By: Danielle Maksimow and Hansik Ha, Norton Rose Fulbright Canada LLP
Many Canadian businesses who are debtors of institutional investors are facing economic pressures and liquidity concerns during the COVID-19 pandemic. In response, the Government of Canada is providing various liquidity support to qualifying Canadian businesses to alleviate this concern. Businesses can qualify for various liquidity programs depending on their size, organization and needs. This article will provide a brief overview of the various programs currently offered in Canada and the eligibility requirements and application details for same.
BUSINESS CREDIT AVAILABILITY PROGRAM (the BCAP)
The BCAP is designed to help qualifying small and medium Canadian businesses and consists largely of the following programs:
- The Canada Emergency Business Account (CEBA)
- Export Development Canada (EDC) Loan Guarantee Program
- The Business Development Bank of Canada (BDC) Co-Lending Program
- BDC Mid-Market Financing Program
- EDC Mid-Market Guarantee and Financing Program
The Canada Emergency Business Account (CEBA)
Aimed at providing liquidity support for small businesses, the CEBA provides interest-free loans to Canadian businesses and not-for-profits to help cover non-deferrable operating expenses such as payroll, rent, utilities, insurance, and regularly scheduled debt service.
The size of the interest-free loans can be up to Cdn.$40 thousand, with 25% (up to Cdn.$10 thousand) of the loan forgiven if it is fully repaid on or before December 22, 2022.
To be eligible for the CEBA, the applicant business must have been a Canadian operating company with a federal tax registration as of March 1, 2020. Further, the business must meet the following requirements:
- (a) the total employment income paid out was between Cdn.$20 thousand and Cdn.$1.5 million in the 2019 calendar year;
- (b) it must have an active business chequing or operating account with their primary financial institution which was opened on or before March 1, 2020;
- (c) it must be the businesses’ first time applying for CEBA;
- (d) it must acknowledge its intention to continue to operate its business or resume operations; and
- (e) it must agree to participate in post-funding surveys that are conducted by the Government of Canada.
Owner-operated small businesses with no payroll, sole proprietorships receiving business income, and family-owned corporations which pay employees in the form of dividends are also eligible for CEBA, as long as they are able to demonstrate having eligible non-deferrable expenses between Cdn.$40 thousand and Cdn.$1.5 million. Businesses are able to apply for CEBA through their primary financial institutions.
EDC Loan Guarantee Program
The EDC Loan Guarantee Program is designed to grant small and medium-sized Canadian businesses from all sectors and regions increased operating credit during the COVID-19 pandemic. This program is delivered by various financial institutions and credit unions in partnership with EDC.
Under this program, which is accessible through the debtor’s existing financial institution, EDC will guarantee up to 80% of a new loan or an operating line of credit of a business from such existing financial institution, up to a maximum loan size of Cdn.$6.25 million. The financial institutions will continue to employ credit risk assessment for new loans and lines of credit, and the exact size of each debtor’s loan or line of credit will be determined accordingly.
BDC Co-Lending Program
The BDC Co-Lending Program is designed to work with financial institutions across Canada to co-lend loans to qualifying small and medium businesses for their operational cash flow requirements ranging between Cdn.$1 million and Cdn.$12.5 million.
Under this program, the banks and BDC will fund qualifying loans together with 80% of the loan commitment by BDC, and the remaining 20% of the commitment by the bank.
This program is available to all Canadian businesses that:
- have been a directly or indirectly impacted by COVID-19;
- have been a business which was financially stable and viable prior to the COVID-19 pandemic;
- use the financing solely to support operational cash flow requirements of the business; and
- adhere to the financial institution’s credit criteria.
Similar to the EDC Loan Guarantee Program, this program is accessible through the debtors’ existing financial intuition and the size of the loans is determined by each of the financial institutions according to their credit assessment criteria.
The EDC Loan Guarantee Program and the BDC Co-Lending Program may be combined to increase the support available to qualifying businesses.
BDC Mid-Market Financing Program
Also provided in partnership with BDC, the BDC Mid-Market Financing Program is intended to support Canadian medium-sized businesses from any sector or industry whose credit needs are not being fully met through other BCAP programs and are having liquidity concerns due to the impacts of COVID-19 pandemic and/or the recent decline in oil and gas prices.
Under this program, BDC and the applicant business’s primary financial institution (or lending syndicate) jointly provides a 4-year junior loan ranging between $12.5 million and $60 million to support their operational needs. BDC supplies 90% of the funding for the loan, with the bank supplying the remaining 10%.
This program is designed for those businesses with yearly revenues of between $100 million and $500 million. To qualify, the applicant business must have been financially stable and viable prior to the current environment, and been negatively impacted, directly or indirectly, by COVID-19 and/or the recent decline in oil and gas prices.
This program will be available until or before September 30, 2020, and can be accessed through the businesses’ primary lender.
EDC Mid-Market Guarantee and Financing Program
The EDC Mid-Market Guarantee and Financing Program provides liquidity support to medium-sized Canadian companies, where EDC will work with Canadian financial institutions to guarantee up to 75% of new operating credit and cash flow loans. The loans will range in size from $16.75 million to $80 million.
This program is designed for those businesses with revenues between $50 million to $300 million. The eligibility for the guarantee program has been expanded to include not only exporters and international investors but also businesses that sell their products and services within Canada.
Additional program details, including the application process, for this program have not yet been released but are expected in the coming weeks.
LARGE EMPLOYER EMERGENCY FINANCING FACILITY (LEEFF)
In addition to the BCAP, which largely provides financing support for small- and medium- sized businesses, LEEFF is designed to provide bridge financing to large employers whose needs are not being met through conventional financing during the COVID-19 pandemic. This program is aimed at assisting businesses preserve their employment, operations and investment activities until they can access more traditional market financing. LEEFF will be provided in the form of interesting-bearing term loans that will employ a standard set of economic terms and conditions to ensure timely support.
Minimum loan size of $60 million, based on the applicant cash flow needs for the next 12 months, is required and the actual loan size for each applicant will be assessed on a case-to-case basis based on demonstrated need.
Large for-profit enterprises in all sectors, except for those in the financial sector, can apply for funding under LEEFF. Certain not-for-profit enterprises, such as airports, could also be eligible. To qualify, the applicant business must:
- have a significant impact on Canada’s economy, demonstrated by
- having significant operations in Canada or
- supporting a significant workforce in Canada;
- can generally demonstrate approximately $300 million or more in annual revenues; and
- require a minimum loan size of $60 million.
Further, to qualify for the program, companies must show a commitment to minimizing the loss of employment and sustaining their domestic business activities and that LEEFF funding is part of their plan to return to financial stability. The LEEFF program may not be used to resolve insolvencies or restructure firms, or to provide financing to companies that otherwise have the capacity to manage through the current crisis. Companies that have been found guilty of tax evasion are not eligible under LEEFF. In determining eligibility, an assessment will be conducted of the applicant business’ employment, tax and economic activities in Canada, and its international organizational structure and financing arrangements.
LEEFF is provided through Canada Enterprise Emergency Funding Corporation (CEEFC), a subsidiary of Canada Development Investment Corporation (CDEV), in cooperation with Innovation, Science and Economic Development Canada (IESD) and the Department of Finance.
The key terms for LEEFF
|The loan will be provided by way of two loan facilities: an unsecured facility equal to 80% of the aggregate loan and a secured facility equal to 20% of the aggregate loan|
|Interest Rate:|| (i) Unsecured facility: the interest rate is cumulative at 5% per annum payable quarterly in arrears. The interest rate will increase to 8% per annum on the one-year anniversary and will increase by a further 2% annum each year thereafter. Payment in kind will be possible for the first two years of the loan.
(ii) Secured facility: interest rate will be based on the interest rate of the borrower’s existing secured debt.
(i) Unsecured facility: five years.
(ii) Secured facility: will match that of the borrower’s existing secured debt.
|Restrictions:||Certain operating requirements while the loan is outstanding including (i) prohibitions on dividends, capital distributions and share repurchases, and (ii) certain executive compensation restrictions.|
|Covenants:||(i) performance of obligations under existing pension plans; (ii) performance of material obligations under applicable collective bargaining agreements; and (iii) publishing an annual climate-related financial disclosure report, highlighting how corporate governance, strategies, policies and practices will help manage climate-related risks and opportunities; and contribute to achieving Canada’s commitments under the Paris Agreement and goal of net zero by 2050.|
|Governance:||CEEFC reserves the right to appoint an observer to the board of the borrower.|
|Conditions:||Certain conditions must be satisfied before the initial advance of funds, which will include certain waivers from existing lenders or bondholders of the borrower.|
No deadline for applications has been announced and the LEEFF program will remain open while the current economic climate persists.
To access the LEEFF program, the applicant should complete the online enquiry form on the CEEFC website and send it to LEEFF-CUGE@cdev.gc.ca. The applicant business will be contacted by representatives of CEEFC and IESD to begin the process, and will in this first step be provided a non-disclosure agreement, application form and instructions from the CEEFC representative.
In conclusion, there are many different programs available to Canadian businesses struggling to meet their operational liquidity needs due to the COVID-19 pandemic and/or the drop-in commodity prices, ranging from a small loan program starting at $40 thousand or less, to one exceeding $60 million. The Government of Canada has allowed businesses to combine different subprograms under the BCAP to maximize liquidity support available to qualifying businesses. Further, these loans and lines of credit include additional support measures such as postponement of principal payments and loan forgiveness. Supplemented further by rental assistance programs and payroll support programs, it is anticipated that many qualifying Canadian business will be able to find the liquidity relief they need from one or more of these support programs.
However, due to the requirement to access many of these programs through the business’ existing financial institution, those businesses without an existing relationship with a Canadian financial institution may face challenges accessing these programs. Some of these programs also require the applicant businesses to exhaust conventional means of financing, which may further restrict these companies from accessing the BCAP.
Larger businesses may access the LEEFF program. However. accessing the LEEFF program requires the business to commit to complete annual climate-related disclosure. While it will be easier for those businesses that already employ the practice of preparing climate-related disclosure to comply with this requirement, for those businesses that are facing liquidity concerns, the annual climate-related disclosure requirement could potentially be quite onerous.
In addition, as a result of the high interest-rate coupled with potential government oversight through the CEEFC’s ability to appoint an observer to the board of directors, the LEEFF program just may not an option for some debtors.
It will be important for institutional investors to continue encouraging struggling Canadian debtors to explore government liquidity support programs through their existing financial institutions and/or institutions such as EDC, BDC or CEEFC, to ensure their daily operational cash flow needs are not interrupted and they are familiar and ready to access these programs should the need arise.