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

[The Chair, Conservative, Dave Van Kesteren]

Good morning. Welcome to the meeting of the Subcommittee on Canadian Industrial Sectors of the Standing Committee on Industry, Science, and Technology.

We have a quorum. We are going to begin because I know that our guests have very much to tell us and are very excited to fill us in on something that's very important in studying the industrial sector and how the government can be effective in helping that sector at this particular time of stress and duress in our industries.

I welcome today, from Export Development Canada, Benoit Daignault, the senior vice-president of business development; and Madame Edmée Métivier, the executive vice-president of financing and consulting at the Business Development Bank of Canada. I believe we have the presentation by Madame Métivier, and we're just waiting on the one from Mr. Daignault.

So I would suggest that we begin with you, madame. You have about 10 minutes to give us a presentation, and then 10 minutes for you, sir, and then we will begin with of our line of questioning.

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

Thank you very much, Mr. Chair.

Good morning. Thank you for inviting me. It is a pleasure to be here to tell you about what the Business Development Bank of Canada, BDC, is doing to make credit more readily available to Canadian entrepreneurs. Our support is both direct and indirect, and I'll be pleased to describe it to you.

To begin with, though, a quick description of BDC. We have 1,800 people supporting entrepreneurs from 100 branches across Canada. We offer our support in three forms: financing, venture capital and consulting services. We support 28,000 entrepreneurs.

I'll limit my description to our traditional financing—term lending—which constitutes the bulk of our business and in which, because we act in ways that complement the role of private sector banks, we have a higher risk appetite than they do. This lending portfolio is over $11 billion. These clients generate about $160 billion in sales, including about $22 billion in export sales.

We have about 3% of Canada's term lending market, which makes us relatively small. While our branch network is modest compared to the roughly 6,000 branches of Canada's six big banks, our 600 account managers speak to thousands of entrepreneurs every month. This constant contact gives us a good sense for the pulse of the market.

Right now, we see two forces at work. The first is the recession. A great many entrepreneurs are hesitating to start new projects. They are delaying until they have a clearer sense of what the marketplace holds in store. As a result, BDC is seeing a lower than normal number of entrepreneurs who wish to start to finance projects.

The second force we see is tighter credit conditions. This is the result of three things: first, the departure from the marketplace of some foreign banks and many non-deposit-taking, non-regulated financial institutions, due to the sharp decline in the securitization market; second, a difficult bond market; and third, the difficulty financial institutions are having in lending in an uncertain economic environment.

What does this mean for Canadian entrepreneurs? If he or she has a long-standing business relationship with a Canadian bank or credit union, they are less at risk. However, they are at greater risk if they are operating in a sector strongly affected by the recession, such as manufacturing. And their risk rises if they have lost their financial partner and are trying to establish a new relationship with a new financial institution.

For us Canadian banks, the exit of our foreign non-deposit-taking and non-regulated peers means that we are straining to meet significant new demand. This is certainly the case at BDC. New and increased demand has caused our portfolio to grow much more than anticipated. Also, more mid-sized and larger firms are approaching us. Transactions over $5 million have increased 50% year over year.

Also, our branch employees are talking to their counterparts at other banks more than ever before. In the first 10 months of this fiscal year, there were 15,000 such points of contact, compared with almost 9,000 for all of last year. These conversations have produced more than 1,200 referrals to us.

In November 2008, the government announced a $350 million capital injection for BDC. We have received thus far $250 million, which we are putting to good use in the marketplace via our regular service offerings, that is, via our financing, venture capital, and consulting services. We expect the other $100 million in early April. We will use it for a new operating line of credit guarantee, developed after consultation with financial institutions.

The new federal budget contains two initiatives that seek to alleviate the hardship caused, first, by the exit of foreign banks and, second, by the collapse of the securitization market.

The first is the business credit availability program or BCAP, a collective effort of Canada's big banks, EDC, and us. Its goal is to ensure that at least $5 billion in loans and credit support is made available to creditworthy businesses whose access to financing would otherwise be restricted.

Through our participation in BCAP, we have five initiatives under way. First, for large corporate clients, we are participating in syndicates to replace departing lenders. Second, for mid-market-sized loans, financial institutions will share with us an increasing number of commercial deals on a pari passu basis. Third, for smaller deals, where pari passu could be inefficient or costly, we'll buy participation in commercial mortgages. Fourth, as I mentioned earlier, we are instituting an operating line of credit guarantee. Finally, we are exploring with some institutions a way to handle more quickly small loans that would get declined by those institutions' scoring systems.

Our collaboration with EDC and the banks is good. Constructive partnerships have developed.

The second thing that the new budget created was the Canadian secured credit facility to provide liquidity to the equipment, vehicle loan, and lease financing market. We will do so by helping to revive the securitization market through the purchase of term asset-backed securities. We are working on this with the finance department. We've completed public consultations and have drafted the action plan.

As with BCAP, we're striving to launch this credit facility as quickly as possible, but complex financial facilities such as this one, which may go up to $12 billion, are not created in a day, and we're very much aware of our responsibility to protect taxpayers' money.

If I may, I'd like to offer you some information on a sector of great importance to us: manufacturing. BDC has a long history of supporting it--65 years, as a matter of fact. About a quarter of our clients are manufacturers, more than half of whom are exporters. At present we have close to $4 billion in total loans outstanding. You will not be surprised to hear that we are doing more refinancing and more work in capital financing than we did last year. That's just a sign of the times. In this year alone, we've provided close to $700 million in additional financing to that sector. In terms of the auto sector, this year we have provided close to $200 million in additional financing, which brings our support for that sector close to $700 million in loans outstanding.

In Canada's high-tech sector, by which I mean the sector in which entrepreneurs bring to market, via successful companies, innovation spawned by Canada's R and D investments, things continue to be very difficult. Canada's venture capital industry has been in difficulty since before the credit crisis and the recession. It is causing great strain for young high-tech companies by severely limiting their access to financing.

We've described the industry's challenges in detail in a previous parliamentary appearance and would be pleased to share our statement with you if you believe it would be of interest.

Before closing, I'd like to speak to an issue I believe some of your constituents may be raising with you: BDC's willingness to support specific business projects, and possibly our reluctance to bail out failing business projects.

By virtue of the Business Development Bank of Canada Act, we are a commercial crown corporation with an obligation to do deals when there is reasonable chance of success. What this means is that while we give every business that approaches us a chance to present its case, we cannot help everyone who asks. Our commitment and our desire to help come with parameters. We must seek creditworthy clients and commercially viable projects.

In sum, BDC is working very hard to provide, directly and indirectly, support for Canadian businesses that need access to capital.

I trust you have found my presentation useful, thank you for your time and would be pleased to answer any questions you might have.

Thank you, Mr. Chairman.

[The Chair, Conservative, Dave Van Kesteren]

Thank you.

Now I will ask M. Daignault to give his presentation for Export Development Canada.

[Benoit Daignault, Senior Vice-President, Business Development, Export Development Canada]

Thank you Mr. Chairman, and thank you to the members of the committee for the opportunity to speak with you today. Your study is timely given the challenges currently being faced by Canadian companies across ail sectors.

I would like to divide my remarks into two parts. First, I would like to take a moment to briefly describe Export Development Canada and how we work with Canadian companies. Second, I will share how, from EDC's perspective, the current economic environment is affecting companies in a number of Canada's leading industrial sectors.

As a Crown corporation, EDC plays an important role in helping Canadian companies access credit and protect themselves against a variety of risks. What does EDC do? Briefly, we provide commercial financing and risk management solutions to Canadian companies and their partners.

This includes granting loans to foreign businesses wishing to buy products and services from Canadian companies; we grant working capital credits enabling businesses to meet their export contracts; we grant loans and insurance to assist businesses in investing abroad; we offer guarantees to the banks, which enables them to lend money more easily to their clients; we offer insurance protecting businesses from a broad range of risks, including risk of non-payment; we offer security services assisting business in guaranteeing performance of their contracts, as well as a program for capital investment in businesses in certain sectors.

We offer all these solutions directly or in partnership with Canadian and foreign financial institutions. And we always do it on commercial conditions, like BDC, without any annual funding from Parliament.

In 2008, EDC facilitated trade and investment for Canada worth more than $85 billion, supporting 8,000 Canadian businesses in virtually all sectors of our economy: $27 billion in the extractive sector, including mining, oil and gas; $18 billion in the infrastructure and environment sector; $16 billion in the resources sector; $10 billion in the transportation sector; $7 billion for information and communications technology; and $5 billion in the light manufacturing sector.

Now the challenges that Canadian companies faced last year have grown more pronounced as we move through 2009. Credit and risk mitigation is often difficult to affordably access. And demand for many Canadian goods and services has fallen in this recessionary environment.

That's the newspaper headline story, and one with which we are all familiar. What does it really mean for companies in Canada's major industrial sectors? Let me provide a bit of colour to this story by describing what EDC is seeing.

In the extractive sector, two factors are at play. The first is the sudden and dramatic fall in commodity prices. Lower prices mean lower earnings. It also means falling spending on capital expenditures as companies look to preserve their liquidity. As these companies spend less, their suppliers begin to feel the pressure as well. Of course, all this is amplified by tightening liquidity. At the same time as these companies are earning less, their ability to access capital is also limited. The resources sector, and particularly the forestry sector, is another area where companies are struggling. Lumber markets are depressed, as demand from the U.S. housing market has fallen considerably. Pulp markets are in decline and global consumption of newsprint is falling.

All this is resulting in scaled-back production, layoffs, and facilities being closed, often in remote communities. In addition to dealing with falling demand, companies are finding it difficult to access affordable receivables insurance. This presents two challenges: first, without insurance, they are being exposed to greater risks; and second, companies have typically used this insurance to obtain additional working capital from their banks. Without coverage, their ability to access this financing becomes even more limited. The aerospace sector is another sector where Canada, despite having a world-class industry, is seeing difficulty. Financing is difficult to obtain for the buyers of our aerospace products. Airlines are seeing demand fall and their credit position deteriorate, while private market financing for products such as business jets is tight. As a result, production in Canada is falling, affecting not just the producers but the suppliers as well.

The last sector I will highlight is the light manufacturing sector. This sector accounts for about 40% of the total Canadian exporter population, the majority of whom are small and medium-sized companies. The story in the sector is a familiar one. In recent years companies have had to deal with the rising and now fluctuating Canadian dollar, rising input costs, aging production facilities, and increased competition from lower-cost foreign sources. These persistent challenges are now being amplified by the credit crunch. First, these companies cannot always access sufficient credit to finance their operations. Second, their customers, 85% of whom are in the U.S., cannot access the credit needed to buy their products. Where possible, companies are trying to invest in new technologies to improve efficiency and lower their costs. They're also looking to invest abroad and at offshore operations, again to lower cost and more efficiently serve foreign markets. These are the right steps to take.

Where does Canada go from here? Let me outline what we see as four credible priorities for Canadian companies looking to compete in the global economy.

First, our companies need to think internationally. An exporting company is a more efficient and competitive company. Companies need to identify opportunities to market their goods and services to the world.

Second, we need to think beyond the U.S. market. While Canada has benefited from its proximity to the U.S., there is a wealth of opportunity and high-growth emerging markets we should be pursuing.

Third, companies must continue to invest in new technologies and processes. These investments can improve productivity and enhance a company's competitiveness.

Fourth, our companies need to participate in regional and global supply chains. In today's global economy, larger companies are building their own supply chains and smaller companies are competing to find their link or niche along existing chains. Canadian companies must follow suit.

Of course, tying all this together is the need to access credit and risk mitigation. This is EDC's role and it is one that has been expanded through budget 2009. The measures introduced in the budget provide us with greater flexibility to get credit in the hands of Canadian companies that are active in areas related to EDC's core competencies, and where EDC can add value in a manner complementary to the services provided by the private sector.

As we move through 2009 and confront these challenges, I would conclude with one observation: at EDC we find that as the world learns about Canada and what our companies can offer, opportunities follow. As a country we develop, produce, and export goods and services that are valued in countries around the world. The challenges our companies face today are steep, but they are no different from the challenges being faced by their competitors. By helping viable Canadian companies access credit and risk mitigation, we can position them not only to survive but to compete and succeed.

Thank you.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Monsieur Daignault.

We will begin with our round of questioning, which will take us to approximately 10:30. At that time we absolutely must do some committee business, and there is a motion that we have to address as well.

Our first round of questioning goes to the Liberal side. Mr. Garneau, you have seven minutes.

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

Thank you, Mr. Chair.

First of all, I would like to thank both of our witnesses this morning.

Ms. Métivier and Mr. Daignault, thank you for coming here this morning to talk about your two organizations.

First, I'm going to speak to Ms. Métivier. In your introduction, you mention the Business Credit Availability Program, and you say that your organization, the major Canadian banks and EDC have set as your goal to ensure that “at least $5 billion in loans and credit support is made available to creditworthy businesses whose access to financing would otherwise be restricted.”

Can you tell me where you stand in that regard?

[Edmée Métivier]

Absolutely, Mr. Garneau. I won't speak for EDC but rather for BDC. There are some factors in this that have caught us a little off guard, that is to say that we had to position ourselves in order to have the ability to act. The BCAP program includes five components, as I mentioned a little earlier.

I'm going to proceed from largest to smallest. The withdrawal of financial institutions other than the major Canadian banks has left roughly a 30% void in the market, that is to say 30% of the market has disappeared in a few months. It happened very quickly. As a result of the liquidity crisis, these lenders, who were in the Canadian market, became incapable overnight of raising funding to relend to Canadian businesses. Canadian financial institutions took back part of that market, but obviously were unable to fill the 30% void completely. I'll give you an example.

A major Canadian bank that previously relied on a consortium of a number of banks granted a comprehensive $200 million loan to a slightly bigger business. It is now having difficulty finding partners because there are few of them in the market right now. EDC and BDC have, to all intents and purposes, played a more important role with respect to major bank consortiums. BDC has had to implement that as well. We conducted our first transaction in March, and the equivalent of $300 million is currently being reviewed. We are making good progress in this sector.

There's also the work that's being done together with the financial institutions to be able to share the risk. That's one of the fundamental principles of the BDAP. The idea isn't to make it so BDC or EDC becomes the bankers' banker. The idea is to share the risk. In February and March, we noted an increase in our joint transactions. For example, a $10 million transaction went through my office yesterday. It involved a GM car dealer, and thus was a fairly risky transaction. We took part of it, on a term basis, and the bank took another. That's what we call pari passu transactions, that is to say transactions for which the risk is shared. That's the second element.

As regards the third element, we are going to implement a credit margin guarantee program this week. Some SMEs, particularly in vulnerable sectors, such as the manufacturing sector, are having trouble increasing their credit margin. They currently need this increase right now to meet all kinds of challenges they are facing, such as paying their suppliers. It is taking longer to collect on accounts receivable. This guarantee program will help financial institutions maintain their credit margins at pre-crisis levels or higher, if necessary. Today we began going round to the financial institutions to present our guarantee program. Once again, this is a matter of sharing. We don't completely guarantee the line of credit, but merely a portion of it. This will generate a little liquidity in the market. On June 15, we will be able to report to the government on progress on this matter.

As regards the fourth initiative, I would say that, for the smallest transactions, those representing less than $7.5 million or $10 million, it is hard to share the risk with financial institutions because it takes too much time. We are exploring a mechanism that would enable us to purchase, as a block, a portion equivalent to 50%. For example, we can take 50% of 10 transactions, which puts cash back into the financial system and enables the bank to use that cash to grant other loans. That's a more indirect measure, but it's also effective.

Last but not least—this takes longer to explore—is the way in which BDC is able to interact with the financial institutions concerning, for example, loans that are declined by their scoring systems. Is there a portion of these loans that BDC can take? We obviously won't take the financial institutions' losses, but we could perhaps help some of those clients. This idea is currently being explored, and I will have to talk to you about it a little later perhaps because we haven't yet found the key to doing this.

That said, in January, February and March, BDC granted $750 million in financing to Canadian SMEs across Canada. We are finishing our year today, March 31, and we have put $3 billion in funding into the Canadian market. Even in our normal operations, we are still supporting the sectors, particularly the manufacturing sector. I would say that we pay more attention to it because there is less of an inclination to lend to the manufacturing sector. That's always been a top sector for BDC.

I hope that answers your question.

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

Yes, thank you. I have another question, perhaps a little subjective.

[The Chair, Conservative, Dave Van Kesteren]

Be very quick.

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

Okay.

It's a very subjective question. Are you forced to stretch your margin of safety these days, given the current situation?

[Edmée Métivier]

Absolutely, and we do it regularly. The transaction I'm telling you about, the $10 million transaction that crossed my desk yesterday, is outside our safety zone. However, we think that the management team in place at that business will enable the company to succeed.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Madam Métivier.

Monsieur Bouchard, for seven minutes.

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

Thank you, Mr. Chairman.

Good morning, and thank you both for being here today.

I don't know who my question is for, perhaps for Ms. Métivier. When you talk about the manufacturing sector, are you talking about wood, the softwood lumber sector, the paper sector? Whether that's the case or not, you will tell me regardless. When a forest business, a business operating in the softwood lumber or paper industry, turns to you, can it get a loan or a loan guarantee so that it can perhaps go to another bank? Is that possible with you?

[Edmée Métivier]

Mr. Bouchard, for us, the manufacturing sector includes all sectors, including, of course, wood and the forest sector. So a manufacturer is ultimately someone who makes a product that he can sell, something tangible. It's not a service; it's more of a product that you can touch. That may be in the plastics sector, in the forest sector, the automotive sector, the metals sector.

The answer to your question is yes. We don't discriminate by sector at BDC. If the entrepreneur's project makes sense, if the survival of the business makes sense, we'll examine it and act on it. We are engaged in the fisheries sector, a sector that has not been privileged over the years. We are involved in the forest sector as well, and we know there are issues there. Obviously everything depends on the financial situation of the business, but also on the ability of the management team in place. That's very important for us at BDC. We consider whether the management team has a business recovery plan, to enable the business to get through the difficult period, and whether the business is able, among other things—as my colleague from EDC mentioned earlier—to examine the future and consider whether it isn't able to succeed elsewhere than in its local market, in Quebec or Canada, whether there aren't other markets that it should consider. Ultimately, we really look for entrepreneurs who have sound plans. These are the people we support and assist in getting through the tough times.

When a business is in difficulty, does not have a recovery plan and is unable to reinvest in its business, we won't necessarily take the place of a lender. However, if it has a good recovery plan, if we believe in it, if we trust the management team and it makes sense economically, yes, we'll support it.

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

When you agree to grant a loan to a business, in the forest sector or softwood lumber sector, for example, can the interest rate be higher than it would be if the business were operating in another sector? Does that vary or is it equal for everyone, whether the loan is riskier or less risky? What is your policy on that point?

[Edmée Métivier]

BDC's rate policy varies with the risk that each case represents. Each transaction is reviewed based on risk. A number of criteria are used to determine the risk that a business presents: the sector, management team, financial situation, project effectiveness, etc. Rates are based on those risks. In general, BDC's rates are a little higher than those of the financial institutions.

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

What's the range? Between 7% and 15%?

[Edmée Métivier]

It can vary. More often than not, it's a floating rate. Most of our entrepreneurs prefer to have a floating rate because it's more advantageous for them. It ranges from prime to prime plus 5% or 6%.

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

I don't understand.

[Edmée Métivier]

The prime rate plus 5% or 6%. Today the prime rate is about 4%. Four plus six equals 10; so the maximum rate is 10%.

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

That means that those who get a higher rate are riskier.

[Edmée Métivier]

That's correct.

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

All right. As they're all more vulnerable, they have higher rates. If you incur losses as a result of bad loans, does the government compensate you?

[Edmée Métivier]

No. The bank is required to be financially profitable. BDC has been profitable since its mandate was amended. Over the years, it has returned dividends of $150 million to the Canadian government. When it incurs losses, it has to absorb them. The Canadian government chooses to invest in BDC from time to time to enable it to expand its operations. However, under the legislation governing it, BDC must be financially viable, which means that it cannot incur costs to Canadian taxpayers.

Thank you.

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

Mr. Daignault, your organization's focus is mainly on businesses that export.