Industry Committee on Nov. 25th, 2009

[Richard Rémillard]

If I could just build on what Jean-René has said, a larger fund gives you better diversification. It also enables you to do what's absolutely critical: you can do the follow-on rounds. Tom can probably address this better than I can.

That first investment a fund makes in a company is not the last investment they'll ever make. It needs to keep some dry powder in its back pocket so that when the company needs another round of financing, it can be there, either alone or with other partners. The larger the fund, the better you're able to do that.

[Jean-René Halde]

Would I be allowed a very quick follow-up to that?

[The Chair, Conservative, Michael Chong]

Yes, go ahead.

[Jean-René Halde]

The exit that's required for the venture capital fund to get the capital back and make a profit comes from either selling to a strategic buyer or doing an IPO of the business. That's not happening these days, which means that venture capital funds today... I can tell you that's the way we approach it at BDC. We need to put enough money aside to take the company we're investing in at the start all the way to cashflow positive, because there just might not be an exit. The markets may not be open. So you've got to be able to go through all the way to the day when that technology company is cashflow positive. That means you need to put a fair amount of money aside.

[The Chair, Conservative, Michael Chong]

Thank you very much for those answers.

We'll now go to Mr. Valeriote.

[Frank Valeriote, Liberal, Guelph, ON]

Thank you, Mr. Chairman.

I don't want to be the cloud that rains on everything, but if I had not lived through this last year and I walked into this meeting, I would not think we had gone through a recession. I would think that credit was available to pretty well everyone who asked for it. I only wish some of you had had the opportunity to sit in my riding office and receive the number of calls I received. I swear that every one of those 5% of bank customers felt access to credit was their biggest challenge. You would think it was that 5% that called my office.

Mr. Campbell, I can't resist asking you this. You say that more than 90% of the respondents who approached their banks felt the banks were willing to help them through this period, with more than 50% noting their banks were very willing to help. I have to wonder how many people you asked, because you quote 90% of respondents.

But more importantly, I'd like you to reconcile that statement with the statement on page 3 from the BDC report that states:

The proportion of loans going to new clients is higher than usual. We attribute this to the difficulty they are having in obtaining credit elsewhere.

Something in your report is just not consistent with my experience. Many of my constituents were begging for credit, and many were told to not even apply because they weren't going to get it. In fact, some of them were asked to increase the interest rate by 1%, in the middle of a recession. I have to have an answer to that.

[Terry Campbell]

Sure.

There are three or four questions embedded in that.

First of all, our survey, by the way, has been borne out by PricewaterhouseCoopers and by Grant Thornton. They have done surveys of SMEs in Canada and have come up with largely the same result, that, by and large, about 90% of small businesses in this country report that funding issues—access to credit—were not constraints, were not limitations on their ability to do their business plans.

In terms of our own survey, it was done by Strategic Counsel and is statistically valid. It was a survey of SMEs. The sample size was 200 small businesses, and it had the usual measure of accuracy, accurate within 19 times out of 20, and all that kind of stuff. But it has been borne out by other studies as well.

In terms of what you're hearing from your constituents in Guelph—where I live, by the way—what we find is that if we look at the whole financing marketplace, banks are about a quarter of it. We hear all the time, “I can't get credit here.” When we probe and look, there are a range of providers out there who over the last year have either exited the market or have cranked back their funding activities considerably. There is a very well-known U.S.-based company that actually has on its website that it is no longer writing business in Canada.

There are other examples of foreign entities that have what you might call opportunistic lending: they got into Canada when the going was good, and then when they had problems in their home country, they literally left their customers high and dry.

It comes down, basically, to a question of banks being open for business and lending to creditworthy customers, and they will stand by their customers. But the question here is that you have a situation where, if you have a good customer, a good client, and they're running into problems, our banks are saying two things. They're saying, please, for heaven's sake, come and talk to us. The worst thing a business can do is go silent and the bank doesn't know what the situation is. We're inviting our customers to come forward and talk to us. If you have a problem, let's see if we can work it out. There's a whole bunch of tools in the toolkit here to restructure debt and restructure your payments. What the bank is going to look for is whether there is some strength in your balance sheet, whether there is some resiliency there, whether you know what your problems are and do you have a plan to get through them. They want to help you. It's trite to say, but we succeed when our customers succeed. Nobody wants to say, “Goodbye, you're out the door.”

That said, sure, we are in a recession. There are real problems out there. There are companies whose business model, quite frankly, has now collapsed and is not going to work. They are over their head in debt. If a customer is drowning in debt, giving them more debt is like throwing them an anchor rather than a life preserver. Those are hard stories and they do exist. There's no question about that. The question is, can we help that company get to the next stage where they have to go?

I am not saying, sir, that every customer is creditworthy. What I am saying is, if a customer is having problems, come and talk to your bank.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Campbell.

Go ahead, Mr. Wrobel.

[Marion Wrobel, Director, Market and Regulatory Developments, Canadian Bankers Association]

I would just add, if you want to get a sense as to the appetite of banks to make business loans, look back to the fall of 2008 when there was the greatest financial turmoil that we've seen. That was actually when bank business lending accelerated at the most rapid rate it has in a number of years. Clearly, when there was a great deal of risk, banks were willing to step in and make loans that other people weren't making. I think that's a very good reflection of their willingness to lend.

[The Chair, Conservative, Michael Chong]

Thank you very much.

Mr. Van Kesteren.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Mr. Chair.

Thank you to the witnesses for coming forward.

Just to set the record straight, Mr. Campbell, you mentioned those other lenders in the auto industry. We used to have somewhat of a joke that if you were standing up and breathing, you could get loans from some of these institutions. So it was good practice. It was good practice and it's put you in the position you are today, and I applaud you for that.

And that's not said enough in this country, the fact that we have institutions that, first of all, remember that the money they're working with is the customer's money. I expect some day, if I'm saving money, to go to your bank and get that money out. I don't want to hear about bad risks that you've taken. So I applaud you for what you've done.

[Terry Campbell]

Thank you very much, sir.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I want to ask you, though, when I look at this picture, when things were really rocking, when money was loose and people were making money, I would think that at that point, venture capital, the more money people have.... Once we've come through this period of time—and it's been a period like at least nothing I've ever seen—that's shifted. So there's a shift here.

I just finished a book, The New Deal in Old Rome, written in 1939. You know, there's nothing new under the sun. You have graphs; you follow these things. I put this out, first of all, to maybe the banking association, and maybe BDC. Can you see a parallel to past history, possibly our last recession, with where we are today, in relationship to that? Are we edging up to the point where we're going to start seeing a little more money? Today's paper said $650 million in the BDC in savings. Are we approaching that?

[Terry Campbell]

I think there are probably two questions there.

One is, in terms of looking at history, how does this recession compare, where are we in the recession, and are we coming out of it? To paraphrase what I said earlier—and then I'll turn to Mr. Halde, because I'm sure he'll have commentary too—in many ways with this recession, the old line “This time it'll be different”...well, it's not going to be different this time. There are business cycles.

The one thing I would emphasize is that while we are seeing problems among manufacturers—but not across the board, because there are different strengths—there was greater strength in our industry going into this recession than maybe in previous recessions, and greater diversity certainly. But there was greater discipline on the part of fiscal health, financial health, balance sheet health on the part of SMEs going into this. So at this stage of the recession we're not seeing huge numbers of bankruptcies. Compared to previous recessions, the number of bankruptcies is remarkably mild. And that's a surprise. The number of SMEs that are being created is actually going up. Now people can say that's because unemployed people have become self-employed, but nevertheless we're seeing those numbers go up.

For where we go from here, I think much depends upon two things. Much depends upon the continued resilience of Canadian households. Canadian household balance sheets are way better than U.S. household balance sheets. We're able to continue to spend. Our unemployment, though still higher than any of us would like it to be, is much better than the United States. So I think the domestic demand side is going to stand small businesses, who focus on the domestic economy, in good shape. The problem is what's going to happen in the U.S.

You talked—and I thank you very much for your remarks—about the prudent lending here in Canada. The United States is still paying the price for very imprudent lending, and we're going to see resets of variable mortgages there next year, which is going to continue the crisis. So that's where I see continued problems.

Jean-René?

[Jean-René Halde]

Let me try to come at it slightly differently. I think the SMEs during this recession have been amazingly resilient. I have to tell you that our losses are lower than what we had anticipated, and that's a big plus. And I agree with Mr. Campbell, I think the organizations focused on cash quicker, they learned, and they did have better balance sheets to go into the difficult situation.

I think we are in a better position than probably we all expected, honestly, 15 months ago. We're not out of the woods, as I said, because there's always a bit of a lag period and there are still companies hanging on by their fingernails, and whether or not they can make it through remains to be seen in some circumstances.

I'd like to maybe offer a couple of comments on BDC. I don't want to make this a commercial, but just try to outline the difference between the more traditional financial institutions and ourselves. We do have a higher risk appetite. Even though we also are looking for creditworthy businesses, we maybe don't put the line in exactly the same place as these guys do. One of the things we try to do to help entrepreneurs during those tough periods.... We've allowed many entrepreneurs to postpone capital payments for a while--7,000 of our 29,000 people were offered capital postponements: simply pay off the interest, don't pay us your capital, we'll postpone it, start repaying six months from now. That has helped an awful lot the working capital of those businesses.

The other thing we're doing is there are a lot of people who buy long-term assets and have a tough time finding a long-term debt to finance the long-term asset, and what happens is it eats into their working capital if they don't get the matching right between a long-term asset and a long-term debt. So we're really focused on providing those entrepreneurs with long-term debt.

Thank you.

[The Chair, Conservative, Michael Chong]

Thank you very much.

We'll now go to Monsieur Paillé.

[Daniel Paillé, Bloc, Hochelaga, QC]

I didn't know that I would find myself in familiar territory barely 24 hours after being sworn in as an MP.

I would especially like to welcome Mr. Halde, since we did have business dealings in a previous life. The ones I'm thinking about were profitable. I worked as an investor for the Caisse de dépôt et placement and for the Société Générale de financement, and as a financial director for a company with sound liquidity for growth, as well as for other businesses that were rather poorly equipped to weather the crisis.

Mr. Campbell, we will do everything we can to ensure that you are not forced to call in any business loans. Clearly, you don't want to end up owning any businesses. Costs, fees and restrictive clauses are all additional burdens that the business entrepreneur must shoulder. There are restrictions as to what he can or cannot do. In terms of return, interest rate margins are no longer very high. Would you not agree that the fees charged during the crisis were outrageous? Would you not agree that the pendulum swung too far in the other direction? The entrepreneur relies on his business for his livelihood. Mr. Halde stated that 75% of people definitely want to reinvest. That's good to hear, because they are entrepreneurs. They see the world through rose-coloured glasses, but they also have to work hard.

There is a saying that an entrepreneur cannot start anything without first getting permission. I'm listening to you and I would say that entrepreneurs are almost being harassed. Given what happened to the Canadian economy, don't you think that the screws were tightened a little too much? Ultimately, the entrepreneur cracks under the pressure. Isn't there some way for bankers to adopt a more entrepreneurial approach?

I also have a question for you later about start-up capital.

[Terry Campbell]

I'm sorry, but I will have to field that question in English.

There are a couple of things--costs, covenants, and entrepreneurialism. In terms of costs, it's really important to step back and put this into context. Perhaps my colleague, Marion Wrobel, will have some comments on this as well.

If you go back as recently as, say, August 2007, the prime rate was standing at 6.25%. The prime rate now is 2.25%. Now, you take a prime rate and it's adjusted up or down. If you have a home mortgage, you're in the best condition ever. But even with adjustments, effective interest rates for businesses and consumers are at their lowest rate in literally years and years. The Bank of Canada, for instance, does a regular survey of what it calls effective business interest rates. It's a blended rate, but it gives you an indication of where things stand. Its latest report in October indicated that the effective business interest rate in Canada was about 3.33%.

When you look at the issue of cost, the price of loans, you have to take two things into consideration. As you know, one is the cost of funds to banks. As you pointed out, compared with last year, when the cost went really crazy, it has gone back down to normal, but it's still not at what we would call historical norms. We fund a lot of our stuff, we try to match it, as you know, we try to fund it off the bond market, and that is going to vary. That has to be taken into account.

The other thing that has to be taken into account, as it always does, but particularly so in a recession, is the issue of risk. When we see loan losses elsewhere in our industry, where loans are not being paid back, there is an impact on the prices for everyone.

So it's our cost of funds, it is the risk of individual customers, and it's the operating environment with loan losses.

Marion, do you have any other comments?

[Marion Wrobel]

I think you said it all; it's simply the sequence of events. The first thing that happened was this financial market turmoil, and that's what really increased the cost of funds, because financial institutions were in fact very risky at that time. We saw a lot of big players failing and at risk of failing. As that market started to normalize over that period, then we went into a recession. In a recession, all of a sudden credit risk went way up. We had these two things; one followed the other.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Paillé.

[Daniel Paillé, Bloc, Hochelaga, QC]

May I continue?

[The Chair, Conservative, Michael Chong]

Yes.

[Daniel Paillé, Bloc, Hochelaga, QC]

Thank you. I can appreciate your comments for the most part, but one cannot complain insofar as bank profits are concerned.

I want to talk about venture capital and about creating a funds of funds. Someone suggested that a funds of funds be set up. I agree that we shouldn't set up many small funds, because we would get lost in all of the fees. When the funds get overly large, we can buy tickets and build up a bigger pool. However, would you not agree that SMEs or, as we call them in Quebec, the PPEs, which stands for “petite, petite entreprise”, are shut out of this type of structure? The danger is that the funds of funds will be set up far away in Toronto or in Montreal, and that the Gaspé region will be overlooked. Isn't there some risk that small businesses will be shut out of the bigger picture?

[Richard Rémillard]

I''m not sure if that question was intended for me, but I will try to answer it.

The majority of our venture capital funds have a cash value of under $100 million. So then, this isn't a problem for us right now and it won't be a problem for us tomorrow, or the day after that. You've asked a good question, but it isn't the question of the hour. The burning issue insofar as all funds are concerned, whether start-up funds or later stage funds, has to do with the shortage of capital. I don't know whether I've answered your question.

[The Chair, Conservative, Michael Chong]

Thank you for your questions, Mr. Paillé.

I forgot to congratulate you on your election. Welcome to our committee.

We'll go to Mr. Warkentin.