issue is with respect to the credit approval. We have a lending limit in Atlantic Canada of $7.5 million, so it's only credits above that amount that would go into Toronto. As you can appreciate, that deals with probably 98% of people in the industry who fit into the commercial market segment. My account managers typically have a 15% discretion on whatever has been approved, so it means that if we had a $2 million credit approved, my account manager on the ground could grant another $300,000 in credit, on his own decision.

The industry risk rating is only about 10% of the overall risk assessment that we do, so we rely very heavily on our people on the ground to testify to the quality of the fisher person or the person in the industry and their experience. We rely heavily on that, because that's our most unbiased source of information.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

For instance, the $2 million original credit, where would that original credit approval come from?

[Peter Conrod]

Halifax.

[Steve Murphy]

Mr. Chairman, in terms of trends, I would say that over the last year we have had three or four substantial financings that we've done to the fishing industry. So by extension, our exposures actually to the industry have been going up as a result of those financings, and as a portion of our business outstanding.

In terms of decision-making, we have within Atlantic Canada a decision authority up to $20 million, which covers 99% of the opportunities we would have. The base for those decisions would be in Halifax with senior on-the-ground leaders in all of our major centres, such as Fredericton, St. John's, Saint John, Charlottetown, and what have you.

In terms of risk in pricing, what we're finding is that we're working well with our customers. The one informative benchmark we use is our customer satisfaction ratings, simply to see how we are doing in this particular economy. They've actually been going up, so we're very pleased to see that as well.

[The Chair, Conservative, Rodney Weston]

Thank you very much.

Gentlemen, I'd like to thank you today for coming. Once again on behalf of the committee, thank you for taking time out of your very busy schedules to come and meet with the committee and answer some questions the committee has had. We really do appreciate it.

We'll take a five-minute break as we prepare for our next witnesses.

[The Chair, Conservative, Rodney Weston]

We'll call this meeting back to order.

I'd like to welcome Ms. Métivier, who is with us today.

Ms. Métivier, I don't know if you were here earlier when I discussed the timeframes. You'll hear a beeping noise from the front here. There are certain timeframes we try to adhere to for questions, answers, and presentations. We generally allow 10 minutes for a presentation. So if you hear a beeping noise up here, that's the alarm going off. I'll ask you to maybe start to wrap up at that point.

Thank you very much, once again, for joining us here this morning. I'll turn the floor over to you for any comments you'd like to make to the committee.

[Edmée Métivier, Executive Vice President, Financing and Consulting, Business Development Bank of Canada]

Thank you very much, Mr. Chairman.

Good afternoon. Thank you for having invited me. I'm very pleased to be here with you today.

I understand that within the context of your study of the Atlantic lobster fishery, you would like to know what the BDC is doing to improve access to financing. I would like to give you an overview of the BDC's activities, including a description of its participation in recent budget initiatives intended to ease access to financing. I will then tell you about the support we are offering to the fishing industry. But first of all, a brief description of the BDC:

We have a staff of 1,800 employees working out of 100 branches across Canada, including 13 offices and 150 employees in the Atlantic provinces. We offer three types of support: financing services, venture capital and consultation. We support 28,000 entrepreneurs. These clients carry out their activities in all sectors of the economy, including the fishery.

With approximately 3% of the term financing market, BDC is relatively small. Our network of branches is modest in comparison with the roughly 6,000 branches of the 6 big Canadian banks, but our 600 account managers are in direct contact with thousands of entrepreneurs every month. These conversations give us a good idea of what is happening in the market.

Currently, we can see two forces at work. The first is the recession. Many entrepreneurs are reluctant to launch new projects. They are waiting to have a better appreciation of what is in store. We see that the number of entrepreneurs seeking project financing is, as a result, lower than usual.

The second force is the tightening of credit conditions. This situation is the result of three factors: (1) the withdrawal of certain foreign banks and unregulated financial institutions because of the sharp decline in the securitization market; (2) a difficult bond market; and (3) the difficulty, for financial institutions, of giving out loans in a climate of economic uncertainty.

For those entrepreneurs who are seeking credit, what does that mean? If he or she has a long-standing business relationship with the Canadian banks or credit unions, they are less at risk. If they are operating in a sector that is strongly affected by the recession, they are at greater risk. Their risk rises again if they have lost their financial partner and are trying to establish a relationship with a new financial institution. For Canadian banks, the exit of foreign non-regulated peers means that we are straining to meet new significant demand. This is certainly the case at BDC. New increased demand has caused our portfolio to grow more than anticipated. Also more mid-size companies are approaching us, and transactions over $5 million have increased 50% year over year.

The recent budget had two initiatives to improve business access to credit, the business credit availability program, the BCAP, and the Canadian secured credit facility, the CSCF. Both are on track. I'll start with BCAP and then turn to the CSCF.

BCAP is a program in which BDC, Export Development Canada, and private sector banks are participating to help ensure that at least $5 billion in loans and credit support is made available to creditworthy businesses whose access to credit would have been restricted otherwise. It is best understood as an enhanced cooperation between private sector financial institutions and BDC, to refer creditworthy clients when there is a desire to share in the risk. Thus far, BCAP has five components.

The first one is the working capital support. BDC provides either partially secured or unsecured working capital to Canadian businesses so they can sustain their operations. In general, these businesses targeted by this program carry out too much risk for most banks. At the time of the transaction, BDC will have to make a judgment call as to the ability of the business to succeed even if it is having temporary difficulties. This part of the program will end in 2012.

The second component is referrals. Other financial institutions direct clients to BDC when they want to share risk with us. In some cases we share the term loan pari passu, half and half. At other times, the financial institution will retain the operating facility and we will take the term loan.

The third component is syndication. BDC participates in financing syndicates with others, by invitation from other financial institutions, usually to replace departing players.

The fourth component is the purchase of commercial mortgages. BDC buys a 50% share in small bundles of commercial mortgages. Our goal in doing so is to liberate capital so the other financial institution can then put it back in the market.

Finally but not least is refinancing. BDC acts as a buffer to replace departing foreign players that have exited or are exiting the market, leaving good companies without proper financial support.

We have completed all the work related to the creation of a new operating line of credit guarantee, which I understand has been of interest to your constituents. It gives financial institutions the means to guarantee an incremental portion of their clients' operating line of credit. We, BDC, provide the guarantee to the financial institution that holds the client account and act as the behind-the-scene partner throughout the process. So businesses interested in the operating line of credit guarantee should request it directly from their financial institution, which will in turn contact us.

The new BCAP collaboration is working very well. Entrepreneurs are getting more opportunities to make their case, potential deals are being referred, and businesses are benefiting in general. You may recall that in November 2008 the government announced a $350 million capital injection for BDC. We have received and already put to good use $250 million of this via our regular services and the BCAP. We recently received the other $100 million, which is to support the new line of credit guarantees. We will therefore be ready to proceed as soon as the final agreements with financial institutions are signed.

Through BCAP, we at BDC have provided more than $600 million in new financing to Canadian businesses since February. If we add to this financing the regular financing we provide as part of our usual business, this rises to almost $1.1 billion.

Secondly, the new budget created the Canadian secured credit facility, CSCF, to provide liquidity to the equipment, vehicle loan, and lease financing market. It has an allocation of up to $12 billion to purchase term asset-backed securities. Its primary objective is to stimulate economic activity by supporting sales and leases of cars and equipment in Canada. The CSCF is now up and running. We have already allocated in excess of $10 billion through two rounds of allocations to two distinct groups.

Allow me now to turn to BDC's involvement in the fishery sector, which we know is experiencing challenging times. We fully understand these challenges. We support the fishing industry across Canada. We currently have $160 million of our portfolio in support of fishermen, fish processors, wholesalers, and retailers. And this does not include the last 90 days of credit approval.

Those of you from Newfoundland will recall how our support grew after the mid-nineties cod moratorium, which saw several financial institutions reduce their presence. We are committed to continuing our support and are looking at various ways of doing so. Following the Saulnier decision of the Supreme Court of Canada, we are reviewing the value we attribute to licences and are meeting with DFO officials.

I would like to conclude now with two fundamental points, if you will allow me, Mr. Chairman.

First, it is essential to remember that BDC is an instrument of public policy and has a very specific mandate. The BDC Act requires us to limit our support to projects in which the person—the entrepreneur—is engaged, or is about to engage, in an enterprise in Canada. Second, the entrepreneur must have a continuing commitment to the business. And third, the enterprise must have a reasonable chance of success. That is the law for BDC.

While we limit our support to viable projects proposed by creditworthy businesses, we do take a greater degree of risk than private sector banks. And we price for that risk to protect our capital base, which is public money. We ceased to be a lender of last resort in 1995. We cannot support failing businesses, and we do not offer grants and subsidies.

The second essential point to remember about BDC is that its sole mandate is to promote entrepreneurship, that we actually exist to support entrepreneurs. We give every entrepreneur who approaches us a fair hearing and an opportunity to make his or her case. This, of course, includes entrepreneurs in the fishery sector.

I thank you very much for listening to me today, and I am open for questions, Mr. Chairman.

[The Chair, Conservative, Rodney Weston]

Thank you very much.

Mr. Andrews.

[Scott Andrews, Liberal, Avalon, NL]

Thank you, Mr. Chair.

And thank you for coming in today.

You talked about budget 2009 and the increase of $1.5 billion to BDC. You said you had $600 million of that out there now. Is that correct? Did I hear you correctly on that?

[Edmée Métivier]

Yes, it is.

[Scott Andrews, Liberal, Avalon, NL]

Okay. How much of that is in the fishery sector?

[Edmée Métivier]

Our portfolio in the fishery sector at the moment is $160 million.

[Scott Andrews, Liberal, Avalon, NL]

How about in the last 90 days?

[Edmée Métivier]

In the last 90 days, we just approved probably about $20 million, I would say.

[Scott Andrews, Liberal, Avalon, NL]

So out of the $600 million, only $20 million went out in the last—

[Edmée Métivier]

That would be only for the last transactions in the last 90 days, yes.

[Scott Andrews, Liberal, Avalon, NL]

So $20 million would represent how many companies?

[Edmée Métivier]

We do have about 400 companies that bank with BDC at the moment in the sector, so that would represent probably an acquisition of between 10 to 15 clients, because our average loan size is about $350,000.

[Scott Andrews, Liberal, Avalon, NL]

So that would be 10 to 15 clients who access that $20 million, right?