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

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

You said that a business that was more vulnerable got a higher rate.

[Edmée Métivier]

I would not say it exactly like that. In fact, it's the risk.

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

If the risk is higher, the rate is higher, but if the risk is lower, the rate is lower.

How do you establish that? How do you calculate it? It's no doubt complex, but could you explain it to us simply?

For example, what do you do if a business exceeds its profitability or some rate of return by a few percentage points? I'd like to have some clarification on that question.

[Edmée Métivier]

With pleasure. I'll try to make it as simple as possible.

Granting financing is an art, not a science. There's a difference between the two. It isn't done in a mechanical way. Somewhere, a human being makes a decision, particularly at BDC. Like any other financial institution, we use electronic instruments such as scoring, but it's not the technological instrument that makes the decision. The decision is made by a human being who reviews the individual's financial situation, sees where the individual stands and determines whether the management team in place is experienced or lacking experience. You have to evaluate the entrepreneurs who are behind all that.

So we assess the rates based on major criteria. We have tools that enable us to establish orders of magnitude for rate-setting. Our 600 employees in the field need parameters. Our tools enable us to form an approximate idea of rates, but ultimately it's a human being who determines the final rate, in this case the people who make the decisions concerning risk.

BDC has a special loans group for businesses in trouble. We will make every effort to save a business that turns to that special loans group, including lowering the interest rate. You have to be careful when you say that the most vulnerable pay more. First of all, we set a price based on the risk. If a business needs a helping hand, we'll review its situation and support it as far as possible, provided we still have hope that the business is well managed and can turn itself around. In fact, it's more a matter of trust than hope. We have to continue to have trust in the entrepreneur, who we consider to be the right person to manage that business.

Normally, with regard to rates, we asses the risk based on the management of the business, its financial situation, its leverage, the industry in which it operates, its strategic action plan and so on. There are six or seven components that influence the rate-setting, such as an entrepreneur's ability to reinvest in his business. You have to check to see whether he has taken all the money out or if he has kept a little to reinvest with us. A banker will invest in a business in partnership with the shareholders. We don't own that business, but we are a partner. The entrepreneur must be able to make an investment in his business. Otherwise he has no interest in the survival of his business.

These are all the factors we consider. It's not an exact science, but rather an art. You have to develop the talent of an experienced banker. Even after 30 years, you still make mistakes.

[The Chair, Conservative, Dave Van Kesteren]

Thank you.

Mr. Lake.

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

I want to move to BCAP and talk a little bit about it.

In describing it, you say that its goal is to ensure that at least $5 billion in loans and credit support are made available to creditworthy businesses whose access to financing would otherwise be restricted. I'm interested in the term “creditworthy”. It would be safe to say that virtually every company in Canada is more of a risk today than it would have been a year ago, based on the circumstances, isn't that right? Could you define “creditworthy” and say how the definition may have changed over the past year?

[Edmée Métivier]

That's a very tough question. How do you define “creditworthy” when banking is an art much more than a science?

There are elements in creditworthiness. Prior to the beginning of the recession 12 months ago, a company could have been profitable and it could have had a leverage that was reasonable. It could all of a sudden face not being profitable and still be creditworthy. It is the judgment of the banker, and that includes my judgment. When I look at a company's creditworthiness, I look at the ability of this company to withstand the next two years as a recession. Even if they lose money, profitability is only one criterion; it's not the only criterion. It's also the leverage of the company.

Now, if the company was losing money before the recession, please understand that that makes it very hard for the company to be creditworthy. If they weren't capable of being profitable when the environment was absolutely positive, what makes us think they will be profitable over the next two years and beyond?

So creditworthiness is looking at a combination of factors. Leverage means how much debt they have on their balance sheet. If they are fully loaded, 100% of their assets.... It's like your mortgage. If you have 100% of the value of your home in a mortgage, you have absolutely no room to get a loan against your house if you lose your job. Your leverage is too high. However, if your mortgage is 50% of the value of your home and you lose your job, you can probably go to your bank and say you want to raise your mortgage to 60% or 70%. You're able to get a bit of working capital out of that.

It's the same principle for a balance sheet of a company. If a company's leverage is so high that you cannot give them the additional working capital they need and they weren't profitable before the recession, chances are they're not going to survive this. Their creditworthiness could be challenged.

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

One of the things we heard from Industry Canada the last time we met was a kind of differentiation between companies that were facing cyclical challenges versus companies that were facing structural challenges. I think that's what you're talking about.

[Edmée Métivier]

Yes, that's what I'm talking about. With the example I gave of a company that was profitable before the recession losing money in the next two years, that's just time. It's not a structural problem of the company. It's a company that is well managed, that has proven it can be successful, and that is facing tough times. To me, that's creditworthy.

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

Moving into the next paragraph, you talk about five initiatives for BCAP. In the first one, you talk about large corporate clients participating in syndicates to replace departing lenders. Can you explain the syndicates? It almost sounds similar to what you were talking about the with secured credit facility.

[Edmée Métivier]

No, it's different, actually.

Let's take a company, a larger company in this case, because these would be Canadian businesses. Usually it's a company that would have an operating or term facility of about $100 million and over. The financial institution that's leading this syndicate will usually arrange the financing for the $100 million that's required, but decides, for a number of reasons, that they want to share the risk with somebody else. That's called a syndication. They will go to EDC, to Royal Bank, to any other financial institution, and they'll say, “Would you like to take $20 million and you'll be one component of this $100 million?” Five banks may come together and say they are each going to take $20 million, as in this particular case, and each will be a lender to this business.

With the CSCF, we're not going to see the ultimate customer, so we'll never see Edmée Métivier, who is the leaseholder. It's a bundle of assets. As a syndicate, I'm participating in real-time financing to a company. I know who this company is, and I can assess the risk of that company.

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

Okay, so the difference is--

[The Chair, Conservative, Dave Van Kesteren]

I'm sorry, Mr. Lake, we're out of time.

Go ahead, Mr. Allen.

[Malcolm Allen, NDP, Welland, ON]

Thank you, Mr. Chair.

We may have developed a new financial term: “stuff”. We have a new term that MBAs may have to learn.

I have a request of the chair. Mr. Garneau had asked Madame Métivier to supply us with the report. If she could supply it to the chair, the chair could then distribute it to all of us. I think we'd all be interested in seeing that. We'd greatly appreciate that.

Thank you very much.

[Edmée Métivier]

It would be my pleasure.

[Malcolm Allen, NDP, Welland, ON]

I'll go back to the unregulated group you talked about earlier that was a player in the marketplace while things were going exceedingly well and that has now retreated out of the market. You talked about the sense that the big banks and the BDC and the credit unions are playing in a regulated market and understand the Bank Act and the credit union act. And these unregulated groups deserted at a time when we really need liquidity.

No doubt when things get better they'll be looking to come back. Do you see a place for regulations that speak to the types of things we do in the regulated market when they decide to come back and play in the market? I'm talking about things like giving credit and extending credit and doing those sorts of things that help the marketplace as far as business is concerned so that the financial system works. Should we be allowing them back in to the market, or should we be telling them that these are the rules they're going to play by if they come back?

[Edmée Métivier]

I think that's a very good question. I can only answer on a personal basis, because I think this is the realm of the finance department of BDC. I believe that some form of regulation will be needed if we want to avoid this catastrophe in the future.

You're quite right, they will come back. Typically those players will come back to the marketplace when they see that they can make a buck, and typically they will try to exit before the storm starts. I'm not sure they exited this time before the storm started. That was interesting to watch.

You're absolutely right. Whether it's the same players or new players, they will come back. We have a wise government, and I suspect that this is under serious consideration. Maybe they don't need the same kind of legislation as our top financial institutions in Canada, but certainly they need some form of legislation. I'm not knowledgeable enough to suggest something.

[Malcolm Allen, NDP, Welland, ON]

I appreciate that answer. I wasn't necessarily looking to you for chapter and verse on what regulations we need. It was the sense that if they're going to come and play in the market, we need them to understand that there's a certain series of rules to play by.

This isn't the first time we've seen them come and go.

[Edmée Métivier]

No.

[Malcolm Allen, NDP, Welland, ON]

There's a certain element that comes and goes. As you quite appropriately said, there's a buck to be made, and they decided to make it. And you're right, I think they got their fingers singed a little bit on the way out this time. They weren't able to retreat before they actually took the loot and ran. They actually got burned.

I'm not suggesting that this makes anyone happy, of course. What we're trying to do is ensure that the liquidity of the market comes back into play and that we can actually help businesses get going, and consumers as well.

You talked about secured financing and you talked about how to bundle. You used the lease example. The other part of that, from Mr. Lake, is that the asset that secured that particular lease, which was the vehicle, actually depreciated in value in the first place, and it started an unravelling of all kinds of things at the same time. General Motors and a couple other folks got out of leasing vehicles because to buy the car back at the end was about 30% less than what they actually had written into the contract in the first place. A $13,000 buyback was worth about $9,000 to the auto sector when they bought it back. That's about what they could sell it for. So there was a great depreciation in all that.

I appreciate the example, because it was eminently easy to follow, because some of this stuff is not. And it seems to me that the easier and more transparent we make this system, so that we can actually follow the penny as it moves, the better off we all are. The risk becomes less in the sense that as long as you can follow it, it doesn't continue to be marked up as it goes. For each piece that moves, it seems to me--and correct me if I'm wrong--someone needs to take a piece of the penny to actually make themselves stay in business. Otherwise, they're simply benevolent organizations, and I don't think they're in the business of being charitable. So if that's the case, it seems to me that fewer steps in the process rather than more would be an advantage to businesses.

I'm not negating the fact that the financial system is a complex instrument. It is international in scope, and that makes it difficult.

Do you see any way to eliminate the number of times these instruments change hands?

[Edmée Métivier]

I believe, yes--

[The Chair, Conservative, Dave Van Kesteren]

Perhaps I could just interrupt. Mr. Allen, that was a great commentary, and actually, that wrapped up your time.

I just want to say to the members that we have reached the time when we really need to do some committee business, but I get the sense that we could go on for a long time hearing this testimony. We haven't had too much on the other side yet, but I certainly know that you have much to contribute as well, and I think we've only just scratched the surface.

However, members, we really must decide what we're going to do beyond this scope. There's a two-week break coming, and our clerk needs to have that time to call the next witnesses. It's ten-thirty, and unless somebody really has a burning question, I really have to insist, as chair, that we move forward. Does anybody have that burning question that's still on their lips at this particular time?

Then I'm going to respectfully thank you both for coming and thank you for your excellent testimony. There were a number of things that I didn't quite understand—and I'm in the car business—and you really explained something that I probably didn't quite understand as well. I think it casts a lot of light on what we're studying. We appreciate your taking the time out and sharing your expert information with us, and I know that committee members are well served by having you here again this morning.

We'll take a quick break, and then after that we will resume in camera.

[Proceedings continue in camera]