Proceedings of the Standing Senate Committee on
National Finance
Issue 5 - Evidence - May 5, 2010
OTTAWA, Wednesday, May 5, 2010
The Standing Senate Committee on National Finance met this day at 6:40 p"m" to examine the Estimates laid before Parliament for the fiscal year ending March 31, 2011 (topic: Extraordinary Financing Framework)"
Senator Joseph A" Day (Chair) in the chair"
[English]
The Chair: Honourable senators, I call this meeting of the Standing Senate Committee on National Finance to order" I thank all honourable senators and our guests this evening for being here" We will start early because we have an interesting subject that might take a considerable amount of time to try to cover"
[Translation]
This evening, we will continue our examination of the Main Estimates for fiscal year 2010-2011, which have been sent to our committee"
[English]
This committee has already held eight meetings in relation to these Main Estimates for this fiscal year and we will continue to examine them over the course of the fiscal year" As I have mentioned to honourable senators previously, we will file a report on an interim basis leading up to the main supply, which will be forthcoming in June"
This evening we will focus our attention on the Extraordinary Financing Framework" This plan was designed to facilitate access to credit for consumers and Canadian businesses by temporarily filling the gap left by the withdrawal of foreign financial institutions"
To bring us up to date on this implementation, which was begun last year and, in some regards, is continuing in a two- year fiscal stimulus program, we are pleased to welcome from the Business Development Bank of Canada, Jean-René Halde, President and Chief Executive Officer" From Export Development Canada, we have Stephen Poloz, Senior Vice- President, Financing Products Group" We Also, from Canada Mortgage and Housing Corporation, we have Karen Kinsley, President and Chief Executive Officer, and Marc Joyal, Vice-President and Chief Financial Officer"
I ask each of you who have opening remarks from your organizations to please go ahead"
[Translation]
Jean-René Halde, President and Chief Executive Officer, Business Development Bank of Canada: Mr" Chair, thank you for inviting me" I am happy to be here to report on BDC's contribution to the Extraordinary Financing Framework"
To start, though, a quick overview: BDC has 1,800 people in offices across Canada supporting 28,000 entrepreneurs" We are a complementary lender" By complementary I mean we design our lending to complement that of private-sector financial institutions — the better to support Canadian businesses"
The businesses we support generate about $174 billion in sales, including about $21 billion in export sales"
In the 2009 budget, the government asked us to help with two initiatives: the Business Credit Availability Program (BCAP), and the Canadian Secured Credit Facility (CSCF)" I will describe BCAP first" Then CSCF"
[English]
Let us start with the Business Credit Availability Program, BCAP" BCAP is really a partnership and not a program as such" It is a collective effort of Canada's banks, Export Development Canada and the Business Development Bank of Canada to do one thing: support credit-worthy businesses whose access to financing would otherwise have been restricted"
BCAP's goal was to have these organizations collaborate to ensure that at least $5 billion of incremental financing was available for Canadian business" I am happy to report that number has been met and surpassed" As of the end of March, as part of BCAP, BDC has made available $2"75 billion as part of the program"
For us, participation in BCAP means referrals" At the request of other financial institutions, we make a loan that usually goes beyond the risk appetite of such institutions" We also participate in syndicates, replacing departing lenders; share with financial institutions an increasing number of financial deals on a 50-50 basis; and buy participation in commercial mortgages" BCAP will continue in the current year in the form of continued collaboration between the financial institutions, EDC and BDC"
Also, as part of BCAP, but announced in this year's federal budget, is the Vehicle and Equipment Financing Partnership" The goal of that partnership is to expand financing options for small- and medium-sized finance and leasing companies to increase the availability of credit at appropriate rates to dealers and users of vehicles and equipment"
The partnership has an initial allocation of $500 million" We will fund and manage it, working in partnership with the Tau Group of companies, which will provide structuring and administration services" We are also working on different delivery mechanisms with other private sector partners, some of which we will be able to announce shortly"
The second initiative we were asked to help with is the Canadian Secured Credit Facility, CSCF" We were asked to create and manage it" CSCF has two objectives" The first is to stimulate economic activity in Canada by supporting the sales and leasing of vehicles and equipment by purchasing term asset-backed securities" The second objective is to promote investor participation and confidence in the Canadian term asset-backed securities market, as well as in vehicle and equipment financing more broadly"
CSCF ended a month ago, on March 31" Through it, we purchased in five transactions, $3"7 billion in securities" This purchase was instrumental in restarting the securitization market in Canada, providing direction to the market, and adding liquidity for originators who were unable to place public or private market issues" CSCF commitments provided financing alternatives that set pricing benchmarks for market participants" These benchmarks set a market standard that was eventually passed, ultimately reducing market prices for originators"
Our investment of $3"7 billion directly facilitated $4"3 billion of public issuance" Our pricing benchmarks and willingness to purchase these securities indirectly facilitated both public and private non-CSCF transactions, which amounted to an additional $4"7 billion of asset-backed security issuance in the Canadian marketplace"
That is BDC's contribution to the Extraordinary Financing Framework, the partnership I described as BCAP, and a new securitization facility, CSCF" Please remember we did not limit ourselves to these two initiatives" We did much more of what we always do" Our term lending reached record levels this past year: $4"3 billion was authorized in term financing, a 47 per cent increase from last year"
We also continued with our other regular services such as consulting in venture capital that are not part of the Extraordinary Financing Framework" However, I will talk about them later, if you wish"
The essential thing to know is that, during the recession, BDC lent to Canadian businesses more money than at any time in its 65-year history" We are Canada's Business Development Bank, so that is exactly what we should have done" I hope my short presentation has been clear, and I am happy to answer any questions"
Karen Kinsley, President and Chief Executive Officer, Canada Mortgage and Housing Corporation: Thank you" It is a pleasure to be here today to discuss the role of Canada Mortgage and Housing Corporation in implementing the Extraordinary Financing Framework, announced in Budget 2009"
[Translation]
When I appeared before the committee last year, I talked in general terms about CMHC's role as Canada's national housing agency" You may recall that I touched on our support of affordable housing for low-income Canadians, our research programs and our work with first nations to improve access to housing on-reserve" But it was CMHC's expertise in the area of housing finance that positioned us to support key elements of the Extraordinary Financing Framework"
[English]
As you know, the goal of the framework was to help ensure that credit continued to be available throughout the global credit crisis that took hold in 2008 and through 2009" Access to cost-effective credit is critical to ensure that businesses can continue to grow and create jobs and that consumers can continue to purchase homes"
Although Canada's financial system performed well during the global economic downturn, it was not immune to what was happening elsewhere" In particular, the global crisis made it difficult for Canadian lending institutions to obtain funds from international markets at reasonable costs"
Through the Extraordinary Financing Framework, Budget 2009 provided up to $2 billion to support lending to Canadian households and businesses" The Insured Mortgage Purchase Program, one of the measures included in the framework, was delivered by CMHC on behalf of the Government of Canada" CMHC also expanded its ongoing Canada Mortgage Bonds program in 2008 to include a new 10-year bond maturity"
[Translation]
We also administer the Municipal Infrastructure Lending Program, which provides up to $2 billion over two years in low-cost loans to municipalities for housing-related infrastructure" The government's fifth report on Canada's Economic Action Plan indicated that 93 loans have been approved"
[English]
The Insured Mortgage Purchase Program, IMPP, was introduced as a temporary measure under CMHC's existing mortgage-backed securities program" Because the IMPP was built on one of our core strengths, securitization, we were able to implement this program quickly, and at a time when it was needed the most" Under the IMPP, CMHC was authorized to purchase on behalf of the Government of Canada up to $125 billion in insured mortgage pools to help Canadian financial institutions raise longer-term funds and, in turn, make them available to consumers, homebuyers and businesses in Canada"
This relief to Canadian homebuyers and consumers came at no fiscal cost to the taxpayers" Indeed, these securities will earn a rate of return for the government that is above the government's own cost of borrowing"
Moreover, since insured mortgage pools in Canada already carry government backing, there is no additional risk to the taxpayer"
The committee may be interested to know that the activities of the IMPP form part of CMHC's overall activities and, as I mentioned, are built on existing CMHC practices and processes" These systems and practices have consistently received clean opinions from periodical special examinations and from our annual financial audit"
When the IMPP came to an end on March 31 this year, $69"35 billion worth of insured mortgage pools had been purchased" The bulk of this activity occurred in the first months of the program at the height of the liquidity crisis" In the latter half of 2009 and early this year, as the liquidity crisis abated, there was a corresponding decline in participation in the program" This decline is actually good news, a positive indication that financing conditions in Canada have eased since the Extraordinary Financing Framework was introduced"
[Translation]
The introduction of a 10-year maturity in the Canada Mortgage Bond, or CMB Program, has also been a positive development for credit markets" By way of background, the CMB Program was introduced in 2001 to complement the Mortgage-Backed Securities Program"
[English]
Under the CMB program, bonds are issued on the capital market by the Canada Housing Trust and guaranteed by the Government of Canada through CMHC, providing another source of cost-effective funds" Canada Housing Trust uses the proceeds to purchase insured mortgages packaged into mortgage-backed securities from financial institutions"
All our housing finance programs operate at no cost to taxpayers" An evaluation of the CMB program in 2008 found that it had contributed to lower cost of funding for mortgage lenders and in turn, homebuyers, and had supported competition in the mortgage market"
The addition of the 10-year CMB since that time has further enhanced the value of the program" The 10-year bond provided financial institutions in Canada with additional funding capacity by widening the pool of potential investors" Ten-year CMBs now outstanding total $9"8 billion"
CMHC's securitization activities, including both the IMPP and CMB programs, have helped to ensure that cost- effective mortgage funding has been available to Canadians during the global credit crisis" The strength and stability of Canada's housing finance system was one factor that helped Canada avoid some of the worst impacts of the global downturn" Strong economic fundamentals and the availability of funds to lend to consumers and businesses have also been key to Canada's recovery efforts"
In closing, let me say that CMHC is pleased to have played a role in delivering the Extraordinary Financing Framework" I am happy to answer your questions"
[Translation]
Stephen Poloz, Senior Vice-President, Financing Products Group, Export Development Canada: It is my pleasure to be here today to discuss EDC's role in the Extraordinary Financing Framework and how we helped Canadian businesses weather the economic storm over the past year"
[English]
As you know, in Budget 2009, Canada's Economic Action Plan, the government introduced measures to reduce the impact of the credit crunch" The mandate of Export Development Canada is to help Canadian exporters expand their international business, but as part of this plan the government authorized EDC to do more for Canadian companies at home through a two-year temporary expansion of the mandate"
We were tasked with filling gaps in private credit markets, putting more credit into Canada's financial system to help viable but struggling trade-related Canadian companies"
I will start by saying that EDC stayed within its space in providing domestic support" These expanded powers allowed us to move from facilitating exports to helping exporters" We still believe the best defence against the kind of economic troubles we have seen over the last year and a half is a good offence" Companies need to diversify their customer base, their supply chains and their investments globally" That is what EDC's core mandate is about"
When this new flexibility came into effect last March, we had to act quickly to add credit capacity to the system in a manner that complements rather than competes with the services provided by the private sector" This task meant leveraging our solid network of relationships with Canada's private sector financial institutions" This network was in place because of EDC's ``partnership preferred'' philosophy" This means that we seek to share risk without being the lead financier on a given deal" We let the private sector take the lead so as to add capacity without distorting the market" Through our temporary domestic powers, EDC provided $2"5 billion in support for 208 Canadian companies during 2009" Of those companies, 179 were small- or medium-sized businesses"
To put those numbers into context, during 2009 we also saw tremendous demand for EDC's core products and services" In total business volume, we supported $83 billion worth of international transactions for almost 8,500 Canadian companies" This business was conducted on a commercial basis, as always, and EDC earned a profit of $258 million in 2009"
While dealing with high demand for our core products and services, we also provided domestic support through three key channels" The first is pure domestic financing where we provide guarantees to banks or participate in group loans to make it easier for financial institutions to lend to Canadian companies" The second channel is through credit reinsurance, where we partner with private insurance companies to share the risk so they can protect Canadian companies against a variety of risks, including nonpayment" The third channel is contract insurance and bonding, where we partner with private surety companies to help Canadian companies guarantee their performance and effectively manage their working capital"
One way in which we supported financing to Canadian companies last year was through the Business Credit Availability Program" The government created this program to increase financing available to Canadian companies by identifying and managing financial transactions that required additional capacity" Through BCAP, EDC and BDC committed to providing at least $5 billion in additional loans and other forms of credit support to Canadian companies with viable business models whose access to financing would be restricted otherwise" This commitment was to be achieved over two years" Between EDC and BDC, we surpassed that amount in nine months" Through BCAP, EDC was able to fill financing gaps primarily by participating in syndicated and club credit facilities — essentially loans involving a number of lenders" In most cases, EDC stepped up to add capacity when, for many reasons, one or more lenders exited a syndication" EDC also worked bilaterally with private financial institutions through risk-sharing agreements that gave banks the confidence to extend more financing to Canadian businesses" By December 31, EDC had provided $1"7 billion in domestic financing for Canadian companies under this program"
Second, we collaborated with Canada's major credit insurance companies to add our capacity into the domestic credit insurance market" By May 2009, we had negotiated general reinsurance agreements with AIG Commercial Insurance Canada, Atradius, Coface, Euler Hermes Canada, Executive Risk Insurance Services and Guarantee Company of North America"
Through these arrangements, EDC can provide reinsurance for Canadian companies' domestic receivables, whereby EDC shares the risk 50-50 with the private sector" By December 31, EDC had provided $32 million in reinsurance capacity, supporting almost $103 million in sales"
Third, EDC partnered with major surety companies to provide reinsurance for bonds, whereby EDC and its partner would share the risk 50-50" By working with Canadian financial institutions to provide contract guarantees on behalf of Canadian companies, EDC was able to provide 100-per-cent protection for the bank's exposure, allowing banks to forego the collateral they would normally demand from a Canadian company, thereby freeing up more capital for Canadian business" As at end of 2009, EDC had underwritten $688 million in sales by Canadian companies in this way"
The credit crunch and the recession it triggered are over, but it will take time for the economy to settle into what we call a ``new normal"'' The first characteristic of this new normal will be slower economic growth globally" I think slower economic growth will mean a slow climb out of the hole dug during the recession and persistent credit issues, which tend to linger for two or more years after the end of a recession"
EDC's domestic powers will remain in place throughout 2010" On the domestic financing front, we expect that demand will be somewhat lower than last year as capacity begins to return to the markets" However, we must be careful not to withdraw too quickly — it is like priming an engine" Now that demand is beginning to return, we must ensure the private sector is willing and able to provide that supply"
It is likely that private lenders will remain cautious throughout this year and financial gaps will remain" EDC expects to facilitate an additional $1 billion of domestic financing, based on our current pipeline this year; around $2 billion in domestic bonding and surety; and up to $1 billion in credit insurance in the domestic market this year"
[Translation]
Again, thank you for the opportunity to appear before you today" I would be happy to answer any questions you may have"
[English]
The Chair: Thank you very much, Mr" Poloz" When you are answering questions, one item that will be helpful, especially for Export Development Canada, is for you to explain how much of your business is the extraordinary business relating to the two-year mandate to operate within Canada, where your traditional work was for exports" If you can work that information in, that will be helpful"
Another series of questions that might be asked, if you are able to help us in that regard, is how EDC works with Atomic Energy of Canada Limited," AECL was here yesterday and EDC came up in the discussion"
Honourable senators will know that we looked at this Extraordinary Financing Framework a year ago, when it was starting" The framework was the government's reaction to a difficult economic time"
We are interested in learning your assessment of how the various projects have developed" Have they worked well? What projects should be continued? For those projects that are sunsetted as of March 31 of this year, did they do their job? We want some sort of a report on all the different programs"
The Extraordinary Financing Framework was over $200 billion" That amount of money is huge" As parliamentarians, we gave a lot of leeway to the government with respect to reporting on and funding a lot of these programs" It is important for us now to look back and determine which programs should continue"
With those general remarks, I will begin with the deputy chair of our committee"
Senator Gerstein: Thank you, witnesses, for appearing before us this evening" I want to direct my question to Mr" Halde" I refer to your opening remarks, in which you said that BDC is a complementary lender" You went on to explain that by complementary, you mean BDC designs their lending to complement that of private sector banks, the better to support Canadian businesses"
If you are a businessman approaching a chartered bank in Canada, I suggest that it does not matter which one you approach" Banks use the same criteria and you either end up getting the loan if they say yes, or not getting the loan and they say sorry, we will not grant any credit on this application" You might have different terms, but basically the banks travel in a pack"
In your comments, you also say that the regular business of BDC is consulting and venture capital" How do your criteria for granting credit for your regular business differ from the chartered banks, or are you, in effect, another Schedule A bank?
Mr" Halde: I can assure you that we are not another Schedule A bank"
Senator Gerstein: Which means you must have different criteria, which I am sure the committee would love to hear"
Mr" Halde: Fine" First, you need to understand that the bank provides term lending, which means that every client that we have already has a relationship with a financial institution for their operating line — and often even for term lending"
We try, as best as we can, to put forward in front of a potential client a way of lending that takes into account the client's needs" As you correctly said, banks tend to have boxes; and in many ways clients either fit into the box and they receive the loan, or they do not fit into the box and they do not receive the loan"
We are prepared to look at much riskier situations but we will price for risk" One thing we do extremely well is assess the risk of a project properly and price it properly"
As a result, while our loss rates are much higher than the bank, because we price a bit more expensively, we still manage to be sustainable and make a profit" We generally have a risk appetite that is higher than banks, and we work in collaboration with them"
BCAP, this program that we have been talking about, was a wonderful exercise where the financial institutions in this country were cooperative" Financial institutions were, I suspect, happy to say this entrepreneur has been a long- term client that wants to take on this project, but it is above where we like to put our limit; will you look at it?
We were more than happy to oblige and provide the extra credit, even if the risk was higher" I hope that answers the question"
Senator Gerstein: That is helpful" With regard to the fact that the Business Development Bank takes higher risk, I think the committee is interested to know how your delinquency rate has changed in the past year as a result of these higher risk loans"
Mr" Halde: The delinquency rates went up; the impaired rates went up — all the various criteria that bankers look at in a recession"
Senator Gerstein: Was it more of a surprise than you expected?
Mr" Halde: It was less than we expected" The rates all went up, but for the year ending March 31, 2010, we forecasted some pretty ugly numbers" We prepared those numbers because of the corporate plan back in the fall of 2008 — I think we all recall that time" Everything was gloomy then, so we assumed nasty losses" The losses did go up, as obviously they would in a recession, but not anywhere close to what we had forecasted, which is good news"
[Translation]
Senator Massicotte: Thank you for being with us today" I am certainly among those who thought that you had an important role to play in all these special financing programs whose objective was to inject some money in the market" That had been lacking for a year or two"
Congratulations! I believe that you have done a good job" I trust the market, but I also believe that it is important to get out of the market when it is opportune to do so"
Regarding the Canadian Mortgage and Housing Corporation, I believe that the program has come to an end, but I notice that in the budget, your two programs have been extended" I also notice that the Bank of Canada's figures show a recovery, but not for securitization, where it is still very low" It seems that banks have difficulty getting involved"
What efforts are you making to make sure that you are getting out of the market? What are you doing to make sure the private sector plays its role as it was doing before? When do you anticipate getting out without the market being affected?
Mr" Halde: Perhaps I could start answering this question" There are actually two questions: one on securitization and the other about our role in extending the programs"
As for securitization, there is no doubt that it is still a fragile market" It has not recovered as we were hoping, although it is now much better than six months or a year ago"
As far as our role is concerned, we are dependent on a builder who has a project and who, as Senator Gerstein was saying, will first contact its financial institution" Presently, our financial institutions are back in the market, I can assure you of that" They are much more active on the market, so much so that we have planned a decrease in our activities for this year, simply because we believe that some of our builders who have nice projects will be very well served by the banks, the credit unions and so on"
However, there will always be a number of projects that may present such a level of risk that some financial institutions will stay away from them" I can assure you that we are presently planning a decrease in our activities because the banking market is coming back at a more normal level"
Mr" Poloz: Thank you for your question"
[English]
There are two parts, as Mr" Halde said" First, I will offer clarification to the committee in case I have confused anyone about how large our extraordinary efforts were" The Extraordinary Financing Program counted for $2"5 billion worth of transactions here in Canada for 208 companies" The program took the three forms that I talked about, but program transactions were mostly in the form of financing; second place goes to the bonding that we do" When someone wins a contract for one of the infrastructure projects, the project might be paid for, but contractors still need to post a performance bond to assure their performance under that contract, and that bond draws credit from their bank" As part of the credit crunch, that bonding was not available" Our bonding program proved to be one of the most important parts of this program and, at the time, we did not expect that" Bonding turned out to be an important part"
The other number I mentioned was $83 billion, which is our total business for the year at EDC, most of which, obviously, is in our normal line of business — international lending or insurance against foreign receivables — which is our most important part"
Turning to the specific question here, one thing that makes me feel comfortable from our side about the eventual return to normal, or to a new normal, is that we have adopted this ``partnership preferred'' approach to the lending" A company comes to us and says, my syndicate is coming up for renewal, and this bank and this bank has said they will not be there; I am $80 million short of what I need to run my business"
We will consider joining that syndication to fill that gap, but the private sector sets the terms of that engagement" We feel we are not distorting the market in any way by filling that gap" We are only bringing capacity to the table" It means that two years from now, when that syndication is up for renewal again, the private market may be fine and we can back away from that position" The bank client relationship has been maintained throughout, and the bank's expertise has been retained throughout" We feel that it is almost like an accordion" It can come and go as needs require it in the marketplace"
Senator Massicotte: Am I hearing you right? I have a sense that maybe the EDC is arguing that this extraordinary financing, which was supposed to be temporary, should be permanent and you should remain a permanent contributing financing partner to the marketplace"
Mr" Poloz: The way I described —
Senator Massicotte: Yes or no?
The Chair: We like our witnesses to give a full answer" Do not feel bound by ``yes or no"''
Mr" Poloz: Thank you very much"
I think the financing environment we were in during 2005-06-07 was itself extraordinary" It is unlikely we will go back to those kinds of conditions" That is why I used the term ``new normal"'' I believe that the excess liquidity in the global system was filling all the usual imperfections in the marketplace with essentially free money" I am sure you will agree with me"
When we go back to normal, financial institutions not only here but everywhere will stick to their knitting more" We will maybe have a different regulatory environment" We expect the environment to remain one in which there are more imperfections, and our institutions were created to help fill those imperfections"
We expect more of a demand, but does it need to be domestic? That is a question mark" We will see what happens this year" The government will make its decision almost a year from now based on the evidence" I would have to say I do not know at this stage" However, we designed the program in such a way that it can come and go" If next year everything is fine, then it will go by itself" That is the ``partnership preferred'' approach in action" We do not have to turn something off in order to do it"
The flexibility we used is in the definition of an exporter" Usually, to provide what you would call domestic financing to a company that exports, the company needs to have 80 per cent of their revenues, the majority of their revenue, as an export revenue" Many companies that we helped this past year are still exporters, but at 40 per cent or 50 per cent of their revenues" That definition is the main thing we used for the extra flexibility"
Senator Massicotte: The answer is ``maybe"''
Mr" Poloz: The answer is ``maybe"'' I will say, as the question has been asked before, that it did work very well, and I believe that the banks, when asked, would say so" Not only the banks but also the insurance companies that we partnered with should answer the question" Was it useful to help them keep their business going and the companies going? I can cite examples of businesses that would not be with us today without this program"
The Chair: We are talking about the activity of EDC in Canada for two years under the special provisions" When we approved the Budget Implementation Act last year, we approved the extension of that program, if cabinet decides that it wishes to extend it" That decision will not come back to Parliament" If you are extended, it will be by cabinet order, order in council, and senators should be aware of that fact" The extension is not something we will have an opportunity to review"
Ms" Kinsley, do you have a comment on your extraordinary role in the marketplace and whether you should stay there? You have $63 billion worth of buying up insured mortgages and taking good assets away from private sector companies"
Ms" Kinsley: We in fact do not have that program" It expired, or it came to its natural end" As I mentioned in my opening comments, we see this end as a good thing" In fact, it was a sign that liquidity was coming back into the normal parts of the market, and therefore the extra facility that we provided was not necessary"
As I said, we saw that increased liquidity towards the latter part of 2009 and into the beginning of 2010" It was not something that happened in February or March" We were starting to see, as we went out to the marketplace, less and less take up, but again, that situation was defined by us as a positive indication"
We have ongoing programs that deal with matters around housing finance, but in the case of this particular measure, as was mentioned by my colleagues, filling that liquidity gap when it was needed the most was critically important, and I think industry will agree" In our case, we would say that we are back to the normal infrastructure that is in place"
The Chair: My recollection is that when CMHC was before us previously, you indicated that you did not have any private sector take-up on your offers and that you had to go back to the market again with a package that had a lower carrying rate so that you could lend more money" Does that sound familiar?
Ms" Kinsley: I am afraid not, chair" When the auctions began — we have had 20 of them — they were oversubscribed in the initial period of time"
As time went by, the demand then started to be reduced" There was no time when the program was launched that there was not any interest"
The Chair: You had an approval for an amount of $125 billion and you put out $63 billion"
Ms" Kinsley: It was $69"3 billion; close to $70 billion"
Senator Ringuette: Chair, the situation you referred to that happened in front of our committee was related to buying auto leases" The BDC was in front of us, saying that they had no take-up, and that the market was providing sufficient financing" This committee commented, saying BDC should then leave the market alone" A month after that, we saw two press releases in the papers that indicated that the words of this committee were not taken into consideration and that BDC did go into the market and buy $12 billion worth of car leases"
Mr" Halde: We had the same situation as my colleague to the right" When the program was first launched, the concept was that maybe we would have to buy up to $12 billion worth of asset-backed securities to restart the market" However, the market recovered relatively quickly, and we ended up buying $3"7 billion worth of asset-backed securities" I think it is great that we bought only $3"7 billion and not $12 billion" It shows that the market has recovered" At this point, the program is 150 basis points above Canada's and, right now, that rate is too expensive" That is wonderful" The market has returned and our help is not needed, which is great"
The Chair: That was the Canadian Secured Credit Facility" There are so many different names for programs that I have to write them on my sleeve to remember them all"
Mr" Halde: That is correct"
The Chair: Does that program continue after March 31?
Mr" Halde: No; that program has now expired"
Senator Eaton: I will ask a question of Mr" Poloz" Talking about the new normal, will the problems in Europe, with the falling Euro, and in Greece and maybe in Spain and Portugal, have an effect on either one of your programs or the companies that you deal with?
Mr" Poloz: Yes, in many different ways there is potential for an effect" Those symptoms are not that unusual, having had the kind of global recession that we have had, which was unusual and the biggest ever"
During a recession, we start digging a hole" When the hole becomes big and someone says the recession over, all they have told us is that it is time to stop digging" We will still have the hole"
It does not matter whether they are an individual, or a company, or a government, they go through an extended period while they are in that hole where their revenues grow more slowly than they planned and more slowly than they promised their lender"
Credit stresses rise for at least a year, and often two years, after a recession is over" In 2001, which was not really a recession year, at EDC our claims and our default rates did not peak until the fourth quarter of 2003, fully two years after we had begun to grow again" Those credit stresses continue to grow" In a place like Greece, the situation is out of control" They have an unsustainable situation and they need big help" The symptoms are not that different than any other country" It can be a hot-potato kind of situation" In that situation, I think you will see that the world economy is not as strong as it may have looked during the last three to six months" That realization is settling in now" Yes, it will affect Canadian companies operating abroad — certainly the ones that are operating in Europe — but it will also affect credit markets" There will be defaults or restructuring that will cost financial institutions real money"
Senator Eaton: It might cost you more money"
Mr" Poloz: That is possible" We have exposures in the region ourselves" Canadian companies that sell there use EDC insurance to ensure that they will be paid" If there is a deeper recession in Greece, then we will have defaults"
Senator Eaton: Will Greece, Spain and Portugal affect the Euro? If the Euro drops, will that have an effect all across Europe?
Mr" Poloz: The falling Euro is a reflex mechanism or shock absorber for the region" It does not really have a direct implication on us" More of a concern is the fundamental economic performance"
Senator Gerstein: What currency do you lend money in? Is it Canadian dollars or U"S" dollars?
Mr" Poloz: For a domestic transaction, it is in Canadian dollars" The majority of our transactions are in U"S" dollars" We occasionally do something in a local currency, such as in Brazil, or Mexico, or Australia, but it is not a big part of our business" Primarily, we use U"S" dollars"
Senator Meighen: To follow up on that area, what does the weakness of the Euro do for you if you have loaned in American dollars?
Mr" Poloz: Nothing; EDC reports everything in Canadian dollars but conducts the bulk of its operations in U"S" dollars, including borrowing internationally to fund its loans"
When the Canadian dollar falls like it has this week, for instance, for a given U"S" dollar, our book is rising" To compare this year to a year ago, the Canadian dollar is much stronger" For a given amount of U"S" dollar business, it looks like we have done less than we have" It is accounting, senator"
Senator Meighen: You have answered a lot of this question, which came from the chair initially" What do the four of you foresee as the fallout from this downturn in terms of your mandates and roles? What will stick on the wall, or does everything go back to normal, as Mr" Poloz said? That is, the regulators will regulate better; the financial instruments will not be as off-the-wall as they were; and the money will not be free" In other words, we will return to a more regular situation"
The success of some of these initiatives may not be restricted to the moment in time and to the particular situation they were designed to meet" Do you see anything remaining?
Over the years, we heard that borrowers were frustrated that scheduled banks would not price to risk, and people said they would rather have the loan at a higher interest rate than no loan at all" In one case, a bank's explanation was that they might be accused of being usurious, although there is a law against that" Nevertheless, they might have gotten into public relations trouble if it was found out they were lending to a risky business at 14 per cent when prime was 5 per cent, 6 per cent or 7 per cent"
Mr" Halde, you said in your statement that you make loans that go beyond the risk appetite of banking institutions" Given the fact there are little or no second- and third-tier financial institutions in Canada as there are in other counties, is there a void here? Is there something to be learned here; is there a tale coming out of this crisis that the country might benefit from?
Mr" Halde: It is an interesting question" If we take the big picture, it has been shown that the private markets, while generally being right, are not always right in 100 per cent of the situations, as some of our entrepreneurs are finding out" It has also been shown that organizations such as ours, Mr" Poloz's and others have to be in a state of readiness" While we expand when there is a need and contract when there is less need, we cannot contract to zero because we will not be there when the need arises" We have to be in a constant state of readiness" There are enough imperfections in the market that one can keep busy for some time"
In terms of the pricing for risk, you have to realize that the banks have different objectives than we do" Banks are there to maximize shareholder value and they will do whatever is required to do so" We are asked to have a return on equity that is greater than our long-term cost of capital, which means obviously a much smaller number" Due to that different mandate, while we price for risk, the losses being what they are as a result of the riskier loans, we will be profitable" However, we will not be close to the profitability of chartered banks, which try to maximize their return"
There is probably a proportion of our lending book that banks would not be terribly interested in, despite the fact that the lending is appropriately priced" I do not know if that answers your question"
Senator Meighen: You are almost there" Going forward, where does that leave the poor entrepreneur who is turned down by the bank? Will those entrepreneurs have recourse to BCAP in the future, or a form of BCAP, or will they have to put themselves totally in your hands?
Mr" Halde: There are provincial organizations in Canada that perform a role somewhat similar to ours, depending on the provinces, which is good" From a federal standpoint, I think we have done a decent job of trying to fill those market gaps" However, not a lot of organizations in the country are filling those gaps" That is a fact"
Senator Meighen: You seem to want to get out of that role now"
Mr" Halde: No, if you heard that, then I did not express myself well"
Senator Meighen: It is my hearing" I am sorry"
Mr" Halde: The role of the Business Development Bank is to take on more risk" That is our role; that is our basic role and that role will continue"
Under BCAP, the government basically said to the financial institutions, please, if you will not take this risk, be kind enough to refer your client to BDC or EDC; do not just say no, say no but send them to DBC and EDC"
My hope is that attitude will carry on"
Senator Meighen: BCAP was only a referral system? I thought it was a means of spreading the risk"
Mr" Halde: It is and it is not" In some cases, it is purely a referral system where they call us and say, we have this long-term client with a project; I cannot take it because it is beyond my risk; and will you please take it?
Obviously, we do because that is our normal role"
Due to the problems in the market, we were also involved with banks" Mr" Poloz talked about syndications" We never were called on syndicated deals" There was no need; the market had lots of liquidity" Suddenly, a lot of lenders departed and the phones started ringing with people saying, I am trying to close a $300 million deal; we are short $50 million; and can you take a piece?
Obviously, we did"
Again, the syndication was led by a private-sector financial institution" In those cases, we were only adding financial capacity to the system" We performed both roles" One role was our normal role, which is to lend to entrepreneurs taking more risk, the difference being that, this time around, financial institutions were encouraged to refer to us — and willingly agreed — so we could lend more"
A normal lending year for us is approximately $2"9 billion or $3 billion" We lent $4"4 billion" You have to understand that, in a recession, entrepreneurs put aside plans and projects" Normally in a recession, our loans would have gone down from $3 billion to perhaps $1"5 billion" Instead, they went up to $4"4 billion, because we received all the referrals from the banks, and we participated in syndications, deals on commercial mortgages and other pari passu deals with financial institutions"
Hopefully, that clarifies the answer"
Senator Meighen: Yes; if I were the Minister of Finance, would you urge me to speak to the banks and say, keep those referrals coming; they are good deals for businesses in Canada?
Mr" Halde: I suspect that has already happened" I think there is a great willingness from the various financial institutions to continue this relationship" I will be candid: I think they uncovered a friendly partner whose role is there to help"
Senator Meighen: That is what I was looking for" I hope you are right because that role seems to make sense"
Senator Marshall: I have a question for BDC and then one for CMHC" BDC spoke earlier about increased risk, and you talked about your delinquency rates going up" Can you give a percentage or number to indicate your delinquency and collection rates?
Mr" Halde: I prefer to get back to you with a solid number rather than guess, because the rates changes rapidly" Can I send that information to you?
Senator Marshall: Sure"
What is your source of funds; does the federal government provide the funding for lending, or does the BDC raise the funds?
Mr" Halde: In the past, we used to raise our funds in various structured transactions" As of about three years ago, we now borrow directly from Ottawa"
Senator Marshall: Go back to the delinquency rate" Who eats the losses?
Mr" Halde: We do" If I was to make a simple financial statement for the bank, we charge interest rate to entrepreneurs — that is our revenue; we have our operational expenses, payroll, people and rents and so on; below that, we have our losses; and what is left, thankfully, is still a positive number, despite the losses"
Senator Marshall: The money comes from Ottawa" You lend it all out" You do not get it all back, obviously, because there is a delinquency rate" Does money go back to Ottawa? Close the loop"
Mr" Halde: I will take it down one more level" Basically, we sell shares of the bank to Ottawa" Ottawa puts in capital" We are allowed to borrow at different rates" If it is for a term loan, we are allowed to borrow $10 for every dollar of equity" If it is a mezzanine loan, it is only $4 per dollar of equity because the loan is riskier" The different rates protect the balance sheet of the bank"
With that balance sheet money, which is a mix of equity and loans that we borrow, we extend loans out" As I said earlier, those loans will bring in revenue through interest and will pay our expenses" Including the delinquencies, we are profitable" We have been profitable since 1997" Every year, as any good corporation, we pay back dividends to our shareholder" Our payout ratio is about 15 per cent, and every year we happily send a cheque to our shareholder for 15 per cent of our earnings"
Senator Marshall: That shareholder is the Government of Canada?
Mr" Halde: Yes; right now, we are in excess of $175 million of dividends to the Government of Canada" We do not cost the government anything, contrary to programs you might think of where there is an appropriation" In our case, we more than balance"
Senator Marshall: I am interested in the delinquency rates"
Mr" Halde: I will provide you with that exact statistic"
Senator Marshall: How does CMHC decide what sectors financing will be provided to? I will explain why I am asking the question" In Newfoundland and Labrador, there is a sector called personal care homes" Large ones are able to receive financing from CMHC, but the smaller ones are not" As a result, the smaller ones have difficulty operating" I would think CMHC would have something available for them"
What is the distinction? Why is a certain part of the sector eligible for financing from CMHC but not another portion?
Ms" Kinsley: In terms of broad context, we are mandated only to provide mortgage insurance, which is really what you are talking about, for residential mortgages" Residential mortgages will include care facilities as you have described" They are eligible"
The question is why one type versus another" That decision is based on underwriting criteria" In other words, we look at the projects and assess the risk of those projects and, like lenders, we will say that we like the risk of this project or we do not like the risk of another one" It is not a mandate issue; it is a risking decision at the end of the day"
When we look at large and small facilities, especially care facilities, in addition to the structure, which of course we are comfortable with, we look at the business operation" It provides care and services" An element of risk is added that we have to consider" With small facilities, that risk generally increases because the critical mass is less" Therefore, if the business runs into vacancies, as an example, the potential for loss is higher"
It is an oversimplification, but the issue about large or small, one or the other, is a per-project, per-risk decision, not a mandate issue"
Senator Marshall: Will the element of risk that you speak of be impacted by the Extraordinary Financing Framework? It sounds like when BDC is talking, Under this Extraordinary Financing Framework, it sounds like BDC would assume more risk and lend the money out" Does the same thing hold true for CMHC? Why does CMHC not assume more risk with this additional financing?
Ms" Kinsley: I will make the distinction between two things we do in the area of housing finance" The area we are talking about in terms of extraordinary financing measures was not about lending; it was about providing liquidity into the marketplace" We are not a lender under any circumstance in a commercial sense" We provide mortgage insurance on loans that banks provide to protect the lender, the bank, from default of that particular borrower" That is one line of business" That is not what the extraordinary financing measures were about"
The second line of business in the mortgage market, separate from providing default insurance, is to ensure there are sufficient funds in the housing market for the institutions to access to be able to make loans for creditworthy projects" It was that issue, the availability of funds for lending, that required us to step in and help"
The insurance activity continued in its normal way with its normal criteria; the extraordinary financing was to help increase the supply of funds for creditworthy projects in the residential mortgage market"
Senator Marshall: Are the criteria consistent regardless of the province?
Ms" Kinsley: Yes, it is by application, and it is assessed by application" The market it is in, the quality of the borrower, the strength of the project itself; they are all individually assessed"
Senator Massicotte: I have a supplementary question"
I think I heard the answer, but the average return to the shareholder on capital was 15 per cent in the last five years?
Mr" Halde: No, our average return on equity for the last 10 years has probably been in the neighbourhood of 4 per cent, 5 per cent or 6 per cent"
Senator Massicotte: If I say equity, including all the money they advanced as shareholder or as an advance, when you say 5 per cent or 6 per cent, it includes all that capital?
Mr" Halde: It includes the return on equity, which is the capital; that is correct"
Senator Massicotte: They have not provided capital on loans?
Mr" Halde: No"
Let me correct that" There is the purchase of the shares, which creates the equity on the balance sheet, and then there is the fact that we can borrow" We used to borrow from the structured markets" We used to borrow generally in yen or euros, but we were asked not to borrow from the outside but, rather, borrow from central office here in Ottawa, which we have agreed to do, obviously" We have close to $4 billion in equity now" The number I am quoting you is our return on that $4 billion in the shares"
Senator Massicotte: You pay separate interest on the borrowings they make to you"
Mr" Halde: I can assure you that we pay market rates"
Senator Massicotte: Is the bulk of the equity, the amount of guarantee, significant compared to the equity? Is it a multiple?
Mr" Halde: I am sorry?
Senator Massicotte: You say 5 per cent or 6 per cent on capital contributed but I presume there are imputed guarantees besides that?
Mr" Halde: No, we do not have imputed guarantees"
The Chair: For clarification purposes, I have a supplementary question as well" Both Business Development Bank of Canada and Export Development Canada had their authorized capital increased by $1"5 billion last year as part of this package, and that is authorized capital that you then sell the shares to the Government of Canada to raise more revenue to do the other activities you are asked to do?
Mr" Halde: That is correct"
The Chair: Do you have any borrowed money in addition to the authorized capital of the sale of capital investment by the Government of Canada? Do you have any external loans? You indicated you were asked to borrow from the Government of Canada" That is, I assume, a loan in addition to selling your shares"
Mr" Halde: Yes; I will go by memory so I might be marginally off"
Right now we have approximately $17 billion in assets" Basically, $3"7 billion is devoted to the CSCF program, the securities that we purchased" The rest is obviously loans receivable from our various clients, in the neighbourhood of $13 billion" That is one side of the balance sheet"
The other side of the balance sheet is $4 billion worth of equity, and the difference being borrowings, so let us assume $13 billion" Of that, there is probably $2 billion left to outside parties, structured notes that will evaporate over the course of time" The last one is due in 2022" The rest is borrowing, so $11 billion is borrowings directly from the treasury"
The Chair: Honourable senators are interested in knowing whether the outside borrowing is guaranteed by the Government of Canada"
Mr" Halde: Yes, it is"
Senator Massicotte: What is the rate on the loans?
Mr" Halde: It is low" I am not close enough to tell you if it is 15 basis points, 25 basis points or 35 basis points these days, but it is a low rate, given the situation"
We have been profitable since 1996 so I suspect the government feels comfortable"
The Chair: Mr" Poloz, do you have a similar type of structure and exposure?
Mr" Poloz: With some differences, yes: Because our borrowing is almost entirely in U"S" dollars or other foreign currencies, we did not switch to the central borrowing authority as BDC has done" In round figures, EDC has received in its lifetime about $1"3 billion of capital from the government" That capital includes the extra money in last year's budget, which was $350 million" Over the course of that period, it has given back something like half of that amount in dividends, but has approximately $10 billion in capital because of all the retained earnings in 65 years"
The outstanding assets are approximately $30 billion; so we have borrowings in the marketplace of approximately $20 billion to fund those loans on our book" We pay market rates for that borrowing" We borrow from ordinary investors around the world to fund that borrowing" Our costs are the costs of borrowing plus the costs of rent and personnel" Then we add our revenues, which come from the interest rates that we charge, which are market interest rates" We have made a profit every year doing that"
Our debt is still guaranteed by the Crown" It is a Triple-A bond that is in the market and there is an explicit guarantee there"
The Chair: The legislation that creates both your entities will have a limit on borrowing; I assume that is in there"
Mr" Poloz: Yes, each year when we prepare our corporate plan that goes to Treasury Board, we have a side plan, our borrowing authority, which is approved by the Department of Finance" It is usually arranged with the plan in mind — this is how much we will need, and a little bit more is allowed" We would need to go for extra if the situation became extremely active"
Mr" Halde: If I can add one comment, my colleague made an interesting point, which I probably should have raised in my comments" When I said we had $4 billion of equity, this is not $4 billion of capital that the government put in" It is about $2 billion worth of capital that the government put in; the other $2 billion is retained earnings" That adds up to the $4 billion"
I talked about equity" It is really made up of two pieces — the shares we sold to Ottawa and, on top of that, the retained earnings" That is for clarification"
Senator Murray: I want to pursue one or two matters that were raised earlier"
Mr" Halde, from your perspective at the Business Development Bank, what was, or is, the value added that EDC brought, and brings, to the domestic market? Is it money? Is it expertise? Is it a different set of criteria or programs?
Mr" Halde: That is an interesting question" EDC has a tremendous amount of industry expertise that I think we all recognize" We often share expertise and discuss how to look at things"
In the situation that this country was in a year and a half ago, the concept of all hands on deck to help out and allow various arms of government to help out was an appropriate one" While we were a bit surprised that my friend to the left ended up with domestic powers, it was probably a correct decision, given the urgency of the situation"
The question, which I think Mr" Poloz mentioned, is a year and a half from now, depending on whether the market has returned to normal, will those powers still be appropriate? The fear is obviously a bit of confusion in the marketplace, a bit of duplication" We have to be somewhat careful, but the policymakers will have to make that decision, taking into account the situation a year and a half from now"
Senator Murray: You answered my second question, which was whether, from your perspective, it is desirable or necessary to extend their involvement in the domestic market beyond the two years"
Mr" Halde: We will have to see what the market looks like at that point" We are somewhat concerned about duplication and confusion; but I think, in this case, it was the right answer because so many entrepreneurs were looking for financing" The more of us that could help out, the better"
Senator Murray: Is it to the Minister of Industry that you report?
Mr" Halde: Yes"
Senator Murray: EDC reports to the Minister of International Trade, I think"
Mr" Poloz: Right"
Senator Murray: Will one or the other or both of you, describe a typical ``risk-sharing agreement''? Who are the other sharers in this risk? Is it correct to assume that whatever return is contemplated in such an exercise, that the return is commensurate — indeed proportionate — to the risks that the various participants have carried? Describe a typical risk- sharing agreement"
Mr" Poloz: I will take a simple example where the company that is in question has lost one of its lenders" It may be a Scandinavian bank, for example, that has left the marketplace — or it could be GMAC or GE Capital, someone like this — but the company still has a domestic bank that the company uses in addition to this lender"
Then we will sit down with the company's bank" The bank may have a limit on that company and the company may have, let us say, a $50 million credit line" We will be prepared to take half that weight in that situation"
If the bank has a limit that says $20 million instead of $25 million, we will persuade that bank that these are extraordinary times" That is what BCAP is all about; let us all work together" We both agree this company will make it across this chasm"
When it is done, it is a fully pari passu loan agreement, where we are in exactly the same status as the bank" All collateral is shared 50-50 and the same fees and interest rates are charged" Everything is identical" That is the biggest role we normally play"
Normally, there is more than one institution" Especially in the case I described, we look for others who might be prepared to participate" That extra work is worth it because we have more capacity to go around" If we can bring in other institutions and go three ways or four ways, then we have enhanced the credit package for that company" When that two-year agreement is over, the company will have lots of bankers interested in doing business with them"
We think that partnership philosophy serves us well" As I described it before, the role is like an accordian" The question of whether it should be permanently domestic is less of an issue to me" The question is, does the flexibility serve the financial and corporate sectors well?
We may have flexibility and use it only on occasion" It is not the same as having a special program, given the circumstances in which we found ourselves last year" Should it be extended is a separate question to me from how did the flexibility work for us?
I think we worked extremely well together" We were able to divide up the marketplace in convenient ways" In several deals, we both participated in that syndication"
Senator Murray: Mr" Poloz, the chair mentioned AECL" This is not the subject matter of this evening's meeting, but I am the culprit who asked the AECL people yesterday about their relationship with EDC over the years"
I have been under the impression, perhaps wrongly, that the Government of Canada, one way or the other, has offered sweet deals or inducements to foreign governments or utilities over the years to purchase the CANDU or the nuclear technology from us" In particular, I recalled an announcement made some years back when Prime Minister Chrétien was in China"
My take on the announcement when I saw it — and I never did revisit it — was that we are giving the money to them to buy the technology from us" Anyway, I left it there"
After the meeting, a man from AECL approached me and said, look, you are wrong about that" We charge the Chinese interest, something in excess of 7 per cent, and it has been a money-maker" I do not know if you are in a position to comment on that deal" However, if you feel like it, do so" I think I have corrected the record, as it were"
In general, on your relationship with AECL, is this business, from your perspective, conducted on a completely commercial basis?
Mr" Poloz: I can comment" AECL, of course, is in the business of selling expensive equipment, so when they make a sale, we know that someone will need financing in that picture" We often find ourselves together on a bit of a mission, whether in India or Turkey, and there is an implicit understanding that EDC is prepared to help with that financing" Help usually means there are partners" Of course, a nuclear reactor is a big purchase, and it is too big for EDC's balance sheet to finance entirely, so we are there to be a partner and see how we can facilitate the matter"
It is done not quite on a commercial basis" The nuclear sector is governed by an understanding under the consensus arrangement of the Organisation for Economic Co-operation and Development between export credit agencies, similar to the one for aerospace or shipbuilding" These sectors have big gaps in financing" However, it amounts to close to market rates" They can borrow to buy a nuclear plant at 18 years, and the rate will be based on the 10-year U"S" bond yield plus a premium" The case in China was sufficiently expensive that China pre-paid its loan because market rates went below what they were charged at the time"
Senator Murray: The number $30 million sticks in my mind"
Mr" Poloz: In China, in 1997, we provided about $1"5 billion in financing" That sounds like a big number, and the loan can be that big because it had a Canada Account guarantee attached to it, so it was literally on the Canada Account, but we funded it" It was priced in the same way I described"
Senator Murray: Who else was involved?
Mr" Poloz: I do not think anybody else was involved in that one" I think the price tag was about $2 billion, thereabouts, so the Chinese simply paid the equity"
Senator Murray: The loan was $1"5 billion"
Mr" Poloz: Yes; it has been fully repaid" It was paid in advance because market rates went below the agreed rate" There was nothing by way of a sweetener, if you like" There never would be"
Senator Murray: Because of the OECD consensus arrangement?
Mr" Poloz: It is an agreement across countries" When one is placing a bid for that project, one has to notify the other members, and they see all the terms that we are offering" That agreement also ensures a level playing field" If a French company bids on the same project, they can see what financing is offered and say, we can match that rate" That is the way that process works"
Senator Murray: That is helpful" Thank you"
Mr" Halde: I want to answer, also, Senator Murray" You asked about the way the risk is shared between our institution and others"
Senator Murray: Your organization can do what his can?
Mr" Halde: Yes, we have had syndication and pari passu deals and so on" In those cases, we go with the rate that has been set by the private partner, obviously" We are joining the party, so we are at the same rate"
However, the vast majority of what we have done is the referrals that I mentioned, where the banks say, we have a problem; can you handle it? Of the $2"7 billion in loans we made in BCAP, we have made $236 million in syndication, but we have done well in excess of $1"5 billion in referrals where we are pretty well on our own" In this case, you have to understand the loans are small amounts" I think Mr" Poloz mentioned that in the case of Export Development Canada, they had 200 transactions" In our case, our $2"7 billion involved 9,860 transactions — so close to 10,000 transactions — and we were pretty well on our own on those small transactions" I want to clarify that point"
Senator Neufeld: Further to Senator Murray's question regarding the Chinese purchase, there are about nine CANDU reactors in countries around the world, not only China" Do you have involvement in any of those purchases, and are they under the same terms and conditions? Were the transactions all commercial, as you described to Senator Murray?
Mr" Halde: Yes, exactly the same; the only other one that we are involved in is the one in Romania, which is a much smaller involvement" I was not around when that deal was made, but our participation is about $300 million" It is governed by that same framework"
Senator Neufeld: Thank you"
The Chair: To clarify the record, Mr" Poloz, can you explain the Canada Account to honourable senators?
Mr" Poloz: Of course; when EDC talks about the business I have described here tonight, that business is all done on what we call corporate account, which is on the balance sheet of EDC, as I described it before" We have around $10 billion in capital, so we can carry $30 billion in loans and another $30 billion in contingent liabilities through our insurance programs" By the way, last year, that activity put five cents out of every dollar into the Canadian pocket, which means 5 per cent of Canada's gross domestic product was generated by the transactions we facilitated" We are proud of that return"
A separate facility is available to the government called Canada Account"
Senator Murray: Who controls it?
Mr" Poloz: The Government of Canada controls it"
Senator Murray: You do not; who does?
Mr" Poloz: The government"
Senator Murray: A minister; who; what office?
Mr" Poloz: A Canada Account transaction is approved at cabinet"
If you think about going along the risk spectrum, the Canada Account is there for when we reach a point where risks are too great for EDC to contemplate and yet the government feels the transaction is of strategic importance to Canada, so they will ask EDC to administer a loan under the Canada Account" That is what happened with the Chinese nuclear reactor, for instance"
EDC will operate the loan as it would any other" We operated a loan last year for the auto sector, for example, and I think most people said it turned out to be a successful operation" In any case, if it is too big or too risky for EDC to handle on its normal balance sheet, that tool is available" EDC is like an accordion" It has come through tough times" Last year, we did more business because of the auto sector and a few others" In better times, it is not used" It has a long history of use" In that particular situation where it is in the national interest or of strategic importance, the matter goes all the way to cabinet, so somebody thinks it is important for us to do, but it cannot be done under normal facilities"
The Chair: Thank you"
Senator Murray: It was through the Canada Account that General Motors — I am trying to find a polite word for ``bail out'' —
The Chair: Rescue"
Senator Murray: — was financed" You were not involved in that deal, were you?
Mr" Poloz: We were involved" We were a key adviser throughout the process" Our ground transportation team did all the negotiating, and people from Finance Canada and Industry Canada were engaged, and the Ontario government"
Senator Murray: The government made a decision, ratified by Parliament, as I recall, to use the Canada Account, and the government turned to EDC as the coordinator?
Mr" Poloz: They turned to us as the centre of expertise, if you like, because we make transactions like this one every day" It happened to be a really big number" In fact, in the automotive sector, we have lots of transactions"
Senator Murray: The government effectively wrote off the loan, did they not?
Mr" Poloz: No, senator"
Senator Murray: They have to dispose of the shares by a certain date"
The Chair: The Minister of Finance told us that he wrote off the loan"
Mr" Poloz: Perhaps what the minister is talking about is that when a Canada Account loan is made, it is almost always in a high-risk area" Certainly, that was true in the automotive case"
Just as with EDC, if I make a loan of $100 million this week, if it is ordinary risk — that is, a reasonably rated company — I put $5 million of reserves aside automatically against that loan" Reserves can be as high as $10 million depending on risk" In a risky situation, we are talking about $30 million or $40 million worth of reserves against that loan"
When there is a Canada Account transaction, the Minister of Finance must choose a reserve rate and that reserve rate then must be accounted for as an expenditure" That money is ``spent'' or put aside so that it shows up in this way" I think that is what the minister was probably referring to" Of the roughly $10 billion that was put out there, about $1 point something billion — I forget the exact numbers — was paid back last month of the loan part" You are correct; the rest is in an equity holding, which will be a longer term question" Nothing has been written off at this stage"
Senator Murray: There is accounting and accounting, with the reserve"
Mr" Poloz: It is a reserve" If I reserve $5 million against a $100 million loan, it is as if I burned that $5 million" It goes in a vault and it is saved there in case something goes wrong" The reserve is calculated on the probability that something goes wrong"
Senator Murray: What happens to the shares?
Mr" Poloz: I know less about this part" The shares are held on behalf of the government in Canada Deposit Insurance Corporation, CDIC" Shares cannot be held in Canada Account" Canada Account holds the loan; it is still there" The loan is backed up with the shares held somewhere else"
Senator Murray: Are we obligated to dispose of the shares in those tranches by the dates set out? Are we obligated under the agreement or is that a statement of intention?
Mr" Poloz: I confess that I do not know the answer to that question"
Senator Murray: Sorry for pressing on matters that you did not come here to discuss"
Mr" Poloz: It is easy enough to find out, if you wish"
Senator Murray: I would like to know"
The Chair: Anything you can help us out with will be appreciated" It is a matter of some interest to us" Thank you, Mr" Poloz"
Senator Ringuette: I was surprised to hear that when you provide a loan with partners, whether it is with both BDC and EDC, or with private sector partners, although your risk is higher — and, you indicated that you always consider the higher risk situation — your lending rate is the same as your partner's" Is that situation constant?
Mr" Halde: No, I think I did not express myself properly"
When we make a deal with another institution pari passu wherein we are all equal in the deal — that is, the risk and the rate are the same — we are like two peas in a pod" We share the risk, receive the same return, and so on"
Senator Ringuette: The amount of the loan is the same?
Mr" Halde: Usually it is 50-50, but it could be 40-60" Basically, the risk is the same" We charge the same rate" It is the same in syndicated deals, where there might be six partners" We might be the seventh partner" We have the same rate as the six others and charge the same rate as the six others"
When we, at BDC, lend to an entrepreneur, then we charge whatever is the appropriate risk" We tend to price for risk so that we can manage to eke out a small profit at year end" They are two totally different situations"
Senator Ringuette: How does your lending rate differ in those two situations?
Mr" Halde: I am not sure I understand the question"
Senator Ringuette: What is your average lending rate in a partnership with shared risk and your lending rate on a sole loan provider?
Mr" Halde: That is a difficult question to answer because the rate depends on the situation, I hate to say" If we are being asked to participate in a Triple-A loan as part of a syndicate, clearly, the spreads are low and the rates are low" In our own case, our average portfolio at the bank is at prime plus 2"7 per cent" That rate is the average" That means that we have some loans at prime plus one and a half and some loans at prime plus four or prime plus five" There is a range" On large deals with Triple-A companies, then the rate will be prime or even below prime, depending on the situation"
Senator Ringuette: Prime and even below prime?
Mr" Halde: There are firms that buy marginally below prime, as I am sure my colleague will agree"
Senator Ringuette: That is interesting to hear, especially when we have small- and medium-sized businesses in this country that are struggling to survive, and they have to pay to our chartered Canadian banks prime plus, plus, plus, never mind prime below"
The small- and medium-sized businesses of this country are the backbone of our country" I am interested in following my research on this issue, but maybe not tonight" I will move on to my other question unless you want to specify something"
Mr" Halde: I want to point out a big difference"
The vast majority of our portfolio does not qualify even as a Triple-B rated portfolio" About 90 per cent of our portfolio is below Triple-B rated" That means that the portfolio is high risk" Those small- to medium-sized businesses — and I fully agree with you about the importance of SMEs in our country — will pay, on average, prime plus 2"7"
The loans I am talking about, which are to much larger companies like the ones that my friend here talked about earlier, are much larger companies that have a Triple-A rating and that we at BDC were never involved with before because that was not our role" We were called into these situations because there was a shortage of credit and lenders had departed" You are talking about apples and oranges here" You are talking about large Triple-A rated companies participating in the syndicate versus the small SMEs that are at a much lower quality in terms of risk rating"
Senator Murray: And your normal clientele"
Mr" Halde: And our normal clientele, yes"
Senator Ringuette: Continuing on with this rating issue, what was the rating on the car leases that you bought?
Mr" Halde: They were all Triple-A rated by two different rating agencies" Our own staff provided a lot of modelling and simulation to satisfy ourselves that they were Triple-A rated" Despite ratings from two rating agencies, we thought it best to do our own homework and we agreed that they were Triple-A rated"
Senator Ringuette: Ms" Kinsley, what was the rating on the $69 billion of mortgages you purchased?
Ms" Kinsley: Mortgages in Canada are not rated in the same kind of credit rating sense" They are individually risked or underwritten"
These mortgages were all of high quality" One of the criteria was that they not be in default at the time they were purchased" To give you a sense of how they have performed, if that might be the question, they are performing exactly on a par with the average portfolio in the marketplace" For instance, the Canadian Bankers Association publishes what arrears rates are in residential mortgages across a number of financial institutions" This portfolio will perform at exactly that level"
Senator Ringuette: If you look at your average mortgage term, and your average car lease terms, most of them are for four years or five years" Therefore, we will be able to assess the value of these over-$70 billion worth of investments only five years from now"
Ms" Kinsley: I am not sure I fully agree" As I said, you can monitor the performance, as any lender will do, of the portfolio, which was the figure I described — the level of arrears" In other words, have home owners missed payments? Have they missed payments for three months and, if so, at what level?
We look at this portfolio no different than the marketplace as a whole to make an assessment as to whether the portfolio, in the case of IMPP, is performing better, worse or equal to what the rest of the market is performing at" It is performing at the average, exactly"
We monitor that performance every single month" There are monthly payments of principal and interest as homeowners make their payments under the mortgage"
Senator Ringuette: We will know only the net value, because the Government of Canada and the taxpayers of Canada had to borrow money to provide you with these funds to buy those mortgages from our financial institutions"
Ms" Kinsley: Yes"
Senator Ringuette: I understand the default scenario" You find the default scenario with your purchases of $69 billion worth of mortgages similar to the private sector default scenario" We will know only five years from now the net result of these actions because of the borrowing in the marketplace and the five-year possible default" We still do not know what will happen"
In that regard, I was reading, interestingly, today, an article in regards to mortgage fraud" It seems they have identified one Canadian institution for sure but there might be a number of other financial institutions affected by these kinds of scams" Law firms would be involved, as would mortgage brokers and banking staff"
As I was saying, we will know only five years from now" When you have recouped all the payments on these mortgages, when we have repaid the taxpayers of Canada for these purchases of mortgages, then we will know the net result and the net value for Canadians"
Ms" Kinsley: If I can —
The Chair: I think the witness wanted to answer first" Then we will go to the supplementary question"
Ms" Kinsley: I need to clarify" As I said earlier, we are not actually lending the money to homeowners" We are entering into an agreement with the financial institution to buy mortgages that they have already put on their books" We are providing the liquidity" The obligation to repay us is with that financial institution, not with the homeowner"
In the event that one of our financial institutions defaulted, as an institution, then, yes, that is of some issue, although we have mitigations for that event" We are not exposed to the actual default of the homeowner" Our exposure, if there is one, is to any default of the financial institution itself"
It is a different relationship" You are talking about credit default of the homeowner, when the homeowner does not pay back the loan"
Senator Ringuette: You were talking earlier that your mortgage default was similar to the mortgage default of other financial institutions"
Ms" Kinsley: To be clear, it was the performance of the portfolio" It is not our risk" It is how those loans are performing to the financial institutions"
Senator Ringuette: Okay"
Senator Gerstein: Ms" Kinsley, you have invested the taxpayers money in a program for which you expect a financial return to the taxpayers of Canada" You do not expect a financial loss but a financial return" Is there any basis that you, at this point, expect that there will be a loss to the Canadian taxpayer?
Ms" Kinsley: No"
Senator Gerstein: Thank you"
Senator Massicotte: The senator was so sharp, he stole my question"
Senator Peterson: It also says these pools are insured" Who is carrying the insurance?
Ms" Kinsley: That could be a private insurer or us, in our other role"
Senator Peterson: It could be but who is it? Are you carrying most of it?
Ms" Kinsley: The insurer of record is not disclosed, but because we have a majority of the market share in the insurance area, if you apply some intuitiveness to it, we probably would be equivalently represented in the pools, from an insurance perspective"
Senator Peterson: If they are insured, they are low equity to begin with"
Ms" Kinsley: Not necessarily"
Senator Peterson: That is usually the case"
Regardless, if the homeowner defaults, the bank takes the hit, or rather, banks have loans insured so they are clear"
Ms" Kinsley: Clearly"
Senator Peterson: So they are not in any risk at all?
Ms" Kinsley: There are two levels of default" One is the homeowner defaults to the bank" The insurance, whether provided by us or by a private sector competitor, will pay the bank" The second level is the guarantee of the institution to us on the $69 billion" That is the guarantee of the institution to us"
I think this is perhaps an important point" Due to loans and mortgage insurance being something we do in the normal course of our mandate, and because these loans were insured but might have been sitting on the banks' balance sheets, they are not obligated to sell them — in fact, they do not sell the majority of the mortgages" When the liquidity issue came, it was not about the quality of the assets" It was about the funding to continue to lend in the mortgage field" We were able to purchase those assets because, first, we knew what the risk was like" As you said, in many cases, we might have insured them individually" Second, there was no additional risk to the government because the government was already exposed on the insurance side"
I can be categorical perhaps in response to the other senator's question with respect to the repayment of the institutions to us under the $69 billion liquidity facility, because credit was covered"
The Chair: Senator Ringuette you have time for one more short question" You have a page and half of questions" Can you choose one?
Senator Ringuette: I want more information on General Motors because we have been hearing conflicting stories" GM claims to be repaying its loan, but when some expert digs into the issue, it is not really the case"
As one taxpayer, I want to know whether GM is repaying its loans to the Government of Canada and to the tune of how much?
The Chair: Mr" Poloz, do you want to dive into equity and loan and help us out here?
Mr" Poloz: Yes, first the loan that was made to GM was shared between the federal government and the Ontario government" Second, it was shared between what is called a cash loan and the rest was classified as equity"
If we look at it from an investor point of view, we are receiving additional compensation for the risk taken by the taxpayer, if everything works" When GM has said it has paid back its loan, it has" It has paid the cash part, which is around one tenth of the total package" The rest is an equity outstanding" As we have discussed, I do not remember the details of when that was supposed to happen, but for sure the companies have shown a good recovery so it is reasonable to be positive on the outlook" It is not done, of course, but the sector has recovered well and the companies have restructured themselves" I find myself reasonably optimistic about the outcome there"
Senator Ringuette: When you say a repayment of one tenth, is that shared equally between what the federal government and the Ontario government?
Mr" Poloz: Yes; my understanding is that it was all pari passu; one third for Ontario and two thirds for the federal government" Any dollar that came will be split between the two"
The Chair: Pari passu is our Latin expression of the evening"
Mr" Poloz: It is a lender's term that is used often"
Senator Massicotte: Given that we have the president of CMHC here, a year ago we had a public debate about the type of loans CMHC is making" I am trying to remember correctly" You want to make long loans" The Bank of Canada expressed a public opinion that they were against CMHC assuming that risk because they thought there was too much credit, and it would increase the default rate of homeowners" How did that issue finish? With the recent measures of the Minister of Finance, CMHC is now back to a shorter, 25-year amortization, I think?
Ms" Kinsley: No; the only time I can recall the Bank of Canada having a view was a few years before that on something called the line of credit product, but you are talking about loans with amortizations longer than 25 years" Until 2008, there were loans that would go to 40 years" Amortization in 2008 was pulled back to 35" That loan still exists in the marketplace today"
Senator Massicotte: You never made 40-year loans?
Ms" Kinsley: We did for the period of time that they were available, but we and the private sector were capped at 35 years"
The Chair: Now I have a supplementary question"
Does the minister impose that cap by regulation or by ministerial fiefdom? How does that cap happen? It does not come before Parliament"
Ms" Kinsley: For the private sector insurers that have a backing by the Government of Canada, and the private sector insurers have a 90 per cent backing by the Government of Canada, that guarantee arrangement is administered by the Minister of Finance" The minister sets the terms under which those private sector insurers can insure, and in that case the minister decided that it would be to a maximum amortization of 35 years"
The Chair: The terms are not set by regulation so we do not review them there, and it is not by statute so we do not review them that way" You were asked to participate in the business credit availability" We did not pass legislation saying you should participate in this activity" Was that directive from the minister as well, who said, We want you to get into the activity and start putting this money out there; and ultimately, it turned out to be $2"5 billion each?
Mr" Halde: It was part of the 2009 Budget" BCAP was basically a request to the financial institutions, EDC and ourselves to work together to extend extra facilities" The target given to all of us was that we should provide at least $5 billion of incremental credit, which I am happy to say we have done, well before the two-year period"
The Chair: Do your different ministers have the authority under the legislation by which you are created or established to direct you to go into activities you were not involved in before?
Mr" Halde: No, that is not exactly right" We are governed by the BDC Act" What the budget did was ask us well within our act to provide extra lending, participate in syndications and other activities that we had not participated in before but that were well within our act" We reacted to the budget request, but it was always within our act" The minister did not have to do anything special for us to participate in BCAP"
The Chair: We as parliamentarians did not have to do anything because you have always had that authority" It was only a minister urging you to exercise that authority"
Mr" Halde: That is basically correct"
Mr" Poloz: Our situation at EDC is completely different" Our Export Development Act asks EDC to finance Canada's export trade" An entirely additional segment was added to the act asking us to enter domestic trade, which was the term used" In addition, our regulations, which I referred to earlier, were suspended for the two-year period" Legislatively, our minister cannot tell us to enter this area"
The Chair: That was in the Budget Implementation Act, as I recall"
Mr" Poloz: Automatically, unless extended, the situation goes back to the way it was"
The Chair: Thank you very much for being here" We have run out of time" We could go on and on with our questions" We thank each and every one of you for being here"
(The committee adjourned")