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Ottawa wants equity option from public companies borrowing money through its new loan program for big businesses

Minister of Finance Bill Morneau takes part in a press conference at the National Press Theatre in Ottawa in March 2020. The Canadian Press/Sean Kilpatrick
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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 Ottawa 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.”

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Talking Point

The federal government will seek warrants that are convertible to equity or cash equivalents from publicly traded companies that use its new Large Employer Emergency Financing Facility. The program will let Ottawa act as a lender of last resort for firms with at least $300 million in annual revenue that would be viable if not for the economic impact of the COVID-19 pandemic.

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.

Ottawa has 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 (CDEV) will run LEEFF, with input from the finance and innovation departments. The federal holding company manages Ottawa’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.” 

The equity position provision is “a backstop for businesses that are unable to pay back the LEEFF loan, said Trevin Stratton, chief economist and vice-president of policy at the Canadian Chamber of Commerce. Many firms may have strong balance sheets and would prefer to pay back the debt, but right now need “some additional liquidity because of what’s going on with prices right now in their industry,” he said, citing the oil and gas industry as an example. 

Don Drummond, a former associate deputy minister at Finance Canada, also said the warrants could provide a fallback if firms can’t return the funding they receive under the program. “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 Ottawa’s role as a rule-maker and enforcer according to Boothe, who previously worked on federal telecom, foreign investment and environmental reviews. “ Transport Canada’s a big regulator of the airline industry,” he noted.

In addition to limits on passing the money on to executives or shareholders, companies must also commit to publishing annual climate disclosures. Drummond, now an adjunct professor at Queen’s University’s School of Policy Studies, said those requirements could limit the program’s appeal, and are examples of why companies won’t want Ottawa 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.

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Ottawa 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 cooperation 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.  

This story has been updated with comment from the Canadian Chamber of Commerce and Western University’s Paul Boothe.