Federal aid comes with strings attached

Companies barred from dividends, buybacks, must cap executive pay at $1M

Struggling corporations with nowhere to turn for needed cash can now come to the federal government for emergency loans to get through the economic turmoil of the COVID-19 pandemic, Finance Minister Bill Morneau said Wednesday.

But in exchange for risking untold amounts of public dollars on companies that can’t find loans anywhere else, the Liberal government says it will force large businesses to agree to a range of conditions to borrow Ottawa’s money.

That includes a hard, $1-million cap on executive compensation that would force higherups to take pay cuts if they make more than that, Morneau’s office confirmed to the Star.

Companies will also be barred from paying dividends to shareholders and buying back their own shares on the stock market and they can’t get the loans if they’ve been convicted of tax evasion.

Speaking at separate press conferences Wednesday, Morneau and Prime Minister Justin Trudeau stressed this new emergency loan program for big business is not a “bailout.” Instead, they said, the loans are meant as a last-ditch tool to “bridge” struggling corporations through the pandemic downturn while protecting Canadian jobs and worker pensions.

“Millions of Canadians work for large employers. We want to make sure that those large organizations get the bridge financing they need so they can keep Canadians employed,” Morneau said.

Applications opened Wednesday for the new program, which the government calls the Large Employer Emergency Financing Facility, or LEEFF. To qualify, corporations need at least $300 million in yearly revenue. They also need to have a “significant” workforce and operation in Canada. Morneau said the minimum LEEFF loans will be for about $60 million and that there is no maximum; the size of the loans will depend on a company’s needs over the next 12 months.

Paul Boothe, a former federal and provincial deputy minister who helped design the auto bailout during the 2008 financial crisis, said the program appears designed for the federal government to provide loans to the “riskiest” companies that cannot raise credit from private sources during the pandemic crisis.

“We want to make sure that those large organizations get the bridge financing they need.”

BILL MORNEAU FINANCE MINISTER

“It is a big risk, and that’s the fine line that the government is trying to walk. Hopefully all these companies will recover and flourish and pay their loans back. But some probably won’t,” Boothe said. “Taxpayers will have losses that come from the ones that don’t.”

As Morneau explained, the LEEFF program will give the government the ability to purchase company warrant shares at an agreed-price or charge fees worth 15 per cent of any loan. That means Ottawa could sell these shares for a profit if the company’s stock rises above the agreed price.

The government will also be able to place an “observer” on a company’s board of directors,

Morneau said.

Companies taking these loans will also be required to report annually on aspects of their business related to climate change and how they are contributing to the government’s goal of net-zero greenhouse gas emissions by 2050.

Twenty per cent of the loan will be guaranteed by a company’s existing creditors, Morneau said while the remaining 80 per cent will have a five-percent interest charge for the first year and eight per cent for the second year. Interest will rise by two percentage points each year, climbing to 14 per cent by the fifth and final year of the loan, according to a government fact sheet.

Craig Alexander, chief economist with the accounting firm, Deloitte Canada, said that aggressive interest rate will push companies receiving loans to pay them back as soon as possible. That and other conditions — including the cap on executive pay — will help ensure only companies who truly need help getting through the pandemic downturn try to get these loans, he said.

“If you have a climbing interest rate associated with the financial aid, what it means is businesses will take the financing but they’ll pay it off as fast as they can,” he said. When the LEEFF was announced last week, NDP Leader Jagmeet Singh argued it would be better for Ottawa to buy equity shares of companies rather than extending loans. In an interview with the Star at the time, he said that that would ensure the government had greater influence over how companies use its money and it would reduce the risk that loans don’t get repaid.

On Wednesday, during the special House of Commons session about the government’s pandemic response, Singh charged the government should slap stricter conditions on the loans to ensure companies don’t use public dollars to enrich executives. He also called on the government to ban companies that stash money in tax havens from using the program.

“There is no provision in the plan that the government’s announced that would stop public money that is purposely hiding their funds in an offshore account to not pay their full share of taxes,” Singh said.

Trudeau responded by challenging Singh to name specific companies “whose workers should not be helped.”