Federal large employer program provides lifeline for companies shut out of bond markets

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A new federal loan program for large companies is unlikely to appeal to many of the country’s premier employers, but could give an important lifeline to mid-tier corporations that are shut out of public debt markets.

The program announced Monday, called the Large Employer Emergency Financing Facility (LEEFF), will offer short-term bridge loans to companies with annual revenues of at least $300-million that need at least $60-million in financing. It targets major employers “whose needs during the pandemic are not being met through conventional financing," a government news release said.

The largest, most highly rated Canadian companies already have plentiful financing available to them. Activity in public debt markets is reaching record levels as an array of large corporations raise funds, often at attractively low rates.

Yet for the next tier of companies, which either don’t have bond programs or have debt that’s considered below investment-grade by ratings agencies, available credit has been more constrained. The LEEFF program could relieve some pressure on hard-hit sectors such as energy, retail, real estate and tourism, where companies need more money to ride out the novel coronavirus pandemic, but the crisis limits their ability to borrow.

“Most companies will have received some sort of credit," said Aaron Henry, senior director of natural resources and sustainable growth at the Canadian Chamber of Commerce. “In some instances, though, they’re not receiving the full amount [they require]. And so that in combination with additional costs and uncertainty of future costs is really where this federal program is trying to fill the void.”

There’s no shortage of debt capital for investment-grade companies in Canada. In fact, after briefly seizing up in March, the investment-grade Canadian bond market has gone on a tear, said Rob Brown, co-head of debt capital markets for RBC Capital Markets.

“Year to date, for domestic corporate and financial issuance, we’re at $53-billion, which is up 61 per cent year over year. That’s the most active start to a year on record,” Mr. Brown said.

Financial institutions such as banks and insurance companies have issued about half of those bonds, while utilities, communication firms and energy companies – mostly midstream pipeline builders – have made up much of the rest.

In a typical year, there are only about 75 to 90 unique issuers using the Canadian corporate bond market, excluding banks. But the Chamber of Commerce estimates that at least 3,000 of Canada’s 1.1 million businesses have more than $300-million in annual revenue, and the number could be much higher.

Since the crisis began, the bond market has remained largely closed to lower-rated companies, whose bonds are referred to as “high-yield." Only one issuer, real estate company Cominar REIT, has sold a high-yield bond in Canada in recent months, Mr. Brown said, and that was at a steep price. Other deals, particularly for energy exploration and production companies, were scrapped altogether.

“We had a couple lined up pre crisis, but had to pull transactions because of pricing blowing out to a point that made it unattractive for them, in addition to the fact that investors were shying away from that particular sector given the challenges in the oil price environment," Mr. Brown said.

Even in sectors facing significant headwinds, some large companies – such as restaurant owner Recipe Unlimited Corp. – can still borrow from banks and are unlikely to need LEEFF support in the near term. Recipe, with 40,000 employees and nearly 1,400 outlets under banners such as Swiss Chalet and Harvey’s, borrowed $300-million on its credit line in mid-March, tapping banks even when 42 per cent of its outlets were closed and the remainder were only doing takeout orders.

After shutting down restaurants in March, Recipe also renegotiated the terms of its debt with bankers and bondholders. But it’s still unclear whether that will be enough. “While the actions taken to provide liquidity and to amend debt covenants are considered sufficient for the foreseeable future, the future effect of COVID-19 on the economy and businesses, in general, remains uncertain," the company said in a news release.

In sectors such as natural resources and retail, companies often borrow against inventory, cash flow or accounts receivable. But with stores closing and stay-at-home orders, “the cash has dried up and the accounts receivable have dried up and the inventory is essentially impaired,” said Karl Littler, senior vice-president of public affairs for the Retail Council of Canada.

That makes it much harder for banks to gauge the risk in extending more credit to those companies, and “there might be a reduced risk appetite [from] financiers in this environment,” Mr. Henry said.

Uptake of the LEEFF program will also depend heavily on key details that have yet to be announced, including the interest rate the government will charge on the loans and limits Ottawa plans to place on dividends, share buybacks and executive pay at companies that take part.

There are also concerns that by supplying money to the tier of companies that the private sector won’t fund, the government could end up using taxpayer money to prop up failing firms, said Alexander Dyck, professor of finance at the University of Toronto’s Rotman School of Management.

“It’s not a value-enhancing activity if you’re going to be bailing out companies that don’t have a future. For both oil and gas, and airlines, unfortunately this shock looks like it’s going to be semi-permanent,” Prof. Dyck said.

With a report from Susan Krashinsky Robertson.

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