Special Committee on Cooperatives Committee on July 26th, 2012

[Michael Hoffort]

With Foothills, we finance the members of the Foothills Co-op to buy cattle. In this case, the security amounts to the livestock.

What the members have done in that situation is come together to set up a pooled security fund as part of their membership in the co-op. It's a backstop, if necessary. But really, it comes back to the member and the livestock first, and then if it ever has to, the co-op's kind of pooled security situation.

You mentioned UFA and some of the others. Typically where we have gotten involved is that we're a member of a lending syndicate. Chartered banks in Canada are typically the lead. Credit unions could be participants in that, depending on the situation. Farm Credit is a member, as well.

These will be structured in different ways, sometimes with specific security agreements, sometimes with overarching agreements with the cooperative, in terms of the security take. There's an assessment of the business model: where they're going with their business, the profitability. It's really a standard assessment on the risk of what's happening there.

[Lyndon Carlson]

I would add quickly that another thing with UFA and some of our crop-input programs, with a cooperative, is that we are taking all the risk. So when we're doing a crop-input loan to a farmer facilitated through UFA, UFA doesn't have to take any of the risk. We'll provide a crop-input loan to that farmer for this year's production cycle without security, based on balancing the risk across the whole portfolio. So that way the cooperative doesn't actually have to pledge security for its crop-input program, and that debt doesn't appear on its balance sheet.

[The Chair, Conservative, Blake Richards]

Great. Thank you very much.

Point of order?

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

It's really a question that I'd like to put to our analysts to complete the picture we just heard, if I may.

Could we ascertain whether or not the Government of Canada guarantees the loan portfolio of the FCC? I thought there was a role there, a backstop role of some sort, and I think we should be aware of that, if it is the case, so we have a complete picture.

Thank you.

[The Chair, Conservative, Blake Richards]

Thank you.

We have concluded the second round of questioning. We do have a few minutes remaining, so I'll allow one more round.

The first in our third round would be Mr. Lemieux. You have five minutes.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Thanks, Chair.

I'll just continue with my question to FCC about co-ops. In the lending practices that you have at FCC, do you find that co-ops are disadvantaged because they are co-ops, or are they treated in much the same way as other groups, agencies, and organizations seeking loans?

[Lyndon Carlson]

I would say they're not disadvantaged. I can't think of how they would be. The large co-ops, of course, are large organizations that have lots of capability, so we set them aside because they can access funds from any financial institution. The medium-sized, independent cooperatives that serve communities also have been very successful, and they've got quite a history. Again, I think we'd treat them as we would any other corporation.

When it comes to the smaller co-ops, the ones we've talked about, like the cattle-feeder ones, those are really where we take a group of individuals that could be quite small in number and, as Mike mentioned, we ask them to put forward a bit of an account so we have a loan-loss pool, and that takes some of the risk away from them and from us, and then they come together as a group. That's different from if they were a partnership or an incorporated group of individuals.

We sometimes fail to remember that whether it's an individual or a group in a corporate structure, those individuals typically will sign a guarantee for the lending that this small company or that proprietor takes on. If the co-op members are also willing to share in the risk, then that's really the thing. How do we, as a financial institution, mitigate the risk? That's where we ask them to participate. So they don't have to sign a guarantee, and that's why we set up a pool. They may not want to guarantee someone else's loan, if they're an individual farmer, so that's how we got around that to create a risk profile that we think is going to be sustainable.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Okay. Let me ask this as well. We did have a larger co-op here saying that it had a fairly large initiative it was seeking funding on, and it did have challenges, even as a larger co-op. It was making reference that it would have to go back to its members, and that's not always easy to do.

Mr. Mali, from a financial cooperative point of view, can you just give us an estimate of how large some of the loans might be that you would give? I'm not asking for a particular case, but can you just give us an order of magnitude of the upper end...?

[Rob Malli]

Just in general?

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Yes, just in general. For example, do you go as high as $15 million sometimes, or never above $10 million...?

[Rob Malli]

The largest loan we have is probably about $25 million. We syndicate past that point, which means that we would share the loans with other credit unions or banks. We do a lot of that, especially with—

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

How big could a loan go in that case, ballpark?

[Rob Malli]

They could go to $50 million or $100 million.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

All right. Then again, I asked this question yesterday to someone. It's a one-stop shop for the customer. In other words, they go to you and then you will syndicate with the other lending institution. It's not the customer running around trying to...?

[Rob Malli]

Right. It depends on the situation. We do commercial lending across the country, mainly looking for impact types of commercial loans, but if we're the lead syndicate on that, then we would do that. Otherwise, we get invited into other syndicates, so it goes both ways. That's the thing.

I was just reflecting on the earlier comment on funding. We're the only cooperative financial institution that's actually rated by DBRS, in terms of a rating agency, to get access to commercial paper programs. That is an issue for cooperatives because our structure isn't well understood. So they were experimenting with us. We've been very successful, but because of the nature of the cooperatives and our structure with Central of B.C. and Credit Union Central of Canada, joint and several, it creates a problem in the capital markets to access funding, which is different from capital for the purposes of equity. But that is an issue, and because of the lack of understanding and entrenchment—even at the federal level, I would argue, with regard to understanding—that further creates uncertainty, so the markets use that uncertainty against us.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Are you a bit of a trial project, then?

[Rob Malli]

Because we're the first ones, we've been consistently trying to prove the case, and investors who take up our offering, even through the credit crisis, have consistently taken up our paper. It never went down, even though it did go down for many of the banks, because the trust in the community is high and our premium is very low. I just think there's more work that could be done to help support the national understanding of cooperatives and the risk level, etc., that could help enable them to be on more of a fair playing field.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

When would you have first received that rating? Is that something relatively new?

[Rob Malli]

No, we've had the rating probably for at least six, seven years, and we operate really effectively. They do a public rating of us, an annual review, and that is something that other cooperatives can't access right now, but—

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Could that change?

[Rob Malli]

It could change.

[The Chair, Conservative, Blake Richards]

Okay, thank you. Time has expired.

That does bring to a conclusion the time for this panel.

We will take about 15 minutes to set up the next panel. If members or our witnesses would like to carry on conversations, there certainly is an opportunity to do that over the next few minutes.

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

Do we have an answer?

[The Chair, Conservative, Blake Richards]

He does have answer for you, yes. I'll read it to the committee:

On March 19, 2007, Finance Minister Jim Flaherty delivered the federal budget for fiscal 2007-08 and announced the federal government's intention to consolidate the Crown borrowings of Farm Credit Canada by providing direct lending to the corporation beginning in 2008. The Consolidated Borrowing Program was officially launched on April 21, 2008, and the FCC is now borrowing directly from the Federal Government. FCC will no longer be issuing debt in the capital and money markets. Outstanding capital market debt of FCC will continued to be honored by FCC until maturity date.

Does that respond to your question?

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

Who's the backup?