Good morning to everybody. Thank you for appearing.
We're here, pursuant to Standing Order 108(2), for a study on measures to enhance credit availability and the stability of the Canadian financial system.
I'll provide the witnesses with five minutes. Perhaps you can keep it to five minutes, and I'll try to indicate that you have a minute left when you're making your presentation. If you can stick to the time allotted to you, it would really be appreciated; the members will want to ask questions.
I have a list of witnesses here, and we can start with the Tricor Automotive Group.
Mr. Campbell, I think you're ready, so go ahead.
, and thank you, Mr. Chairman.
On behalf of the over 6,500 employees who work for the dealerships that make up the Tricor Auto Group, I want to thank you and the committee for your efforts in addressing the gaps currently in the credit markets that are imperilling our industry.
My name is Joe Campbell, and I am president of the Tricor Automotive Group. I am joined today by Mr. Brian Rodd, who is president and CEO of Securcor Financial Group.
Let me begin with some background on Tricor and who we are.
Tricor represents over 100 franchised automobile dealerships from coast to coast in Canada, with annual sales of over $4 billion. Most of you will have a Tricor dealership in your riding. Tricor is your local dealership, from which many of you would have purchased or leased your new or used car over the last number of years. Tricor represents all the major automotive brands, both domestic and imported.
Tricor's business plan was and is based upon a unique model of individual accountability and risk management. It is this model of accountability that has resulted in an industry-leading track record that includes the successful operation of a reinsurance company for over 20 years and the successful operation of an auto management company, Tricor Automotive Group,
Otherwise known as TAG, for the last 10 years, the successful operation of our own finance company, Tricor Lease and Finance Corporation, or TLFC, has generated over $250 million in loans over the last eight years while maintaining a delinquency rate well below industry norms. This accomplishment has been achieved despite these difficult economic times.
Securcor is a Canadian-owned and managed financial services company that provides complete compliance verification between private securitization funders and the originators. In addition to serving in this compliance capacity for TLFC since its inception, Securcor has overseen and managed the origination of over $2.5 billion in auto and equipment leasing financing.
The questions before the committee today are, how did we get to where we are, and how can we help the committee solve the credit availability problem? The current credit crisis has permanently changed the playing field for dealers when looking to help their consumers finance their transportation needs. Captive finance companies and other private funders are no longer operating efficiently, and chartered banks have been unable to fill the void created.
Despite the fact that the Bank of Canada has significantly lowered the prime lending rate, its actions have not resulted in lower borrowing costs at the consumer level. Tricor is presently in the process of applying to become a chartered bank or financial institution. We believe this strategy is part of a longer-term plan to fill this gap in automotive financing in Canada. To fill the gap in the short term, however, we are working with the Department of Finance and the Business Development Bank to find solutions. The best and quickest solution would be for Tricor to make use of the credit facility that the federal government recently made available. In order to be able to make use of the facility, we need the flexibility and an understanding on the part of BDC to understand how the fundamentals of the automotive lending sector work. This understanding primarily involves recognition that with the dealerships accountable, and therefore everyone who is involved in the transaction having their interests properly aligned, risk can be mitigated and the operation can achieve and maintain success over the long run.
Essentially, what we have described and what we are asking the BDC to do is it to copy the key components of the only private model that is still successfully operating, albeit with constricted volumes, in today's credit environment. Please recognize that we are not trying to replace the bank and the critical role they play in automotive lending, but are simply trying to fill the lending void left by the reduced capacity in the market.
Our proposal, we believe, offers the best public policy solution to what is taking place in the market, not only in the short term but in the long term as well. Tricor understands how credit markets, automotive consumers, and car manufacturers interact and what the best conditions are for keeping the marketplace liquid and functional. Tricor has a vested interest in making good-quality loans, the way the marketplace should always work. We are taking risk with every loan and we understand how to mitigate that risk.
The federal government wants to jump-start the automotive sector in Canada, and Tricor, due to its efficient cost structure, with access to the credit facility, will be able to offer a less expensive source for automotive financing and leasing for the Canadian consumer immediately.
Mr. Chairman and members of the committee, thank you and merci beaucoup.
Mr. Rodd and I are looking forward to your questions.
My name is Elyse Allan. I'm president and CEO of GE Canada. I'm joined by my colleague, Jean-François Bertrand. Thank you for giving us the opportunity to appear before the committee.
GE is known for many things. One of them is providing light, and I hope we can provide some light to the challenges of commercial lending in the current environment.
Worldwide, GE has more than 300,000 employees in more than 100 countries. Our business units range from financial services, aviation, energy, lighting, and appliances, to health care, NBC Universal, rail, and more.
We've been in Canada since 1892. GE Canada generated $6.7 billion in revenue in 2008. We have over 9,000 employees, $24 billion in assets, over 15 major manufacturing facilities, and over 100 sales and service sites.
GE Capital Canada is one of our units. It is the largest non-bank commercial lender in Canada. GE Capital Canada lending and leasing division's head office is in Montreal. We have 600 employees at 23 offices across Canada.
GE Capital Canada provides financing to over 60,000 Canadian companies, most of which are small and medium-sized. GE Capital Canada provides lending and lease alternatives to bank financing. We help companies invest in new technology and equipment. We consolidate debt and we provide vendor and franchise financing. In 2008, our asset-based financing for new business activity in Canada was $10.9 billion.
Our 60,000 customers are in a broad range of industries: transportation, aerospace, construction, forestry, manufacturing, automotive, hospitality, and franchise finance. We also have a specialized unit to finance and manage truck and vehicle fleets.
In short, Canadian companies rely on GE Capital Canada to finance their operations, invest in new technology, and employ Canadians.
My name is Jean-François Bertrand and I am senior vice-president of capital markets with GE Capital Canada.
In order to explain how the credit crisis has affected us, it is important for you to understand how we finance our Canadian operations. GE Capital Canada issues unsecured commercial paper, medium term notes and asset-backed commercial paper. Some of this is issued in Canada and some on international financial markets.
The current crisis has reduced our ability to raise funds. The market in asset-backed commercial paper is down 55%, or $63 billion, since 2007. Rates for this paper are extremely volatile. The cost of issuing secured commercial paper has become prohibitive.
The market for unsecured financial corporation commercial paper is also affected, dropping 45%, or $20 billion, since 2007. GE Capital Canada's ability to issue unsecured commercial paper has dropped significantly since July 2008. Since 2003, GE Capital Canada has issued almost $15 billion in medium term notes since 2003, but we have issued none since July 2008.
With the dramatic drop in traditional sources of local financing, GE Capital has had to make use of cross-border intercompany loans in order to meet the needs of its Canadian clients. Unfortunately, long-term use of loans of this type is not sustainable because of the Canadian tax rules to which they are subject.
Loans from our American affiliates are subject to what are known in Canada as thin capitalization rules. These rules limit deductions for interest on money borrowed from American parent companies to a two to one leverage ratio, making this a very costly source of financing. By comparison, Canadian banks typically have what is considered a conservative leverage ratio ranging from 16 to one to 20 to one.
GE Capital Canada is clearly an important part of the financial infrastructure of Canada. We applaud the Government of Canada for the initiatives they have taken to strengthen this financial infrastructure that is so crucial to small and medium-sized Canadian businesses--the $12 billion secured credit facility, the amendments to the EDC mandate, and the injection of capital into EDC and BDC.
But more needs to be done. As with everything in the current economic crisis, good policies need to also be matched with good timing. We believe the secured credit facility needs to be operational in the second quarter of 2009 if we are to ensure that the capital will be available to finance Canadian business operations and investment.
Also, the facility should not be limited to only AAA-rated tranches. It should also be open to investment-grade tranches. Prior to the current crisis, investment-grade tranches were being purchased on the market. Recreating the normal market for all investment-grade tranches will allow financial companies like GE to extend more financing to those companies that are not AAA and are in fact the most vulnerable in the current crisis.
Secondly, we believe the Bank of Canada should target its intervention on non-bank financial companies, where the breakdown in the commercial paper market has had its greatest impact. The Bank of England's new asset purchase facility is actually an excellent precedent, as it creates new liquidity in the market, assures confidentiality, and provides a clear exit strategy to the bank.
Third, and finally, Canada should revise the current thin capitalization rules to make it easier for financial services subsidiaries of international companies to access related-party capital. The debt-to-equity ratio should be increased from a leverage of 2:1 to at least 10:1, as this would provide Canadian financing institutions access to additional capital, which, in turn, would finance Canadian companies.
Good morning members of the committee, Mr. Chair, and ladies and gentlemen. My name is Sara Anghel, and I'm here representing the National Marine Manufacturers Association of Canada. I am joined today by Mr. Jeff Wilcox, president of George's Marine and Sports.
National Marine Manufacturers Association, which I'll refer to from now on as NMMA, is the leading association representing the recreational boating industry in North America. NMMA member companies produce more than 80% of the boats, engines, trailers, accessories, and gear used by boaters in North America. The association is dedicated to industry growth through programs in public policy, market research and data, product quality assurance, and marketing communications. We represent 100 members in Canada and another 1,600 members in the United States.
In 2006 we conducted an economic impact study that told us that the recreational boating community has a $26 billion impact on Canada's economy and produces close to 375,000 jobs, directly and indirectly. This includes close to 7,000 well-paying manufacturing jobs. In 2006 nearly six million Canadians took to the water in a boat. These boaters have a $6 billion impact on tourism through travel, fishing, trailering, angling, and other tourism-related activities in Canada. We also see many of our American friends taking to our waterways as they have 4.3 million boats in the eight Great Lakes states.
Of those six million boaters in Canada, 80% have a household income of less than $100,000 per year, and 95% of all boats in use and sold each year are less then 26 feet in length--trailerable boats. Boating is solidly middle class, and it is middle-class workers making and selling boats for the middle class.
These strong economic figures will no doubt be smaller this year and next due to the significant slowdown in the economy. Our industry is usually the first to suffer and the last to come out of recession, because our products are non-essential to consumers.
As we know, normally functioning capital markets began to seize up in early 2008 in the U.S., causing commercial paper markets to fail to operate effectively as investors pulled away from lending to all but the most credit-worthy organizations. Lenders traditionally active in consumer and dealer financing began to pull back or exit the recreational marine dealer inventory/floor plan lending segment.
Floor plan financing is a source of financing that permits a retail dealer to buy goods from manufacturers on a wholesale basis and finance pending resale. The products purchased become the security for the loan that is repaid when the merchandise is sold.
The total marine industry floor plan market in North America is approximately $3 billion to $4 billion.
Here in Canada, 2008 was a relatively good year; however, the availability of floor plan financing is making the 2009 season very difficult. Textron, a financial lending company, exited the market in February of this year, leaving GE Commercial Distribution Finance Canada as the sole floor plan lender for the marine industry. Textron represented nearly 30% of the marine inventory finance business in Canada. At the same time, GE is expected to reduce its wholesale marine lending due to current market conditions and the credit health of marine dealers.
As floor plan lenders leave the market, the lack of readily available alternative credit sources poses major risks to marine manufacturers and their dealer networks. As a result of the credit crisis, the marine industry's distribution chain is now in serious jeopardy, already costing jobs, which will threaten more jobs.
Due to contract requirements, manufacturers in many cases are required to buy back or repurchase inventory from a dealer that goes out of business, creating a severe negative feedback loop that drains key capital from already struggling manufacturers. Excess inventory on the market as a result of liquidation, credit inaccessibility, and low demand means less production, fewer Canadian manufacturing jobs, and closures.
I urge you to consider and include the marine industry in your decision in the same way you consider automobile dealer financing. Relief to help stabilize the floor plan lending market and ease the flow of credit is crucial. Government needs to get the banks to begin stimulating the economy by expanding their leverage.
To be more specific, the following solutions are proposed.
First, increase the amount of insurance that Export Development Canada currently provides on exported goods from 90% to 100%. If the insurance were increased to 100% and it were made easy for lenders to access, this would provide a solution for boats being exported to the U.S. by Canadian manufacturers.
Two, implement a similar government-backed program for boats shipped within Canada by Canadian manufacturers. This could be done by expanding the mandate of Export Development Canada or by increasing the roles of the Business Development Bank of Canada.
A federal government loan guarantee program for floor planning will increase liquidity, attract new lenders, and increase existing lender participation to marine dealers. This will keep manufacturers and dealers in business and secure many of the 375,000 jobs our industry produces across Canada. In addition, stimulating retail customer-level financing will help move products and allow new products to enter the market, thus keeping our manufacturers working.
GE cannot do this alone in our industry, and, as I mentioned, currently they are the only available financing for our industry. We urge the BDC to work to assist GE, who will in turn be able to assist Canadian manufacturers, dealers, and, more importantly, assist middle-class jobs. Our retail buying season is March to July. We need to act now to prevent further declines.
l'd like to now turn it over to Jeff to give you a brief outline of how this issue affects a local business here in Ontario.
My name is Jeff Wilcox. I'm president of George's Marine and Sports.
Over the past 10 years that I've managed this company, we've taken it from a $100,000 dealership to nearly $14 million. I have been president of the company since 1999 and have been employed with it since 1985. During my tenure I've seen a number of changes to both credit at the consumer's end and to wholesale credit.
These times, however, have now created some of the most challenging set of parameters I have ever seen in how small businesses run. In business, we've seen interest rates rise and fall many times, but never have we seen a change this dramatic on both the wholesale and retail side. Not only have our credit providers changed the game plan in mid-stream, but so have the retail lenders, causing pressure from below and above.
Our main floor plan lender is GE. In the past month we have seen our rates nearly triple and credit availability tighten beyond anything I've seen in the past. We have seen rates this high in the past, but never with margins on products this low. Given the current economic status, our margins on our products have declined by over 40% as a result of dealers trying to keep market share. Combined with the increased flooring costs and the decrease in margins, profitability will be next to impossible without cutting costs dramatically.
The most likely cost will be to our employees. Given that we employ highly trained people, it will be a very difficult decision, but one that we may be forced to make.
In addition to the wholesale problems that we are experiencing, retail lenders are also changing how they do business. They have increased their requirements for available credit beyond what some of the consumers are able to maintain, making it virtually impossible for a mid-income family to receive credit. In some cases, clients who would have received credit a year ago and are currently working with very little debt have been denied.
These two factors are now forcing small businesses like mine to restrict business operations and directly reduce our workforce in order to remain in business. George's Marine and Sports will most likely not look the same after this current recession ends, nor will we return to where we once were.
Thank you for seeing us today.
I'm Jeff Hanemaayer. I'm the vice-president and a director of the Canadian Recreational Vehicle Association, CRVA. It's a non-profit industry association representing manufacturers and suppliers to the Canadian RV industry.
I'm not a financial expert, but I am joined by Pierre Major. He's the president of Textron Financial Canada's floor plan division. However, he's here not representing Textron Financial Canada, but instead basically as an expert in the field of floor plan financing in Canada.
The Canadian RV industry is valued at about $3.5 billion. That doesn't include revenue generated by campgrounds or other economic impacts that result in the tourism sector as a result of RVing. RV ownership hit a record level in 2008, with 14% of Canadian households owning an RV; that equates to over a million RVs in Canada.
RV retail sales in Canada in 2008 reached a record high of almost 58,000 new units, both motorized and towable. Although the credit crisis has reduced retail demand from record levels, demand currently remains reasonable by historic standards—this despite the fact that retail lending standards have become more strict, resulting in more willing buyers being left without retail financing.
Retail financing is still reasonably available to diligent RV dealers for credit-worthy customers. The bigger problem the industry has is that although retail sales are reasonable by historic standards, floor plan financing for dealers has become much more difficult to acquire and maintain. Survey results from members of the RV Dealers Association of Canada cite the lack of floor plan financing as their number one concern for 2009. Without adequate floor plan financing, dealers are not able to maintain an appropriate number of RVs to maximize their sales and profits.
Reduced dealer floor plan availability has been caused by three things: as mentioned earlier, the exit from RV floor plan business by Textron Financial Canada, which is one of only two major non-bank floor plan lenders in Canada, both of whom happen to be U.S.-owned; reduced lending by the other one; and the last would be minimal interest from Canadian chartered banks to increase their lending.
We have a few suggestions to improve availability of floor plan lending to the RV industry.
One would be to modify the Canada Small Business Financing Act: first to include RV dealer floor plans—RV dealers sell big-ticket items for small margins, so we need to revise the eligibility to include businesses with annual sales over $5 million; second, to revise what is eligible for financing to include RV inventory; and last, to increase the loan limits beyond the recently increased current limit to $1 million.
A second suggestion is to broaden the BDC's mandate to include RV dealer floor plan.
A third is to modify the Canadian Secured Credit Facility to include RV dealer floor plans; currently, the facility only allows for loans for vehicles and equipment.
The last is to encourage Canadian chartered banks and other lenders to increase RV dealer floor plan lending. The big banks already benefit from retail RV lending, which has a lower risk than other forms of consumer loans. They provide floor plan to a small number of dealers with whom they've had a long-term relationship; however, they are reluctant and are risk-adverse to offering new floor plan lending.
Finally, with the only other remaining non-bank floor plan lender being U.S.-based, their Canadian businesses may not be their first priority. The Canadian industry, already affected by one U.S.-based lender leaving the market, would be less vulnerable if there were other major, Canadian-sourced lenders.
Thank you to our witnesses.
This has proven to be a most fascinating study that we've gotten into, but a very critical one. You folks represent the people whom we represent as well--the dealers, the auto dealers, the RV dealers, the financiers who back these operations--so it's good to hear from you.
We keep hearing this recurring theme about the difference in financing. We still have bank financing. The Canadian Bankers Association will come in and tell us that their numbers are up; they're lending more money. It's the non-bank financing that has disappeared from the market, and that's what has created the pressure on all of you folks. We recognize that.
We're dealing with taxpayers' money here in this secured lending facility, so we're trying to make sure that we protect taxpayers' money. We've given the business, if you will, to BDC to get this out, knowing that they haven't had to push this much money out, and report back to government, report back to Canadians, that they've done it the right way.
There was an interesting article in the Globe this morning that quoted Mr. Richard Gauthier:
||But even Mr. Gauthier acknowledges that Ottawa must tread carefully as it wades into this area for the first time.
||“There is no infrastructure, there's no mechanism in place in Canada at this stage to accommodate this kind of credit facility, so they've basically got to start from a clean piece of paper with [BDC] and all of the stakeholders and invent the process.”
So we appreciate your patience. We're hoping that BDC can get it right but get it moving. That's our concern, I guess, and I'm sure it's yours as well.
StatsCan figures show--I just got this note on my BlackBerry--that auto sales and auto manufacturing and parts manufacturing are up 19% this month over last. I guess I'm a little surprised that it's up 19%.
Mr. Campbell, perhaps you would comment on that. Your model, of having skin in the game, to me makes a lot of sense. That's maybe not the right way to term it, but you folks are the people who are involved in this, and you're doing some of your own financing.
How do we deal with this AAA rating that has to be met?
I think the rating issue is something we've all talked about around this table. We've been through the rating process, all of us, over the last number of years, certainly the last 10 or so.
When we started Securcor, our objective was to have a privately funded facility that really got into the details, that knew the contracts and knew the customers. We spent a ton of time up front on understanding the business being invested in before we actually went out and did any funding.
As well, we track the transactions on a very transparent basis all the way through, cradle to grave. Back then it was a negative for us, but today transparency is certainly something that is the buzzword on Bay Street and Wall Street.
That's what we add to the pie for the private funders; we're in between Joe and the funder of one of our conduits. We've provided that service with extremely good results for nine years.
Thank you, Mr. Wilcox, for your reality check. Nothing like knowing you're still going to be in business, but it's going to cost you triple what it was before.
The choke point here appears to be BDC. The article Mr. Menzies referred to in the Globe and Mail talks about a Mr. Allan being hired, formerly of Coventree, and as I recollect Coventree, they were one of the non-bank sellers of asset-backed commercial paper. I don't know whether they created this mess in the first place, but they certainly were participants in this mess. So, ironically, the government is in the situation of having to turn to the originators of asset-backed commercial paper to be able to get into the business of asset-backed commercial paper, because clearly the expertise doesn't lie within BDC.
Tricor, I know you want to become a bank, and that ain't happening any time soon. What's not clear to me is how you will access BDC's funding under this Canadian Secured Credit Facility, and if in fact you do, do you provide serious competition to GE?
A straight loan to them. Okay. I appreciate that.
For our friends from GE, I've heard, and it's been talked about before, that Textron has left the business of floor plan financing, leaving you folks basically the only ones in the game at this point. It has been mentioned before, the secured piece that's out there, which we're promoting, that's coming--but not available as yet--includes automotive, equipment leasing, but it does not include RV and marine at this point. They're excluded. I believe it's because of the rating of the businesses in terms of their credit ratings.
As GE, what are you hoping to accomplish through this facility when it comes? What is it that you're looking for? I know you talked about the British model and about another fund they have, but what do you need from us? If we get this facility up and running, how quickly can you, will you, have access to that? Will you be able to use that money fairly quickly? Where are you with--
Let me make one comment, and I'll turn it over to Jean-François.
The first thing, and I think it's important, is that it's in our best interest as well as the market's that we have more competition. I know there's been some comment, and people might say it's great that Jeff has only us to call on. At the end of the day, a healthy economy is based on a diversified source of financial lenders. So it's in everyone's best interest that we have other people in the marketplace. We can't do it all, and neither can the banks, so the loss of some of these other financial companies is in fact not in anyone's best interest. So it's important that we have a healthy economy.
In terms of this specific facility, yes, we can use it. As Jean-François has mentioned, we have been negotiating specifically with BDC since day one to help them in any way we can, to help structure it and help put it in place.
Jean-François, you might want to talk about how we use it.
Thank you very much, Mr. Chair.
Thank you very much, everybody, for being here.
A special welcome to the RV guys. Having spent ten months two years ago in a very big red one, I will put a plug in to say that it is the best way to travel and it is the best way to get to see a country and to get to know people. So there you have it. Welcome.
There's an underlying issue here. Certainly following on some of the media reports this morning, one of the big challenges we have, clearly, in terms of credit was attempted to be resolved with the involvement of the BDC. It was good in terms of the way it sounded at the time, and there was a lot of support for whatever we could be doing in terms of easing the credit situation. One of the really big problems we've encountered, though, is that the BDC simply hasn't been able to get this moving. It seems rather astounding to us that we're this far along and we just see an announcement today that the BDC has taken on somebody to help them figure this out.
We have a certain concern, in opposition, that it's taken this long for the BDC. And I understand your comment that people are trying really hard, and this is not to take away from that, but it's a bit of a concern, when there are so many jobs at stake, that it has taken so long for somebody at the BDC to say, “We actually don't know how to do this properly because we've never done it before.” Add a concern that we now have, as my colleague mentioned, the hiring of Mr. Allan, who was at Coventree, and who was clearly involved in the asset-backed commercial paper fiasco that happened not too long ago.
I'm actually asking you for advice. Are there entities? Are there people? We've heard certainly from some of the other people in the auto sector pointing to entities like Wells Fargo, for example, who know what they're doing, or apparently do. I'm throwing it open. We're looking for help, all of us, in terms of a non-partisan thing. The government needs some help; BDC needs some help. Do you have any ideas? Do you have any recommendations for helping BDC right now in getting this credit facility out and getting things moving?
I have a quick question for GE. The credit crisis affected you in two ways: in the existing business, because all of a sudden, in July or sometime in the fall, you reported devastating losses or an increase in your losses, so that affected your ongoing business; and obviously, your going-forward business was affected because you weren't able to get new financing.
But what happened with the previous business? If you had good assets and not these toxic assets, for lack of a better term, you should have been able to roll with your money if you matched your assets with your liabilities in terms of maturities. Correct? So you didn't necessarily have to go to market if you had your liabilities matching your assets.
Am I missing something? Something happened with your assets where you took heavy losses, if I'm not mistaken.
For the ABCP market, the issue is more one for the sponsor of the program, because they are the ones who need to roll the paper. It's not a GE responsibility; it's a problem for the banks that were our sponsors of the conduit. They got issues and they had to keep a high inventory of those papers.
The problem is that in the street, when they publish their financial statements, it's not seen as being very good that they cannot roll paper and they have a large inventory of it. Each time you can see, close to the quarter ends of banks, the market shifts a bit more. They have that problem.
For our commercial paper program, we have backup lines of credit. We can fund in the U.S. We can bring money cross-border. So we don't have any problem with that. But GE committed to reducing the utilization of commercial paper. I don't have the exact numbers, so I will not give those, but I think that reduced by more than 50%, probably around 60%.
Elyse, maybe you have the numbers. I don't have them.