Industry Committee on Oct. 19th, 2016

[The Chair, Liberal, Dan Ruimy]

Well, I'd love for them to answer that question, but you ate up the time.

[Majid Jowhari, Liberal, Richmond Hill, ON]

Do you want me to share my stats with you?

[Lloyd Longfield, Liberal, Guelph, ON]

These are great stats. Sorry.

[The Chair, Liberal, Dan Ruimy]

Thank you very much.

Gentlemen, we're actually going to move to the next question. I'm sure we'll come back to it.

Mr. Nuttall, you have five minutes.

[Alex Nuttall, Conservative, Barrie—Springwater—Oro-Medonte, ON]

Thank you, Mr. Chair.

I have a few questions for you on manufacturing. As things have begun to slow, what are you seeing in your book overall? Obviously you would monitor it overall, but you'd also have some sort of sector-by-sector monitoring. What's happening in the manufacturing industry as a whole in terms of those who are clients of yours?

[Jérôme Nycz]

The probability of default in manufacturing is a bit higher, particularly by the ones that are in high growth. It's a sector that has opportunity because of the export potential but it does have some stress in terms of portfolio. So there's more risk in that portfolio than we see in the rest of the portfolios.

[Alex Nuttall, Conservative, Barrie—Springwater—Oro-Medonte, ON]

I hit the road this summer and did quite a number of round tables. One of them had me near Mr. Longfield's area in Kitchener-Waterloo, and it was very interesting because the information we were given there showed that times were actually busier in terms of the dollar value of orders, yet they were nervous about hiring because of the reduction in the value of the Canadian dollar against the American currency. Is that what you're seeing throughout?

[Jérôme Nycz]

We're seeing orders going up, and I think the export stats are showing that orders are going up. There are significant changes in the currency and the impact. In venture capital, we see evaluation being driven up or down based on the value.

There's a reticence to hire for tomorrow. What we're seeing more is hiring for today and maybe not building the team required for continued growth. Being able to increase the bench strength in manufacturing and for businesses in general is very challenging.

Often a company won't hire a CFO to bring them to another level. Particularly if they're looking at consolidation in their market, their comptroller might not have the skill set to do tuck-in acquisition. We're pushing them to think outside the box and to try to hire, but we see reticence in hiring before they get an order.

[Alex Nuttall, Conservative, Barrie—Springwater—Oro-Medonte, ON]

Yes.

[William Ciprick, Senior Vice President, High-Impact Firms, Business Development Bank of Canada (BDC)]

There's another part I'd like to add to what we're seeing, and I can cite a specific recent example from Saint John, New Brunswick, with one of our clients there. They're already in international markets, and they're taking advantage of a devalued peso and a good exchange with the dollar.

They lucked into being in those markets, but they don't know what they're doing. I represent the non-financial adviser side. We're trying to work with them to come up with a plan.

In the case of this particular company, somebody found them on the Internet and started placing orders. What started with one container has turned into 50, and now they're hitting the point of critical mass and saying, “what do we do? Can we keep up?” They really had no plan. Part of our focus through our international group is helping them redevelop that plan.

[Alex Nuttall, Conservative, Barrie—Springwater—Oro-Medonte, ON]

That's very interesting.

What is BDC's approach to, let's say, the oil industry which had about a half-billion-dollar injection into Alberta to try to stabilize things? We've seen significant job losses in manufacturing this year, with over 40,000 net losses. In the oil and gas industry in Alberta, I think it's only about 80,000 this year. At what point does the BDC say, “We need to double down and underpin this industry that's obviously going through some pain?”

[The Chair, Liberal, Dan Ruimy]

You have just under a minute.

[Jérôme Nycz]

We have committed in excess of $500 million to help the industry. Of course, we're not in the big exploration companies. Our portfolio is a combination of a lot of service companies servicing oil and gas and some of the smaller manufacturing plants.

In growth and transition we've been able to provide some working capital in order for them to be able to weather the storm. We've sat down with a lot of financial institutions in helping these companies, and we've tried to relax some of the financial conditions by being able to provide additional funding for them to stay within their financial ratios.

[Alex Nuttall, Conservative, Barrie—Springwater—Oro-Medonte, ON]

Can I get a yes-or-no answer to this? I'm right out of time. Would that expand to Ontario in the future based on what we're seeing in manufacturing?

[Jérôme Nycz]

If we see strong weaknesses, in the same way we always respond when there's a crisis, we'll step in. We did that in the financial crisis in 2010. We stepped in significantly and increased our authorization by 53% across Canada at a time of crisis. For sure, we would step in.

[Alex Nuttall, Conservative, Barrie—Springwater—Oro-Medonte, ON]

Thank you.

[Susan Rohac, Vice-President, Growth and Transition Capital, Ontario and Atlantic, Business Development Bank of Canada (BDC)]

If I can quickly add to that, over the last three years we've averaged just over a billion dollars of lending to the manufacturing sector. Over our six-month year to date, we're already at $928 million. If that trend continues, we will be significantly higher this year. That's not necessarily because we had a special project targeted in manufacturing, but rather because the ask is there and chartered banks are possibly pulling out. We're getting more requests, and we're doing more financing naturally.

[Alex Nuttall, Conservative, Barrie—Springwater—Oro-Medonte, ON]

I've seen that. Definitely they're pulling back.

[Susan Rohac]

Yes.

[The Chair, Liberal, Dan Ruimy]

Excellent. Thank you.

Mr. Masse, you have five minutes.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

It's an interesting quandary in a sense that a lot of people argue that it's government or government-affiliated agencies, and we should just get out of the way because the private sector will do it better.

Here we have the Business Development Bank having to fill a gap that the private sector won't touch, or is reluctant to, or reluctant to with the interest rates.

Maybe you can explain the difference—and I think people need to understand this—between yourselves, the credit unions, and the banks with general lending. Distinguishing that element is very important as there is a greater degree of public interest in public accountability and public investment by the BDC versus that by the private sector or a little bit by the not-for-profit sector. The credit unions are not really not-for-profit, but they're a different mixture all together.

[Jérôme Nycz]

I'll start, and I'll ask Ms. Susan Rohac to complement my answer.

The reality is that the only thing we do is support entrepreneurs. We don't take deposits. We don't do lines of credit. We help through term lending, venture capital investments, and advice.

We look at projects and look at how those projects are structured, and then we're able to price according to risk. With the pricing structure, if you compare Canada and the U.S., in the U.S. you have a broad pricing structure and the availability of capital according to different stages of risk. In Canada it's pretty shallow. It's within a couple of percentage points of prime.

We price for risk, and we'll take into consideration other aspects. We'll also provide more leverage, and so we'll finance a greater part of the asset. In equipment, particularly, we'll finance up to 125% of the value of the equipment to incentivize the entrepreneur to invest in machinery, equipment, and ICT so that they are able to have an incentive to bring that into their company and increase their productivity.

We really look project by project, and we try to structure the financing according to the needs of the clients. It's very highly customized financing for the client.

Susan, you may want to complement that.

[Susan Rohac]

Yes. It's a good question. We hire a lot of employees who have worked previously at chartered banks, and they say that the culture difference when they come to BDC is incredible. People in the field really don't know or don't care about what the bottom-line profit is on any particular file. What we're looking for is how we can help a client achieve their goals.

I'm going to call it the “five Cs of credit”. We use the same lending criteria as a chartered bank, the five Cs of credit being character, capacity, collateral, capital, and conditions, but instead of saying no if one of those five Cs isn't achieved, we price to the risk or we modify the terms and conditions to allow us to try to get to a yes.

No one in the field—and this is a key comment—wants to say no to an entrepreneur. We really try hard to get to a yes, and if we can't do it now, we usually give them the one or two things that have to change or be modified so that we can get to a yes.

[Brian Masse, NDP, Windsor West, ON]

For the general public out there, how would you rank your business case in terms of maybe the last several years with regard to investment and return? Has that paid off in terms of your overall ledger?

[Jérôme Nycz]

As I mentioned in my opening remarks, by statute you have to invest in or lend to a company with a high probability of success. In terms of return or success, you can benchmark against return on equity, which right now in the lending portfolio is about 7%. We're covering the cost of capital; we provide a retained earning; and we use that retained earning to do two things: send a dividend cheque to the government and reinvest in our ability to relend to the company. We have been able to sustain the growth of our portfolio by reinvesting in our ability to lend.