Subcommittee on Canadian Industrial Sectors Committee on March 31st, 2009

[Benoit Daignault]

Yes.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Do you have a component in Canada and Quebec to increase demand? Does that concern you?

[Benoit Daignault]

We have been active in Canada for years. Our corporation was founded 65 years ago. However, there have always been certain limits in Canada because our mandate is to support foreign trade. That means that we'll support a Canadian business, we will assist it to the extent that it has an export contract, to the extent it is involved in international trade.

As a result of the last budget, EDC has the option of temporarily supporting not only international trade, but also what is defined as domestic trade within Canada, to help fill the void—that Ms. Métivier described a little earlier—left by the financial institutions. We are able to provide temporary support for businesses in Canada doing business in Canada. EDC will support small and medium-size businesses through guarantee programs in partnership with the banks, to the extent that a financial institution believes in the business. The commercial point of view is important for BDC and EDC as well. We operate in accordance with business principles. In the opposite case, that is to say if the relationship between the risk and return were not at market levels, we might be a concern for the World Trade Organization because we would be providing a kind of subsidy to business. That's not part of EDC's mandate, or of BDC's mandate either. We will try to help the banks finance their clients internally.

You talked about forestry a little earlier. We can also provide assistance through our short-term insurance program. When a local business is active in the region, it is often part of a supply chain. That chain is often controlled or managed by major corporations. EDC will provide insurance or enable a business that sells to that major corporation to have protection through insurance so that that company can manage its risks. If I am an entrepreneur in the regions and I want to sell to a major paper maker, I can get insurance from EDC that will enable me to sleep at night because it will ensure that I'll be paid by that business.

As the risks increase within a given supply chain, demand for that kind of instrument increases as well. We've seen that in a number of sectors, including the automotive sector.

[The Chair, Conservative, Dave Van Kesteren]

Thank you.

Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thanks for being here today.

I want to start with a bit of global context, if I could. There have been many commentaries from outside of Canada. We've read comments in Newsweek, The Economist, the London Telegraph, and The New York Times on Canada's relative strength compared to other countries.

The New York Times recently talked about the American banking system, saying, “There is no time to waste. Reconfiguring the American banking structure to look more like the Canadian model would help restore much-needed confidence in a beleaguered financial system. Why not emulate the best in the world, which happens to be right next door?” The World Economic Forum ranked our banking system as the most secure in the world. The Economist said, “...in a sinking world, Canada is something of a cork. It's well-regulated banks are solid. ... The big worry is the fear that an American recession will drag Canada down with it.” There are several more quotes that I won't read, but that are very, very similar to that.

In terms of that global context, what's the difference here in Canada?

[Edmée Métivier]

Maybe I can try it, and Benoit can add to it.

When it comes to the difficulty that we're seeing at the moment, we were caught by the fact that our next-door neighbour was the largest trading partner of a lot of our clients. I would say that of the exporters that we have in our portfolio, which is close to 7,000 companies out of 28,000, 80% of them were exporting to the States. All of a sudden, their pipeline of sales dried up.

Some of them had already explored alternatives to that, and therefore they were lucky; or I should say they had the foresight--because a lot of these entrepreneurs are very good at what they do--to start looking at other markets: Asian markets, European markets. So those that had already established networks elsewhere than just with the States are actually doing well. I look at my portfolio and I see that the sales volume has gone down, but they've been able to compensate for a lot of it.

Over the last 10 years it was easy to do business with the States. They were there and the market was growing, and there was a lot of money flowing between the two countries. It's not that way today. What we have to do—Benoit was right—is continue to help our entrepreneurs in Canada to look at alternatives to the U.S. market. So we do. Even at BDC we have a globalization program. For our manufacturing companies, we're systematically touching base with our clients to talk about alternatives, actually, to the U.S. market. We work with them, with our consulting arm, as well as with DFAIT and EDC to try to help them with their plan to steer to other markets.

Having said this, the global economy itself is affected. I was in Asia last week. It's not only North America. In Asia, too, the volume of transaction has gone down. China, as a manufacturing country, is not as active as it was six months ago. You can sense that in Vietnam; you can sense that in Korea. Europe is also affected. You can see that there's a standard that's going down at the moment. We're going to have to face that. What we have to do, from our perspective, is support the companies and the entrepreneurs who have the foresight and the wherewithal to actually steer their company in the right direction. There's no single answer for all of them. Each one is different, depending on what they're doing, on their type of business, basically.

I think that's the difference between the States.... It's not a question that our banks were sloppy; they're not. I believe the Canadian banks are well managed and well regulated by the Canadian government. They have their appetite for risk, which may be different from what we would wish; nevertheless, they're well managed. So they're trying to compensate, but I have to say that some of the behaviour of the departing players in the financial industry also created the problem that we're facing. There was credit granting that was outside the conventional norms of financing. I've been in this business for 30 years, and this is my third recession. So there was, in my view, behaviour that was not acceptable and it created part of the problem that we're facing today.

Benoit, perhaps you want to add to my comments.

[Benoit Daignault]

Sure. Merci, Edmée.

Well, I have a few reactions.

First, I would say that being global is better. We hear a lot of negative stories and we see a lot of negative stories in the papers today, but every day we see great stories at EDC around companies going to Brazil, going to Asia and the like, and having a lot of success. We should not forget about that, because I strongly believe that diversification, from a country and geographical perspective, is a great way to build Canada's wealth and competitiveness.

Just to go back to Madame Métivier's point on the practices, from the lending side that we have seen over the last couple of years, it was on both sides. It was not only the risk assessment, but it was also the pricing assessment. Money was cheap, and as a result, companies were able to get money that did not reflect their actual risk. As a result now, the companies are suffering on two sides: not only is the liquidity not there, but on top of that, the remaining liquidity is very expensive. Now it's probably going the other way: instead of being not expensive enough, credit is too expensive right now.

And there are some issues in terms of pricing risk currently. On certain deals, we see the private sector pricing anywhere from 400 to 800 basis points over benchmark. So it's very difficult just to understand pricing in the current market.

The last point I would like to make is regarding Canadian banks. EDC recognizes the financial services in Canada as a sector of expertise, and actually, we support Canadian banks in their international ventures. There are many Canadian banks, now more and more, that are looking outside Canada to expand their market, and we're supporting them from that perspective.

[The Chair, Conservative, Dave Van Kesteren]

Mr. Allen.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Mr. Chair.

Thank you to the witnesses for being here this morning.

Perhaps I'll make a statement on the banks, because I hear what Mr. Daignault says about Canadian banks going abroad.

It's absolutely correct, as Mr. Lake pointed out, that Canadian banks may be on a sounder footing than those of their international competitors, so thank goodness we didn't allow them to merge 10 years ago. Somebody had some foresight, it seems to me, when they opposed those mergers when someone decided to bring them up. I'm glad we were able to make folks understand that.

But I love revisionist history. It's always marvellous stuff. I actually studied history and political science in university, so revisionist history is always a great thing.

But when you talk about supporting banks as they go abroad, it seems to me that a few of them, not all of them, also got themselves exposed to some risk that perhaps they wouldn't have exposed themselves to had they been using the same sort of risk management techniques in this country when they ventured abroad and had stuff on their balance sheet.

And I call it “stuff” because, really, that's what it is these days. I don't think it has any intrinsic value, and it probably didn't have any intrinsic value at the time. So I'll call it stuff, for want of a better term, because there's a whole pile of it, whether it be ABCP or whether it be other derivatives or any other kind of mechanism. It's a bunch of stuff, and the market has difficulty in measuring what exactly it is worth. That has washed itself back into what I would call the real economy, where folks actually make things and supply services to us in this country and to those abroad, and has caused our folks who are involved in real economy—which eventually means workers, and those who work for a living—to feel the adverse effects of that stuff causing them to be unemployed and businesses to actually close and go into bankruptcy, receivership, and just disappear.

Based on all of that, as I looked through your presentation, Ms. Métivier, you say here that about 3% of the Canadian term lending market is the approximate piece of the market that BDC has. It would seem to me that at any given moment in time, 3% may have indeed been a decent piece to play in when the economy was sort of moving along. But at this moment in time it seems to me that's lacking. And I don't think that's a fault of the BDC, and I want to make that clear: I don't believe that's the case. But it seems to me—and I'd like your comment around it—that if indeed we can't get the regular lending institutions to actually come back into the market in a meaningful way that will help our exporters, manufacturers, and service industries, do you see a greater role for the BDC to play in the economy that is greater than 3%?

[Edmée Métivier]

The answer is definitely yes. Mr. Allen, I really appreciate your question.

BDC, by its act, was asked to be complementary. Complementary means that you're doing what other financial institutions are perhaps not willing to do, and complementarity also evolves with the context. Our complementary role today is to take a greater part of the marketplace, and that's happening as we speak.

On average, every year the portfolio of BDC would grow by about $500 million to $600 million. This year it will grow by twice that size, and I expect that it's going to continue for the next two or three years. We started, actually, playing a greater role in September of last year, getting closer to mid-sized companies that were coming to us and saying, “We don't have anybody to finance us anymore, because it has stopped.” We're getting involved in larger transactions. We're getting involved in smaller transactions. Our market share is growing.

The 3% that I mentioned is data from 2007. I believe that when we measure it next time, it will be bigger than that. So you're quite right, our complementarity is going to require from us that we take a bigger share of the term facilities, and we will.

[Malcolm Allen, NDP, Welland, ON]

When you talk about taking that larger share, I compliment the BDC for doing that. It seems to me that if we're going to unglue this system and get credit flowing back to business, which is really its lifeblood, to make sure it can actually continue to function and hopefully get back on its feet, then markets will eventually return. And we need to be prepared to take advantage of those particular markets when they do reappear.

If we don't have that lifeblood in the system, if, as Mr. Daignault said, the pendulum has really swung the other way, which I think it is a correct assessment, from the perspective of where you basically walked through the bank door 18 months ago and they would have fallen over themselves to give you money, they now seem to be gone on vacation somewhere, where they don't want to lend money to anyone. Regardless of how great an asset base you may have, it seems they don't have any preferred customers anymore.

I noticed that you said in here that a preferred customer is someone who has a long-term relationship. Some of the calls I get at my constituency office are from small and medium-sized businesses, which are saying, “I've been at the same financial institution for 25 years and I'm being squeezed out.” These aren't businesses that have international exposure, and they are not auto related. They're being squeezed out simply because the credit market is tightening. They become the aftershock, if you will, of that particular tightening.

When I look at your statistics on page 3, where you talk about 15,000 such contacts compared to 9,000 last year, I see where the increase is coming. Perhaps you could let me know whether the uptake is the same now as it was a year ago. In other words, you're at less than 10%. You're seeing 15,000 contacts, but your conversations have produced more than 1,200 referrals, which is running at about 8%. Was it indeed that same percentage when you had 9,000 contacts? Is that uptake about the same, or is it greater?

[Edmée Métivier]

The difficulty we sometimes have is in actually making sure banks don't give us their problem. So the uptake is a little bigger than it was a year ago. Having said this, we sometimes just have to say to the financial institution that we cannot help in this particular case.

Most of the time when they contact us, it's not only for financing, it's also for consulting, because we do have a consulting arm. We did $26 million in consulting last year. We're going to end the year with $26 million in revenue. I use revenue because it's the easiest way to measure, but it represents about 2,700 contracts that we did for small businesses.

The average size of a consulting project is $10,000. What we do when we go into a business is help the entrepreneur figure out what the next step is for his or her business. We've seen an uptake on strategic planning, we've seen an uptake on human resources planning, and we've seen an uptake on efficiency planning, in which a company says, “I've got to reduce my costs; how do I do that?” So BDC will step in.

When we get a call from a financial institution, they don't have the consulting arm, so it could be for consulting or it could be for financing. Sometimes actually it can result in both. Most of the time what we try to do is actually look at the company and see if we can help them without additional financing. So we will use the consulting arm to do that.

Of the 15,000 contacts, it's not always a referral; it's sometimes a financial institution calling us to discuss whether or not there are certain things we could do to help them. We don't touch operating facility. That is and has been the realm of financial institutions forever. What we're going to do this year, though, which we've introduced, is the operating line guarantee that I was suggesting earlier. That will start this week. That's new because there was no need for us to do operating facility in the past. They were there, and there were so many players that they were actually tripping over one another. Now there are fewer players, so we're probably going to have to shore up that activity with them.

[The Chair, Conservative, Dave Van Kesteren]

Thank you.

Our next round is five minutes. Mr. Garneau.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you.

Mr. Daignault, I'll go to a specific example. Bombardier is trying to sell its CSeries. If there was a large demand for EDC's services in helping secure some of those sales, my question is, do you limit yourself in particular sectors to how much you are prepared to expose EDC money, or do you look at each situation on a case-by-case basis?

[Benoit Daignault]

We have a sector approach, and aerospace is obviously one sector where we're very active, as you know. Instead of answering for the CSeries, I might want to draw a parallel with the regional jet story, because it's a very good illustration of what will hopefully happen with the CSeries.

EDC has been very active in the regional jet market, financing customers--buyers of Bombardier's products--as opposed to financing Bombardier themselves. So our portfolio is essentially a portfolio of airlines and companies that are buying Bombardier's product. It is public information that the exposure is in billions of dollars. Just this year we did more than $2 billion of financing for Bombardier's products.

The reason I want to talk about the regional jets is that we did reach some limits in the past regarding the exposure we had on the asset base and on the sector base because we have a single obligor limit, we have sector limits, and we have asset limits.

We have been able to use, in certain cases, the Canada Account, which enables us to essentially use the Government of Canada's balance sheet as opposed to our own balance sheet to add capacity. And we also structured some asset-based insurance, which enabled us to actually increase our own capacity from a balance sheet perspective.

So as we look at the strategy for the CSeries, we will likely use the same tools. I would say that on top of that, the difference with the CSeries is that there is going to be some production outside of Canada and we will likely leverage the local ECAs to actually come up with a more comprehensive package, build more capacity, and to be able to respond more quickly to the future buyers of the CSeries.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Madam Métivier, you mentioned that the situation for small R and D companies is difficult, specifically with respect to venture capital. At a previous committee, I heard you mention that you would be ready to share the views you offered, and I'd like to ask you to provide them to us.

How would you differentiate BDC from private companies that provide venture capital to firms? Are you basically the same, or are you different?

[Edmée Métivier]

We are different, because BDC has always taken a long-term view on all of our investments. We currently have about 150 technology companies. I'm talking about high-tech companies—in biotechnology, information technology, nanotechnology. These are companies that represent the future of Canada. They're at risk, all 150 of them, because there is no venture capital available in Canada. We are going to try to support the best ones. They're not all equal. We're going to continue to invest and try to help the best quarter of them, the best 30% or 40%, through this rough time. At the moment, there's no money available in the marketplace. The longest investment that we've had in this portfolio is well over ten years. We've been a shareholder of that company for over 10 years. Actually, I think it's closer to 12. We take position and wait for the right opportunity for them to become wholly private or public companies. Most of them become public eventually.

There are a lot of successful companies that the BDC has built over the years. If you go back into the history of BDC, Rogers Communications got its first loan with BDC. Ballard and Tundra were created by BDC. I can name many of these companies. Today, what breaks my heart is that if we let go of all the technology companies into which venture capital has been invested, once this recession is over you will have to start the process of innovation again in Canada, and you will have lost an entire decade.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you.

[The Chair, Conservative, Dave Van Kesteren]

Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Madam Métivier, the Canadian secured credit facility is a complicated program. When I'm trying to explain it to my constituents who aren't finance majors, it's difficult to understand. You state that you'll help to “revive the securitization market through the purchase of term asset-backed securities”. Most people, rightfully, wouldn't understand what that means. Could you explain the secured credit facility in a way that an average non-finance major could understand?

[Edmée Métivier]

You're right, it's getting less complicated, actually, as we work on it. Even for us at the very beginning, we said, what is this? Now we're getting it.

I'm going to go back to your comments, Mr. Allen, about stuff on a balance sheet. As a matter of fact, I like that: stuff on a balance sheet.

I'll use a simple example. If Edmée Métivier purchased a car two years ago and decided to use a lease, she didn't actually purchase the car; she leased it, and that contract would have been financed by whatever company she bought it from--let's say Nissan, GM, or the like. They would have provided the financing. To fund that financing, they would eventually have a pool of leases. They would put 100 Edmée Métiviers in a pool, so they would have 100 leases for the same amount and with the same characteristics and profile. They would have bundled that and sold that on the market, and Benoit Daignault, who's an investor and has more money than I do, would have purchased a portion of that asset. So that asset was actually guaranteed by the lease that I had originally taken, and Benoit would have funded an investment. He would have said, “I have $5,000, $10,000, or $25,000 and I want a return on this.” That's how the market would have done it.

To get between him and me, there was a series of transactions being done. GM, for instance, would have funded it by going on the capital market and getting short-term financing to be able to fund this until they got to 100. When they had 100, they then would have sold the bundle through a conduit on the marketplace. Some would have gone directly to the marketplace. Others would actually have gone through a financial institution. If it wasn't GM but a smaller company that we don't know much about, they would probably have gone through a financial institution. The financial institution would have waited to have a bundle and would then have gone to the marketplace and sold it.

Once I've sold it on the marketplace, I can continue doing leases. I can go to somebody else and do other leases, because I've pushed that out of my balance sheet and up comes liquidity, which allows me to continue the cycle. Come September, this cycle doesn't work anymore, because GM goes to the marketplace and suddenly is not able to raise even the short-term financing it needs to support the lease that Edmée wants. It starts there. All commercial paper is stopped. The market is not working very well.

In addition to that, for all the bundles of Edmée Métiviers they had, they couldn't sell them on the market, because Benoit said, “You know what? I don't like you anymore. I don't want to invest my money into this because it's too high a risk, and even if you offer me 20% I won't take it, because I have no appetite for that risk anymore.” So you can see that this stuff actually got stuck on the balance sheet, which means that we don't have cash to be able to support the leasing anymore.

So what BDC has been asked to do is to purchase those asset-backed securities that are right now sitting on some of the balance sheets of the financial institutions and the other players. What Finance has said is that it will be not only the financial institutions but anyone, actually, who fits their criteria, and Finance criteria include the fact that if you're not regulated you will have to become regulated. I believe that is the right thing to do, because part of our problem today was created by those unregulated companies that behave in a fashion that is different from that of the regulated companies.

So in a nutshell, Mr. Lake, the $12 billion program is there to try to unclog the balance sheet and kick-start the vehicle market, so that if Edmée wants to go and get a lease today, she can have access to that lease. There are three ways to purchase a car: you pay cash, you lease it, or you borrow the money and pay the full amount right from the beginning. Over the last 15 years, our consumers have become accustomed to the lease. However, if you want to lease today, you won't be able to purchase the car through a lease unless you have the best credit rating. You will be forced either to borrow the money or to pay cash.

Does that explain a little bit?

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

That's what I was looking for.

[The Chair, Conservative, Dave Van Kesteren]

That was an excellent explanation. I think that's the best I've ever heard.

Please go ahead, Monsieur Bouchard.

[Robert Bouchard, Bloc, Chicoutimi—Le Fjord, QC]

Thank you, Mr. Chairman.

Ms. Métivier, when Mr. Chevrette came to meet with us about two weeks ago, he was seeking loan guarantees that the government could not grant him because that might be in breach of the softwood lumber agreement.

Does BDC grant loan guarantees to businesses in the lumber and paper industry? If so, do you take the softwood lumber agreement or international agreements into account?

[Edmée Métivier]

In the past, Mr. Bouchard, we haven't offered any loan guarantees. There are other loan guarantee programs, but BDC did not provide loan guarantees. We're starting to offer them for operating loans as of now. I'm going to go back to the office to check the answer to that excellent question, but I don't believe that's in breach of the softwood lumber agreement.

In response to your question, that business would be eligible. We don't draw any distinction based on sectors. In our view, the important thing is the business, the quality of its management and the project, if a project is involved. In the case of operating loans, the guarantee will be given to a financial institution. If a business wants a guarantee on its operating loan, it goes through its financial institution, and BDC then intervenes.

I'll be able to let Mr. Daignault talk about EDC's guarantee program later. There are other guarantee programs in Quebec and at Industry Canada.

With regard to softwood lumber, I'm going to cite an example of a transaction that we've just conducted this week. It involves a business that manufactures wooden windows. We've just granted $7.5 million in financing to support the switch or transition of a business that has just gotten into trouble. This is one example, but we do these every day. In fact, every situation has to be examined, just like the entrepreneur who stands behind his plan, what he is contemplating and how he implements his plans. That's important for us.

Our guarantee program is mainly for operating loans. It will be available starting tomorrow, April 1, but there are other guarantee programs for loans. In Quebec, the Government of Quebec has put a number forward, as you are no doubt aware. Industry Canada also has guarantee programs.