Feds want equity option through loan program
The federal government wants the option to take equity in publicly traded companies that tap into its new loan program for big business, The Logic has learned.
On Monday, Finance Minister Bill Morneau announced the Large Employer Emergency Financing Facility (LEEFF), through which the feds will give credit of $60 million or more to firms with at least $300 million in annual revenue that “make meaningful investments in Canada, and provide jobs to Canadians.”
The program is designed to let the federal government act as a lender of last resort to large companies that would be viable if not for the economic impact of the COVID-19 pandemic. To secure a loan through LEEFF, companies must show they intend to “preserve employment,” and agree to restrictions on executive pay, dividends and share buybacks.
But the government also wants the option to take shares in participating companies. “Should a business require further government support through something like LEEFF, we will ensure that these terms protect the interests of Canadian taxpayers,” said Pierre- Olivier Herbert, Morneau’s director of media relations. “This includes seeking warrants from publicly traded companies that are convertible to equity or cash equivalents.”
The LEEFF loans will be “based on commercial principles,” said Finance Canada spokesperson Anna Arneson. In the case of private companies, the program will seek other forms of compensation, though the government has not yet made those public.
The feds have taken equity in exchange for funding to sectors hit by previous economic downturns.
In 2009, the federal and Ontario governments took a combined 12 per cent stake in General Motors as part of a US$9.5-billion rescue package. They also gave Chrysler $2.5 billion, joining the U.S. government in getting a 10 per cent stake of that company.
Morneau said Monday LEEFF would be “available to any sector” save financial institutions. In March, he said some sectors particularly affected by the pandemic, like air transportation and oil and gas, needed “specific help.” He did not say Monday whether the government would be unveiling additional sector-specific aid programs.
The Canada Development Investment Corporation will run LEEFF, with input from the finance and innovation departments.
The federal holding company manages the federal government’s stakes in the Hibernia oilfield and the Trans Mountain pipeline and previously controlled its shares in GM and Chrysler.
Some energy executives have reportedly suggested the federal government take preferred stakes in companies so that they can avoid taking on additional debt, citing the auto bailout.
But in April, Morneau said firms were seeking access to credit, not a new shareholder.
“Businesses don’t want government taking equity in their business,” he said.
On Tuesday, Herbert said that’s still the government’s belief. The new program is meant to help companies avoid bankruptcy, and they “should seek, to the greatest extent possible, private lending options prior to seeking LEEFF.”
Don Drummond, a former associate deputy minister at Finance Canada, said the warrants could provide a fallback if firms can’t return the funding they receive under LEEFF. “From the taxpayers’ perspective, I’d rather have the loan repaid,” he said. “But if there doesn’t seem to be any prospect (of that) anytime too soon, I would rather have an equity interest than walking out with nothing.”
But Paul Boothe, who helped negotiate the auto industry package as senior associate deputy minister of Industry Canada, said there are risks to the federal government’s pursuit of the equity provisions. “If you’re taking warrants, then you’re asking to participate in any upside,” he said. “You have to give up something else, and it might be security (or) the rate that you’re charging on the loan.” The federal funds are meant to be a last resort, so the government should be at the front of the creditor line if companies can’t repay, according to Boothe, now director of the Lawrence National Centre for Policy and Management at Western University.
Holding a financial interest — whether as a debt-holder or an equity investor — in a company also complicates the federal government’s role as a rule-maker and enforcer, according to Boothe, who previously worked on federal telecom, foreign investment and environmental reviews.
In addition to limits on passing the money on to executives or shareholders, companies must also commit to publishing annual climate disclosures. Drummond said those requirements could limit the program’s appeal, and are examples of why companies won’t want the feds as an equity investor long term.
“Most companies have fairly singular objectives: they’re trying to maximize the rate of return to their shareholders,” he said.
The feds reportedly lost $3.5 billion on the auto industry rescue, but unlike that funding, it has said LEEFF cannot be used for restructuring or as part of insolvencies. “These are bridge loans, not bailouts,” Prime Minister Justin Trudeau said Monday.
Arneson said the program will “require the co-operation of applicants’ private sector lenders to ensure government financing is focused on sustaining business operations.”
Drummond said the examples of Chrysler and GM show the risk of taking stakes in distressed businesses in a downturn.
“Whatever value they took in equity when they took it, they would probably end up doing a whole series of writedowns,” he said.
We will ensure that these terms protect the interests of Canadian taxpayers.