May 22, 2020
LEEFF loans a last resort for big firms: Boardroom expert
Government involvement in company boards will be onerous: Governance expert
Canadian companies thinking about applying for the federal government’s new financing program for large businesses ought to tread carefully, according to one corporate governance expert.
“This should absolutely be a last resort for companies,” said Richard Leblanc, professor of governance, law and ethics at York University, in a television interview with BNN Bloomberg on Thursday.
Ottawa began accepting applications for the Large Employer Emergency Financing Facility (LEEFF) program — which aims to provide support to the country’s largest employers whose needs during the pandemic are not being met through conventional financing — on Wednesday.
But there are some stipulations that might not be appealing for big firms.
Indeed, several companies have said they are in no hurry to apply for the program, even as the pandemic continues to weigh on their businesses.
Suncor Energy Inc., which cut its dividend by more than half and swung to a $3.5-billion loss in the first quarter amid a drop in oil prices, will not be applying for the program “at this time,” the company told BNN Bloomberg.
“We’ve been proactive and managed our business over many years so as not to have to rely on these sorts of programs,” a spokesperson said in an emailed statement Wednesday.
Bombardier Inc., meanwhile, said in an email its “liquidity position is solid in the short term” and “it is too early to determine whether we are going to apply or not.” Its decision to stay on the sidelines is in spite of the fact that it foresees a 30-per-cent sales cut in its core private jet business as the virus hurts demand.
And WestJet Inc., which, along with Air Canada has undergone massive layoffs amid the pandemic, is also undecided on whether it will apply. The company said in a statement it is “reviewing LEEFF program specifics to determine our next steps.”
LeBlanc said the program does contain some “good points,” such as the caps on dividends, share buybacks and executive compensation.
But he also cited multiple risks — first and foremost the “exorbitantly high interest rates.”
The financing for LEEFF would be in the form of an unsecured facility (80 per cent of the total loan), which would run for five years, and a secured facility (20 per cent).
The interest on the unsecured facility starts at five per cent for the first year and then rises to eight per cent in the second year. Two per cent is added onto the existing interest rate every year thereafter.
LeBlanc noted that by contrast, the prime rate set by Canadian’s largest banks currently stands at 2.4 per cent. Given the disparity, he said companies should first consider traditional financing options before turning to the government.
He also cautioned on the government’s right to appoint an observer to the borrower’s board.
“I liken it to an activist shareholder, which is never a good thing and in this case the activist is the government,” he said.
“Many government officials don’t have commercial experience, and sitting in the room with a government official who owns 15 per cent of your stock could have a chilling effect on boardroom dynamics and conversations.”
Even if a company hasn’t been convicted of tax evasion, and thus would qualify for LEEFF, taking a loan from the government comes with the risk of exposing your tax-avoidance practices, such as the use of shelters in Caribbean countries, according to LeBlanc.
“There are several large, significant Canadian companies that will be approaching the government that have engaged in these types of activities,” he said, without naming specific firms.
“There are companies that are highly aggressive in this field. So if you’re on a board, you’re having these tough discussions. Do we want to be seen to be this aggressive, particularly now? The optics are crucial.”