The federal government will be able to take an ownership stake in public companies and will block executives from earning more than $1-million, according to newly released details of Ottawa’s loan program for struggling large companies.
The Large Employer Emergency Financing Facility (LEEFF) program, particularly aimed at airlines and oil and gas companies, was announced on May 11 and is designed for distressed companies with at least $300-million in annual revenue. The minimum loan size will be $60-million, and there is no explicit maximum loan size.
The program offers the government’s help as a lender of last resort to companies that are unable to obtain private financing and would be at risk of falling into bankruptcy owing to the economic impact of the novel coronavirus pandemic.
The program harks back to the 2008-09 financial crisis when the federal and Ontario governments bailed out GM and Chrysler, owning and then selling shares in those companies.
Finance Minister Bill Morneau announced further details on the LEEFF program Wednesday, including the fact that unsecured loans will be offered at 5 per cent per year, rising to 8 per cent in the second year and increasing a further 2 per cent a year thereafter.
“I think people will compare this program with what happened in 2008-2009, but of course, it’s quite different," he said. "At that stage, GM, Chrysler [were] actually in bankruptcy proceedings. What we’re trying to achieve here is to make sure firms don’t go into bankruptcy.”
For Ottawa, nonetheless, the political calculation is the same. The risk of not breaking even, through a temporary government program of loans and public ownership in private companies, is viewed as more appealing than the risk of allowing companies to go under. The latter would result in major job losses and reduced federal revenue from personal and corporate taxes.
The government says it already has the legislative authority to move ahead with the loan program.
Whether a loan is approved will be decided on a case-by-case basis after discussions between company and government officials. Applications will be assessed against criteria such as whether the company has a significant impact on Canada’s economy and whether they can show how the loan will be part of the company’s return to financial stability. Companies must also pledge to minimize job losses.
The new details of LEEFF state that a company must provide the federal government with the option to purchase common shares through a stock warrant, or receive cash equivalents, equal to 15 per cent of the principal amount of the loan. A stock warrant gives an investor, which in this case is the government, the option to buy company shares at a specific price by a specific time. The conditions also say the government could appoint an observer to the corporate board of the company receiving a loan.
Paul Boothe, a former senior federal public servant who led the federal team that negotiated the government bailout of GM and Chrysler, said the $1-million cap on individual pay will be viewed as too high by many Canadians and too low by executives. The 2009 auto bailout included a US$500,000 executive compensation cap, which Mr. Boothe said was strongly opposed at the time by executives.
“My experience was that really drove them crazy," he said.
Mr. Boothe said it is “very unusual" that the government is not imposing an upper limit on the size of loans under the COVID-19 loan program. He said the government is getting involved in the private sector, but is not clearly indicating how much risk is being shifted to taxpayers.
“If I was in Ottawa working for the government right now, I would be sweating this," he said. "In the best scenario, you have taxpayers owning pieces of big companies in Canada, and in the worst scenario, losing a lot of money. That’s what it comes down to.”
Alberta Premier Jason Kenney expressed concern Wednesday with the notion of Ottawa holding shares in large public companies.
“We do not want governments directing the operation of companies in terms of micromanaging their decisions,” he said in Edmonton.
Mr. Kenney said his government continues work on a provincial Plan B in case the federal program doesn’t deliver. That could come in the form of a credit facility or some other backstop to ensure liquidity for Alberta’s largest employers, he said.
While he agreed that public dollars should come with restrictions around executive compensation, dividends and share buybacks, Mr. Kenney said his government continues to work with Ottawa to ensure LEEFF comes with “a light administrative touch.”
“There’s no point in announcing programs that are so bureaucratically opaque that they are not accessible by distressed employers,” he said.
Airlines, oil and gas businesses, and large retail companies are among the most likely sectors that would be interested in the emergency loan program.
Canada’s airlines have called for government aid and laid off or idled thousands of employees as border restrictions and lockdowns have halted most air travel. Air Canada has pointed to multibillion-dollar airline aid packages in the United States and Europe, saying Ottawa should provide measures that allow it to compete.
Air Canada said in March that CEO Calin Rovinescu and finance chief Michael Rousseau are forgoing their 2020 salaries, and the airline is suspending its share-buyback program. In 2018, Mr. Rovinescu received a compensation package worth $11.5-million, including salary, bonus and share-based awards. (Air Canada has not published 2019 compensation amounts.) Air Canada did not respond to questions Wednesday on its participation in the LEEFF program.
Marie-Josée Carrière, a spokeswoman Sunwing Airlines, said the Toronto-based leisure carrier is applying for a loan under the program but declined to say how much. ‘We are pleased to see this major commitment to large employers,” she said.
Spokeswomen for Porter Airlines and WestJet Airlines said the companies are reviewing the bridge-finance program before deciding what to do.
WestJet executives, including CEO Ed Sims, have taken a 50-per-cent pay cut this year, while the airline’s vice-presidents and directors took a 25-per-cent reduction. Mr. Sims made a salary of $660,000 and total compensation of $3.4-million in 2018, the last full reporting year before the company was taken private by Onex Corp.
Transat AT CEO Jean-Marc Eustache, who took an unspecified pay cut, was paid $1.4-million in 2019.
For the oil and gas sector, the interest rates under the program should suit exploration and production (E&P) companies, now forced to borrow at much higher rates if they want to access the debt markets, said Jeremy McCrea, analyst at Raymond James.
“Most E&P companies will be paying more than 8 per cent on their unsecured debt anyway and this just gives them a different cost of capital with the government,” Mr. McCrea said.
But the program may be of no use to the largest energy companies, many of which have refinanced debt or added to their credit capacity at lower rates over the past two months. Also, it is not known how current debt holders may respond to being asked for waivers that will allow the government to have secured status for 20 per cent of their loans.
Crescent Point Energy Corp., the oil producer with major operations in Saskatchewan, said it will not make use of the program, which it sees as a funding source of last resort that has some unfavourable strings attached. One of them is the 20-per-cent requirement and another is warrants for common shares. “Where we would have concern is it kind of upsets the apple cart in terms of our existing lenders,” spokesman David Gowland said.
“Not to look a gift horse in the mouth, but it’s just not the right kind of solution and certainly we’re not looking to pursue that," he said.
The LEEFF program will be run by the Canada Enterprise Emergency Funding Corporation (CEEFC), a subsidiary of the Canada Development Investment Corporation, which is a federal Crown corporation that manages government holdings of commercial entities.
The Crown corporation was involved in owning and ultimately selling shares in GM and Chrysler that were acquired as part of the joint bailout of the two auto makers by the U.S., Canadian and Ontario governments during the 2008-09 financial crisis. In that case, both companies went bankrupt and were bailed out by taxpayers via direct ownership stakes.
Ottawa and Ontario spent $13.7-billion on the GM and Chrysler bailout and ultimately fell about $3.5-billion short of breaking even after selling all of its shares once the economy recovered.
Prime Minister Justin Trudeau repeated his comment Wednesday that the program is not a bailout.
“They are loans that come with conditions around governance, around paying proper share of taxes, around a plan for climate change,” he said. “These are the kinds of things that we expect as Canadians when our taxpayer dollars go towards supporting businesses.”
With a report from Jeff Jones in Calgary
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