Canadian Equipment Finance Magazine Summer 2018

Summer 2018 • volume 6 • issue 2 | www.canadianequipmentfinance.com

Tariffs, tax burdens and capital departures clouding market CFLA Report: Future of money key theme of annual conference MARKET REPORT: Canadian LRT market gains speed MANAGEMENT STRATEGY: Transitioned to the lease accounting standard?

PM40050803

contents Summer 2018 Volume 6 Number 2

Feature

Publisher and Editor-in-Chief Steve Lloyd steve@canadianequipmentfinance.com

Canadian market now facing uncertainty »10

Editor Brendan Read brendan@canadianequipmentfinance.com Creative Direction / Production Jennifer O’Neill jennifer@canadianequipmentfinance.com Photographer Gary Tannyan Advertising Sales Mark Henry mark@canadianequipmentfinance.com For subscription, circulation and change of address information, contact

CFLA Report

Publications Mail Agreement No. 40050803 Return undeliverable Canadian addresses to:

Future of money key theme of CFLA annual conference »4

subscriptions@canadianequipmentfinance.com

NEWS »5 Circulation Department 302-137 Main Street North Markham ON L3P 1Y2 t: 905.201.6600 • f: 905.201.6601 info@canadianequipmentfinance.com www.canadianequipmentfinance.com Subscriptions available for $40.00 year or $60.00 two years. ©2018 Lloydmedia Inc. All rights reserved. The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of the publisher.

Printed in Canada. Reprint permission requests to use materials published in Canadian Equipment Finance should be directed to the publisher.

Market Report

Greenbrier reports strong 3Q results »19

Your Business Canadian/U.S. cross-border lending Issues to consider to avoid potential costs and delays »20

Canadian LRT market gains speed »12

Managing B2B national accounts credit and payments systems »21

Management Strategy

Also Publishers of Payments Business www.paymentsbusiness.ca

Transitioned to the lease accounting standard?

Change in Montreal »16

Canadian Treasurer www.canadiantreasurer.com

Most Canadian companies haven’t started: survey »22

Contact Management www.contactmanagement.ca

Next issue...

Fall - The Legal REport

Direct Marketing www.dmn.ca Financial operations www.financialoperations.ca Made possible with the support of the Ontario Media Development Corporation

Global railcar leasing market to reach US $15+ billion: Fact.MR

Insights into changing legislative and regulatory issues in Canada and North America that equipment buyers, sellers and financers need to know.

»18

Ontario Interactive Digital Media Tax Credit

canadianequipmentfinance.com | SUMMER 2018 | CANADIAN EQUIPMENT FINANCE

3

CFLA REport

Future of money key theme of CFLA annual conference Former prime minister Brian Mulroney to keynote

By Michael Rothe

he Canadian Finance and Leasing Association (CFLA) will be holding its annual national conference September 26-27 in Montreal, Que. It is the only event in Canada devoted to the asset-based finance and leasing industry.

It brings together over 400 leaders, executives and senior managers of Canada’s leading industry companies who will be addressed by and engage with over 25 speakers on a wide range of topics. It is also the biggest single event of the association’s calendar.

Our business world is being transformed with technology that is enabling the creation of new business models and threatening traditional ones. Presciently, noted economist John Maynard Keynes said that “the difficulty lies not so much in developing new ideas as in escaping from old ones.”

The CFLA’s conference is intended to provide a forum and networking opportunity to not only meet industry insiders and conduct business but more importantly to reflect on and discuss these changes and the everyday pressures facing our businesses and broader industry.

The conference’s key theme is money.

The speakers will explore what is money really, what is its future and what does that mean for our businesses today and for tomorrow.

This year’s Donner Prize winner Pat Meredith will be leading a workshop on the “Transformation of banking and finance for the information age”. Queen’s University economics professor Dr.

T

4

Thorsten Koeppl will be discussing the topic of “Currency without cash”. There will also be a presentation by futurist Jim Carroll on the impact of blockchain, cryptocurrencies and other emerging technology on the industry.

The Right Honourable Brian Mulroney will be the keynote speaker.

Mr. Mulroney will share his singularly unique and timely perspective on the North American Free Trade Agreement and his insights on Canadian politics and on wider current events.

Economic update, C.D. Howe Institute report, other key topics The CFLA national conference will also feature two important updates and reports: ◉◉ An economic update from JeanFrançois Perrault, Scotiabank senior vice president and chief economist; and ◉◉ Bill Robson, president and CEO of the C.D. Howe Institute will unveil the institute’s report on the impact of the asset-based financing and leasing industry on the Canadian economy.

Over the course of the two-day conference delegates will hear from our speakers on a variety of other subjects related to emerging technology, politics, economics and industry-specific issues.

Topics include the annually popular “Update on industry data” and “What’s new in law” as well as new subjects such as “Auto and fleet industry data” and “Technology & innovative lending”.

Networking opportunities The conference will feature plenty of networking opportunities culminating

CANADIAN EQUIPMENT FINANCE | SUMMER 2018 | canadianequipmentfinance.com

in the Chairman’s reception and banquet where CFLA’s Member of the Year will be revealed. The CFLA Member of the Year recognizes individuals from member companies who volunteer their time and expertise to support the Association and its goals. Delegates will not only come away from the conference with a wider network of industry contacts and hopefully some new business deals, but more significantly some new knowledge and industry insights to help guide their future success.

As Keynes stated, the “master” businessperson “possesses a combination of gifts.” They must: ◉◉ “Reach a high standard in several different directions and must combine talents not often found together”; ◉◉ “Be a mathematician, historian, statesman, philosopher­—in some degree”; ◉◉ “Understand symbols and speak in words, must contemplate the particular in terms of the general and touch abstract and concrete in the same flight of thought”; and ◉◉ “They must study the present in the light of the past for the purposes of the future.”

CFLA’s 2018 national conference intends on helping the asset-based financing, equipment and vehicle leasing business do exactly that. I look forward to seeing you there.

Registration for CFLA’s National Conference is open on CFLA’s website: www.cfla-acfl.ca.

Michael Rothe is president and CEO, Canadian Finance & Leasing Association (CFLA).

News

New studies on possible interest rates impacts, U.S. construction outlook The Equipment Leasing and Finance Foundation (the Foundation) has released two new studies: On the Rise: How Inflationary Pressures and Rising Interest Rates Could Impact the Equipment Finance Industry, to prepare equipment finance firms for the possibility of a more rapid rise in inflation and interest rates in the near future. The study explains potential impacts to customer demand, portfolio performance, spreads and the propensity to finance.

The study, commissioned by the Foundation and prepared by Keybridge, applies principles of economic theory and data analysis to business strategy concepts relevant to the equipment finance industry.

Designed to be a practical guide for equipment finance professional, the report: ◉◉ Explains why a rise in both inflation and interest rates is expected in the near future; ◉◉ Describes different scenarios for how these changes could occur;

◉◉ Illustrates how each scenario is likely to impact the equipment finance industry; ◉◉ Provides signposts to help identify which scenario is occurring; and ◉◉ Offers advice on how individual firms should consider adjusting their business strategies and tactics depending on which scenario occurs.

Download the full report for free at http://bit.ly/ELFFInflation.

This study functions as the second volume to the Applied Economics Handbook, which will be available later this year.

2018-2019 Vertical Market Series – Construction reports that the foreseeable future appears bright for general contractors working in U.S. commercial and residential construction.

The study provides an outlook on U.S. construction market

sector confidence, anticipated spending and key developments and trends impacting this sector over the next one to two years. It is the first release of the Foundation’s new forwardlooking vertical market series designed to help readers recognize and understand key trends that may affect their businesses.

The study, commissioned by the Foundation and prepared

by ORC International, indicates that the all-time high in construction spending in 2017 will carry through in 2018, with predicted U.S. construction industry growth of five per cent. It examines issues impacting the sector, including labor shortages, trade tariffs, corporate tax rate reductions, equipment acquisitions and technological developments.

The study draws from a wide range of sources to provide an outlook for the construction

sector, including construction and architectural consultancies and trade groups, published industry forecasts, media reports and analyses.

Download the full report at http://bit.ly/ELFFConstruction.

All Foundation studies are available for free download from the Foundation’s online library at http://store.leasefoundation.org/.

“The new Foundation construction study is comprehensive, yet concise, making it an ideal information resource for construction industry managers and business owners,” said Tom Ware, Foundation Research Committee Chair. “We look forward in the coming months to delivering additional vertical market studies that leverage industry research, subject matter expertise and analyses for business decision-making.”

CFLA questions Bill 134 effectiveness The Quebec government has been pushing through Bill 134, which is aimed at reducing consumer auto loan indebtedness. But according to the Canadian Finance & Leasing Association (CFLA) the benefits of the legislation will be outweighed by negative impact of the requirements on industry competition and consumer choice.

In an April 4, 2018 letter to Quebec consumer protection and housing minister Lise Thériault, CFLA president and CEO Michael Rothe pointed out that the requirements

placed upon asset-based auto loans would render them uncompetitive and consequently limit consumer choice.

The Bill 134 requirements are overly prescriptive as they include information such as monthly home insurance costs: which most credit approvals do not base a credit decision upon. They also are overly intrusive by using “a notice assessment” to verify income.

Additionally, the proposed rules conflict with other thirdparty privacy concerns, such as the requirement to take into account alimony payments.

Meanwhile the legislation exempts banks and credit unions from compliance.

Asset-based loans represent a significant share and volume of new vehicle financing. Rothe pointed to a report by the Centre for Spatial Economics which said that the asset-based finance industry currently has over $379 billion of consumer and commercial vehicles and equipment financed across Canada. It is estimated that over $79 billion of those financed assets are located in Quebec: consumer auto financing in the province is estimated at

almost $61 billion. Moreover, CFLA members financed approximately 56 per cent of new vehicles across Canada.

“The proposed requirements would likely have a deleterious impact on consumers, due to the potential increase in the time and cost for credit companies to complete the credit review under the new rules, reduce the impact of current and new technologies currently used and consequently diminishing consumers’ choice when looking to lease or finance a vehicle purchase,” wrote Rothe.

canadianequipmentfinance.com | SUMMER 2018 | CANADIAN EQUIPMENT FINANCE

5

News

ERM programmes critical to managing complex risk: RIMS If organizations do not actively embrace and integrate sound risk management practices another financial crisis could occur, according to a new RIMS Executive Report titled, Enterprise Risk Management’s Wakeup Call: 10 Years After.

Reflecting on changes since the financial crisis of 2008, the RIMS report chronicles the diffusion and evolution of enterprise risk management (ERM). It identifies new challenges for risk professionals to deliver solutions that create and protect value. It also offers recommendations for integrating ERM in today’s sophisticated business environment.

“The evidence shows

that risk management has evolved from a promising but somewhat perfunctory exercise into a strategic management competency,” said RIMS vice president of strategic initiatives Carol Fox. “Even so, given increasingly uncertain times, risk management professionals would be unwise to declare victory or become complacent.”

The report features insight from executives from a widerange of industries who share their perspectives on where ERM stands today, as well as what the next 10 years might hold. The report also examines recent literature and studies to better understand the risk management issues that are

important to organizations and what is impactful about ERM. The report, then, challenges risk professionals to deliver programmes that create as well as protect value.

Additionally, the report addresses actions taken by regulators and rating agencies in the past decade.

Complementary to the report, RIMS’ Risk Management Monitor blog recently published the Compliance in 2018: Q&A with James Reese of the SEC that highlights how the U.S. Securities and Exchange Commission (SEC) views organizational risk management.

Enterprise Risk Management’s

Wakeup Call: 10 Years After currently is available exclusively to RIMS members. To download the report, visit RIMS Risk Knowledge library at www.RIMS.org/RiskKnowledge.

For more information about the Society and to learn about other RIMS publications, educational opportunities, conferences and resources, visit www.RIMS.org.

Mary Roth, RIMS CEO, notes: “As a core organizational competency, risk management has the opportunity to play a key role in successfully dealing with a broad spectrum of risks that can impact more than just the organization, but economies, societies, environments and industries as well.”

Exempt asset-based financing from future AML rules: CFLA The Canadian Finance & Leasing Association (CFLA) has urged the federal government to exempt the asset-based financing and leasing industry in future anti-money-laundering (AML) legislation aimed at also curbing terrorism financing.

The association said the rules would merely duplicate the current AML due diligence programmes and processes already in place at all Canadian financial institutions that apply to the industry. Nevertheless, if the AML and anti-terrorist financing regime were to be extended to the sector, the regulations should only cover cash payments over $10,000.

Asset-based financing low money laundering risk The CFLA made these points in its comments in a letter sent May 15, 2018 in response to Department of Finance Canada’s discussion paper: 6

“Reviewing Canada’s Anti-Money Laundering and Anti-Terrorist Financing Regime”, released February 7, 2018.

CFLA president and CEO Michael Rothe pointed out that asset-based financing “is inherently a low-risk transaction” compared with other transaction types. A recent informal poll by CFLA found that none of its members in their normal course of business accept or receive down payments, security deposits or installment payments of cash.

Instead member companies typically accept and receive cheque, bank draft, electronic funds transfers, wire transfer or direct debit through financial institutions already subject to the AML regime.

On the vehicle financing vertical, Rothe pointed to a recent survey by the Canadian Auto Dealers Association confirming that transactions

CANADIAN EQUIPMENT FINANCE | SUMMER 2018 | canadianequipmentfinance.com

involving large sums of cash are not only exceedingly rare but are consistently tracked by current banking practices when they do occur. Their research indicates that cash transactions in excess of $10,000 represent less than one per cent of sales.

Critically, when they do occur, such transactions are fully documented at the dealership and at the dealer’s financial institutions.

“Consequently, there is virtually no risk that an assetbased financing transaction could be used for the placement of cash,” wrote Rothe.

The CFLA president explained that when payment is accepted by electronic money transfer, money orders and cheques, the borrower/lessee has already been screened by the financial institution that facilitates these payment methods at the time the current account was opened and as part

of the Canadian institution’s account opening and ongoing AML due diligence programmes and processes.

“It is not typical under the current legislation that recipients of these types of payments as payee report them to FINTRAC [Financial Transactions and Reports Analysis Centre of Canada],” wrote Rothe. “Rather, it is the financial institution that facilitates the payment item that will complete the required FINTRAC reporting. These financial institutions are much better placed to determine whether a transaction is a layering or integration transaction.”

Oversight be proportional to risk The CFLA firmly believes that implementing new regulatory oversight should be proportional to functional risk.

If a particular function’s failure

Spe cia lty • Co • Aut om • Re SLV G verag atic sid ap es

and ual V Insu In Volu alue ranc clud e: e nta ry P Insura rop nce erty Insu ran ce

Protecting your assets while building your business.

It’s All About Balance.

For equipment leasing and finance businesses, it’s a tough job balancing between mitigating exposure and taking calculated risk.

Tip the scale in your favor by choosing an insurance option to help customers easily fulfill their insurance requirement, expedite the funding process, and provide you additional revenue. And choose one of our solutions to assist you in maintaining a healthy portfolio.

To learn more, contact us at 866-676-5677 or equipmentinsurance@gaig.com

www.GAIG.com/EquipmentInsurance Canadian Branch Head Office Scotia Plaza, Suite 2100, 40 King Street West Toronto, ON M5H 3C2

Policies are underwritten by Great American Insurance Company – Canadian Branch, a foreign registered insurer in all Canadian provinces and territories.

news is unlikely to pose a risk to the system, it need not be as strict as in the case where failure puts the system in jeopardy.

“Given that only a fractional portion of transactions made by leasing and finance companies may potentially include cash transactions and these limited transactions are already

included under the financial scope of the Canadian financial institutions, we believe that it is worth pausing to ensure that any new regulations will actually deliver results before targeting new sectors of the economy to be covered by the AML and anti-terrorist financing regime,” wrote Rothe.

LeaseTeam announces rebrand

After nearly three decades of service to the equipment and asset finance industry, it was announced during LeaseTeam’s 2018 user conference that the company would be changing its name to LTi Technology Solutions.

The announcement was made July 11, during the morning general session, led by president Jeff Van Slyke and co-founder Randy Haug.

Jeff Van Slyke, president of LTi Technology Solutions, said: “For almost 30 years we have been a technology partner and solution-provider to the finance industry. We believe that LTi Technology Solutions more accurately reflects our business and the services we offer.

“Throughout the years, we have often referred to our company as LTi, so rebranding to LTi Technology Solutions will allow us to maintain the reputation and relationships we’ve carefully crafted throughout the years while extending our reach to those not yet familiar with what we do.

8

“Our number one priority is continuing to serve our robust install base of 238 loyal customers. The ‘LT’ in ‘LTi’ ensures that we will always remain LeaseTeam at heart.”

LTi Technology Solutions, formerly LeaseTeam, opened its doors in downtown Omaha, Neb. in 1989 with six employees by co-founders Russ Hallberg and Randy Haug. After beginning with an early mid-range computer solution, the company successfully launched the first Windows-based application for the equipment finance industry in 1992.

Today, they continue to deliver software and services to equipment and asset finance companies throughout North America and the UK from their Omaha headquarters. They were named to the Inc. 5000 list of fastest growing private companies in America from 2015-2017 and were honoured by the Greater Omaha Chamber of Commerce with the “2018 Business Excellence Award in Innovation.”

CANADIAN EQUIPMENT FINANCE | SUMMER 2018 | canadianequipmentfinance.com

Canada continues to be seen as less competitive: CPA Canada continues to be seen as less competitive when compared with the United States and tax weighs heavily in that viewpoint, according to a survey of business leaders

by Chartered Professional Accountants of Canada (CPA Canada).

The CPA Canada Business Monitor (Q2 2018) recently surveyed professional accountants in leadership positions. The findings of the quarterly survey show that 68 per cent of the respondents view Canada as a less competitive place to invest and do business versus the United States when compared with a year ago. That viewpoint is basically unchanged from the previous quarter.

When asked what is the primary reason for the country being less competitive, Canada’s overall tax burden was the top response, cited by 29 per cent of participants.

U.S. tax reform was second, referenced by 14 per cent of those surveyed.

The number of respondents expressing optimism about the prospects for the Canadian

economy over the next 12 months was 32 per cent, essentially unchanged from the opening quarter.

However, that is down significantly from the second quarter of 2017 when 50 per cent of respondents expressed an optimistic outlook.

The top two challenges to the Canadian economy identified by survey participants in the latest survey are U.S. trade protectionism (39 per cent) followed by uncertainty in the Canadian economy (14 per cent).

“Canada’s tax system is fundamental to creating a competitive environment,” explained Joy Thomas, president and CEO, CPA Canada.

“The survey findings reinforce the need for a comprehensive review of Canada’s tax system, led by an independent expert panel, that would strive to reduce complexities, address inefficiencies, improve fairness and ensure economic competitiveness.”

A background document is available online at cpacanada.ca/businessmonitor.

To send press announcements, please direct them to Brendan Read, Editor, at

brendan@canadianequipmentfinance.com

News

U.S. equipment market to continue expansion: Foundation The Equipment Leasing & Finance Foundation (the Foundation) has published the Q3 2018 Equipment Leasing & Finance U.S. Economic Outlook. It expects that equipment and software investment will expand by 7 per cent in 2018, which would mark the strongest annual growth since 2012, though down 8.5 per cent from the previous Outlook.

◉◉

◉◉

◉◉

◉◉ Strong vertical investments The Foundation said that investment in the majority of equipment verticals should remain solid in 2018. Over the next three to six months: ◉◉ Agricultural machinery investment growth will likely slow; ◉◉ Construction machinery investment growth should hold steady, though investment growth may peak later this year; ◉◉ Materials handling equipment investment should continue to grow at a moderate pace; ◉◉ All other industrial equipment investment growth has likely peaked and may decelerate; ◉◉ Medical equipment investment growth has likely peaked and may decelerate; ◉◉ Mining and oilfield machinery

◉◉

◉◉

investment growth may strengthen; Aircraft investment growth is unlikely to worsen and may improve; Ships and boats investment growth is expected to increase; Railroad equipment investment growth should remain steady; Trucks investment growth may soften; Computers investment growth should remain solid; and Software investment growth should remain stable.

Economic momentum Strengthening economic momentum coupled with elevated business and consumer confidence levels should lead to continued investment during the third and fourth quarters and new business volume should follow suit, said the Foundation.

The U.S. economy could finally reach the elusive three per cent annual growth target in 2018 as most major GDP components are contributing positively to growth, with the notable exception of housing.

The labour market should maintain its strength and drive

improvements in consumer spending (which fell far short of expectations in Q1), while business investment should continue to impress.

Credit market conditions remain generally healthy, though credit demand has weakened somewhat and may decline further if federal interest rates continue to rise. Credit supply conditions are mixed, as banks are easing standards for C&I (commercial and industrial) and commercial real estate loans while tightening standards for household lending. Financial stress remains low.

Trade, fiscal policy concerns However, a stagnant housing market, potential softening in global growth (particularly in emerging markets) and continued upheaval in U.S. trade policy are areas of concern, said the Foundation. A handful of industry-specific trade skirmishes with China are unlikely to derail the economy to a significant extent. But a tit-for-tat global trade war involving Canada, Mexico and the European Union would have major implications for all U.S. industries, including equipment finance.

Another set of concerns

identified in the Foundation report that could cloud the future equipment finance market are persistent budget deficits and a ballooning public debt, with the debt-to-GDP ratio projected to reach 96 per cent by 2028 (compared to current ratio of 78 per cent).

While the U.S. fiscal outlook was already set to deteriorate due to increased government spending on Social Security and Medicare and higher debt servicing costs, the Tax Cuts and Jobs Act—while likely good for short-term economic growth —has worsened the long-term fiscal outlook considerably.

Persistently large deficits, particularly during periods of peace and economic prosperity, weaken the United States’ longterm viability and constrain policymakers’ ability to respond to future challenges, the Foundation reported. More immediately, the accelerating increase in the national debt may put additional upward pressure on interest rates due to the increased risk associated with holding U.S. bonds.

The full report can be downloaded from https://www. leasefoundation.org/industryresources/u-s-economic-outlook/

For breaking news and in-depth features, visit our website at www.canadianequipmentfinance.com

.com canadianequipmentfinance.com | SUMMER 2018 | CANADIAN EQUIPMENT FINANCE

9

Feature

Canadian market now facing uncertainty

By Steve Brown

uring the downturn of 2008 and 2009 some economists argued that the Canadian economy emerged mostly unscathed thanks to the Office of the Superintendent of Financial Institutions (OSFI). It had maintained some of the tightest regulatory controls in the world over Canadian-based financial

D

10

institutions. Canadian banks therefore avoided the economic storm by maintaining conservative capital ratios and avoiding sub-prime lending.

Arguably Alberta was the least impacted area in Canada. During this time, a V-shaped curved denoted the market price of both West Texas Intermediate as well as Western Canadian Select oil. The downturn was short and the recovery was fast.

CANADIAN EQUIPMENT FINANCE | SUMMER 2018 | canadianequipmentfinance.com

The 2014-2015 oil slump The story was quite different after 18 months of declining oil prices, which began in summer 2014 and resulted in a price drop which exceeded 50 per cent.

Many banks then decided that they were now overexposed to the Western Canadian Sedimentary Basin and any industry which was related to it.

At times like these banks will often downgrade their categorization of entire

Feature

industries to “enhanced monitoring”.

Basically, they are throwing the baby out with the bath water. Fear trumps common sense and over-response is the action of the day.

During good times credit relaxes and banks push capital to outperforming industries. During weaker times good applicants are declined.

As a colleague used to say, “There are only two mistakes you can make in commercial lending. You can make loans to companies who shouldn’t have it or you can decline companies who should have it.” Unfortunately for borrowers, most banks spend the majority of their time deciding who shouldn’t have the loan.

since the Liberals formed government in 2015.

2. Competitiveness-hurting tax burden.

Canadian business taxes under the Trudeau Liberal government have not kept up with the lower commercial taxes south of the border, which cripples the ability of companies to make critical capital investments.

Due to the Canadian inaction there has been a flow of capital to more favourable tax jurisdictions. This is further enhanced by the ability to repatriate foreign held capital back to the U.S. without penalty.

3. Tariff battles. Pending and newly instated tariffs threatened and imposed by the Trump Administration are creating even more uncertainty, specifically those related to steel and aluminum. We always have to be mindful that capital flows expeditiously to the path of least resistance. Unlike foreign direct investment in plants and equipment, capital flows can happen overnight.

Tariffs don’t have to be imposed to be effective: just the possibility of a tariff can be enough to cause the flight of capital.

4. A weakening Canadian versus U.S. economy. With the U.S. being our main trading partner, we are doubly impacted. First, since the U.S. economy is substantially stronger due to current economic policies, their unemployment rate is lower. As they approach full employment, the risk of inflation (particularly wage inflation) increases. While the current administration is seeking higher wages, they have the ability to raise interest rates. As rates increase, this creates more demand for U.S. dollars via their treasury, effectively pulling investor dollars out of Canada.

Second, as the U.S. dollar appreciates

Tariffs threatened and imposed by the Trump Administration are creating even more uncertainty.

Today’s challenges Canadian industries now face an entirely new set of challenges, such as: 1. Capital is departing Canada at a record pace. Nowhere is this more evident than in the oil and gas industry.

Numbers vary, but the consensus appears to be that approximately $50 billion has departed Canada. Nothing deters investment to a greater extent than uncertainty. Between the nationalization of the Kinder Morgan Trans Mountain pipeline, carbon pricing and the enhanced ability of small special interest groups to dictate political policy, uncertainty about Canadian based projects has never been greater.

Despite federal Finance Minister Bill Morneau’s insistence to the contrary it would appear that the majority of Canadian business leaders believe that Canada’s competitiveness has been meaningfully deteriorated

it pushes the Canadian dollar ever lower, effectively increasing the cost of U.S. goods and services purchased by Canadian consumers and businesses, including production equipment. However, the opposite side of the same coin is that Canadian exporters become more competitive, so long as they can acquire resources in Canadian dollars.

Affected industries While no one can foresee the future, these trends can be logically seen to have specific effects across various equipment intensive industries: ◉◉ Those which manufacture or employ steel and aluminum, perhaps most especially the auto industry, will almost certainly see limited investment in production capacity or upgrading and replacement of existing infrastructure; ◉◉ Those which bear a high tariff for importers, such as the dairy industry, will most likely be negatively impacted as well; ◉◉ General construction will presumably be impacted by a slowing of the Canadian economy which has already been reflected in recent data. This, of course, has a spinoff effect for heavy construction, housing and infrastructure; and ◉◉ The oil and gas sector should continue positive with a roaring U.S. economy and, as we are told, the construction of the now government-owned Trans Mountain pipeline system.

In the end, conditions tend to revert to the long term mean and governments and their policies don’t stay in place permanently. Financiers of impacted equipment would be wise to exercise caution when advancing funds. Business success or failure in a variety of political and economic circumstances is often determined by the skill and agility of management and as a business person you have to ask yourself, “is it really different this time?”

Steve Brown is the founder and managing director of TGC Capital Inc., a Calgary based debt advisory firm which specializes in assisting clients with debt restructuring or rapid growth.

canadianequipmentfinance.com | SUMMER 2018 | CANADIAN EQUIPMENT FINANCE

11

Market Report

Canadian LRT market gains speed

By Brendan Read

pril 2018 marked the 40th anniversary of the opening of North America’s first new light rail transit (LRT) system, in Edmonton, Alta.

Built in time for the 1978 Commonwealth Games, Edmonton Transit Service’s (ETS) LRT began rolling on 7.2 kms of track from the city centre to the northeast and serving the Commonwealth Stadium enroute with a fleet of Siemens DuWag U2 light rail vehicles (LRVs).

The success of Edmonton’s LRT sparked a renaissance of the mode and

A

12

accordingly the rebirth of demand for its rolling stock market in North America.

Nearly every Canadian and American city had abandoned their predecessor streetcar and interurban rail networks.

In Canada, only Toronto’s iconic streetcars had survived.

Until relatively recently though most of the LRT growth has been in the U.S., but Canadian metro areas have been climbing aboard.

Alstom, Bombardier, Siemens and Stadler have garnered Canadian orders.

But the marketplace is changing with the planned merger of Siemens’ mobility business with Alstom. The door is open

CANADIAN EQUIPMENT FINANCE | SUMMER 2018 | canadianequipmentfinance.com

for CRRC to sell LRVs. It had won an order for Montreal commuter rail coaches.

Here is a snapshot of Canada’s LRT and rolling stock market developments:

Alberta Calgary Calgary Transit opened its first 11 km LRT line in 1981 with Siemens DuWag U2s. It now has two routes totaling 118.1 km, with service being provided by 160 U2s and newer Siemens Transportation System SD 160 and SD 200 models, which have supplanted a number of the aging U2s.

Market Report part of plans to replace the U2 fleet by 2024. Specifications are expected to be released in 2019 followed by competitive tendering.

British Columbia Funding is being put in place for a 26 km LRT network centered in Surrey, in Metro Vancouver, to be opened in phases.

The first phase encompasses two routes from Surrey to Guildford and to Newton and could be open by 2024. The second phase will link Surrey with Langley.

TransLink expects to deliver the LRT using a short-term PPP model. The agency will conduct a robust process to select a private sector partner. Under this model the successful proponent will also provide initial operations and maintenance activities for a seven-year extended warranty period.

TransLink said it intends to assume operations and maintenance responsibilities after the end of the extended warranty. Using this model will help it to maximize competition to enhance innovation and efficiencies and ensure cost and schedule certainty.

Ottawa’s Confederation Line is being completed with its Alstom Citadis LRVs being tested, with opening scheduled for November 2018. There will be more construction and additional LRVs acquired as part of the city’s Stage 2 LRT project. Alstom Citadis LRVs will also be rolling on new LRT lines in the GTHA.

Construction is expected to begin in 2020 on a third route totaling 46 km, with a 20 km first phase to open in 2026. The city has approved a DesignBuild-Finance (DBF) delivery model and request for qualifications (RFQs) are expected to be issued in fall 2018.

Calgary will be ordering additional LRVs for its network expansion and for longer trains on its existing routes.

The city also plans to finish the U2 replacement.

Edmonton Edmonton now has two routes totalling 24.3 km. They are operated by 94 U2s

Courtesy City of Ottawa

Ontario

and newer Siemens Transportation Systems SD 160 LRVs. Construction and planning is underway to eventually extend the LRT system by 45 kms. A third new route, the Valley Line, is now being undertaken by a public-private partnership (PPP). TransEd Partners is building the first 13 km phase that is scheduled to open in late 2020.

Bombardier, a member of TransEd, is supplying 26 Flexity LRVs. The Valley Line is low-platform, unlike the other LRT routes that are high-platform, thereby requiring a separate new fleet.

The city will look at buying additional LRVs as expansions progress and as

Greater Toronto Hamilton Area (GTHA) Infrastructure Ontario (IO) is enabling the financing and procurement on four LRT projects: Eglinton Crosstown (Toronto), Finch West (Toronto), Hamilton and Hurontario (BramptonMississauga), totalling 64 km, in partnership with Metrolinx. All of the new LRT systems are scheduled to be open between 2021 and 2024.

The two Toronto LRT projects use design-build-finance-maintain (DBFM) while the Hamilton and Hurontario LRT will be delivered through design, build, finance, operate and maintain (DBFOM) PPPs. Crosslinx Transit Solutions is building the Eglinton Crosstown while Mosaic Transit Group will be constructing Finch West. A bidder is expected to be selected in 2018 for the Hurontario LRT and in 2019 for the Hamilton LRT. There is a difference in how the

canadianequipmentfinance.com | SUMMER 2018 | CANADIAN EQUIPMENT FINANCE

13

Courtesy Bombardier

Market Report

One of 26 Bombardier Flexity LRVs being delivered to Edmonton Transit Service for the new Valley Line LRT. Bombardier is supplying LRVs also to Toronto and Waterloo Region.

vehicles are being procured between the systems. Metrolinx has acquired LRVs separately for Eglinton Crosstown, Finch West and Hurontario. Alstom is supplying 44 Citadis Spirit LRVs for Hurontario and 17 for Finch West while Bombardier is building 76 Flexity LRVs for the Eglinton Crosstown.

But the Hamilton LRT has included LRV equipment procurement in its bids because of the project’s timeline, with construction anticipated to start in 2019 according to Metrolinx. Request for proposals (RFPs) have been sent to three shortlisted teams: CityLine Transit Group, Ei8ht Transit and Mobilinx.

The exact number of LRVs for Hamilton has not been determined. This will depend on the model selected by the proponent teams, according to Metrolinx, taking into account vehicle length and capacity and the operating plan.

Ottawa Ottawa expects to open the 12.5 km Confederation Line LRT in November 2018, the work for which is being undertaken by the Rideau Transit Group (RTG) through a DBFM contract. Alstom is supplying 34 Citadis Spirit LRVs to serve it.

More expansion is in the works. The 14

city announced it was moving forward with Stage 2 LRT in March 2017, which will significantly expand the network.

The Confederation Line will be extended by 27 km, which will require 38 more Citadis LRVs. A Memorandum of Understanding (MOU) between Ottawa and RTG provides for a fixed price for the Stage 2 LRT Confederation Line project components and services that will be delivered by the consortium including the additional LRVs. Once the Stage 2 extensions are complete, RTG will assume responsibility for maintenance and lifecycle of the fully constructed line until 2048. It will also maintain the expanded LRV fleet.

The MOU has netted Ottawa significant savings. The negotiated price for each LRV is $1.1 million less than the 2012 price resulting from the Confederation Line competitive procurement process. The city also secured a lower per km vehicle maintenance price and a lower infrastructure maintenance price.

Stage 2 LRT also includes the tripling in size of the 8 km non-electrified Trillium Line to 24 km by 2021, including with an extension to the main line and a spur to reach Ottawa Macdonald-Cartier International Airport.

CANADIAN EQUIPMENT FINANCE | SUMMER 2018 | canadianequipmentfinance.com

To serve it the city is buying seven Stadler FLIRT vehicles. They will supplement the existing fleet of six Alstom LINT vehicles. The city then will run a mixed Stadler/Alstom fleet on the Trillium main line with the Alstom LINTs running on the airport spur line.

The Stadler FLIRT equipment offers the potential to be converted to electric propulsion should the Trillium Line be electrified as they utilize dieselelectric drives, unlike the LINT, which uses diesel-hydraulic-mechanical transmission.

Waterloo Region The first 19 km phase of the Ion LRT is expected to open in December 2018.

It will be operated with 14 Bombardier Flexity LRVs. The region is planning an 18 km second phase. The GrandLinq consortium won a DBFOM contract for Ion in 2014.

Quebec Gatineau announced in June 2018 that it will study a 26 km LRT system that would also connect the city into Ottawa and its LRT network. If approved and funded the LRT could be open by 20281.

1 “Gatineau reveals $2.1B LRT plan, eyes 2028 launch”, CBC, June 20, 2018.

Do you want to reach executives who make key decisions about financing and leasing for their companies?

Sign up NOW for a free subscription to Canadian Equipment Finance magazine.

Visit our website at www.canadianequipmentfinance.com and learn more about the magazine Canadian Equipment Finance is a Lloydmedia, Inc publication.

Lloydmedia also publishes Financial Operations magazine, Canadian Treasurer magazine, Payments Business magazine, Direct Marketing magazine and Contact Management magazine.

Market Report

Change in Montreal

By Brendan Read

ommuters who rely on trains running under Mount Royal to reach downtown Montreal’s Central Station will in a few years be boarding customized Alstom Metropolis light metro vehicles on the Réseau express métropolitain (REM). They are being provided by CDPQ Infra, a whollyowned subsidiary of the Caisse de depot et placement du Quebec.

Alstom is supplying a fleet of 212 vehicles that will be operated on a 67 km network (see Canadian Equipment Finance Spring 2018). The company is the lead partner in the Groupe des Partenaires pour la Mobilité des Montréalais (PMM) consortium that won the contract for rolling stock, systems, operations and maintenance (RSSOM) in February 2018.

The Alstom vehicles and service will be very different from those that have been used by commuters since the mid1990s. The trains will be automated, configured in two- and four-car sets, be operated frequently and draw 1.5k V DC

C

16

power from overhead wires.

The principal commuter rail line, from Deux Montagnes, has been operated with a fleet of 58 Bombardier-built electric multiple unit (MU) vehicles that draw 25 kV AC from overhead wires.

The MUs can operate in trains up to 10 cars in length. They replaced a mix of 1950s-vintage MUs and coaches and locomotives, some of which dated back to when the tunnel opened in 1918 and which relied on 2.4 kV (later 3 kV) DC overhead-supplied power.

Most commuters will continue to have a one-seat ride into Montreal. However, those using the Mascouche line that connects into the Deux Montagnes line will have to transfer cross-platform to the REM. That is because its trains use Bombardier-built multilevel commuter coaches and dual-powered diesel/electric locomotives that are not compatible with REM. The Mascouche line is nonelectrified outside of the tunnel. The ability to operate under electric power is necessary in order to use the tunnel.

But the transfer station design and

CANADIAN EQUIPMENT FINANCE | SUMMER 2018 | canadianequipmentfinance.com

the high frequency of REM service promises to minimize the inconvenience.

Moreover, the REM will feature two new stations built inside the tunnel that will also have Metro (subway) connections, thereby bringing many commuters closer to their destinations.

Innovative procurement model The REM fleet is being supplied through a purchasing and project model that differs materially both from traditional transit system and public-private partnership (PPP) projects and procurements, according to CDPQ Infra. It also brings two important ownership structure and procurement process innovations.

First, CDPQ Infra is involved from the project inception, managing the development phase that allows for innovation and creativity. The development process is managed, it says, in an efficient and timely manner with a strong focus on commercial objectives and cost control.

Second, CDPQ Infra owns the project assets in the long run. In contrast

Courtesy CDPQ Infra Inc.

Left: Here is one of several designs that are being considered for REM’s light metro rail vehicles that will be built by Alstom.

Centre: The REM will have style as well as function in its stations as well as its trains, like Montreal’s Metro subway that it will connect with.

Courtesy Exo

Courtesy ALSTOM SA 2018. Desgin&Styling | METROPOLIS REM™

Market Report

Right: The Alstom vehicles will displace commuter rail MUs built by Bombardier in the mid-1990s.

concession models like PPP typically revert the assets after 30 years to the sponsoring public authorities.

CDPQ has PPP experience as it is a partner in the InTransit BC Canada Line PPP. Opened in 2009 in time for the 2010 Winter Olympics the Canada Line connects downtown Vancouver, B.C. with Richmond and Vancouver International Airport (YVR). It is operated frequently in short automated trains whose fleet was built by Hyundai Rotem and which uses third rail-supplied 750 V DC power.

Two concurrent tender processes were conducted in parallel for the REM’s infrastructure engineering, procurement and construction (EPC) and RSSOM contracts.

Here are several key advantages of CDPQ Infra’s model: ◉◉ Maximizes competition and economic efficiency by unbundling EPC, RSSOM and financing procurement and allowing to select the best quality and price offer for each element; ◉◉ The submissions proposed by the RSSOM suppliers were evaluated based

on pre-determined criteria specific to the rolling stock (vehicles) and systems. This allows them to focus their efforts on developing the best possible product and service offering without interference from other members of the consortium involved on other facets of the project, such as civil infrastructure.

The benefits of this approach extend to financing and lifecycle management as RSSOM suppliers are able to accurately match project revenues with project costs without being influenced by larger members of a multifaceted consortium; ◉◉ By dividing the procurement into two parts (EPC and RSSOM), CDPQ Infra was able to select the best proposition from each category without compromise. There is often a mismatch in the number of companies focused on EPC works and RSSOM works. In a traditional PPP procurement strategy, a company or consortium unable to find a complementary partnership is shut out of the process. By separating the

two contracts the project is able to generate interest from companies or consortiums that may not have otherwise been able to bid on it; and ◉◉ Ensures that ownership is retained by long term investors which have no interest in the short-term construction aspects of the project, therefore creating a good alignment with public authorities’ objectives in the long run.

Fate of MUs and locomotives The REM will mean that the Bombardier MUs and possibly the dual-powered locomotives will become redundant.

Exo, the Montreal area transit authority could reassign the locomotives to its other commuter rail lines. It could also demotor the MUs and operate them in trains with locomotives. In both cases Exo would continue to obtain value from the assets. Optionally Exo can sell the equipment.

An Exo spokesperson said it is analyzing the best solutions to dispose of the MUs. It is also analyzing different scenarios for the locomotives.

canadianequipmentfinance.com | SUMMER 2018 | CANADIAN EQUIPMENT FINANCE

17

Market Report

Global railcar leasing market to reach US $15+ billion: Fact.MR

Commodities including chemical and petroleum-based are helping to power demand for railcars globally.

rowing need for delivering commodities in a cost-effective manner in various industries is projected to fuel demand for railcars globally according to Railcars Leasing Market Forecast, Trend Analysis & Competition Tracking published by Fact.MR. As a result the global market of railcar leasing is projected to reflect a healthy compound annual growth rate (CAGR) of 5.6 per cent over the forecast period, 2017-2022, representing a value of over US $15 billion by the end of 2022.

G

Market highlights: ◉◉ The industrial goods segment is expected to register the highest CAGR throughout 2022; ◉◉ The petroleum and gas industry will continue to represent significant revenue contribution as compared with several other segments; ◉◉ A surge in demand for shipping agricultural commodities, including grain and for coal is expected to 18

positively impact growth; ◉◉ With the increasing need for containerization in a cost-effective manner demand for railcar leasing is expected to increase among several industries; and ◉◉ A growing need to carry diverse array of raw materials for production and construction projects in various industries has revved up demand significantly.

Box cars leading segment With surge in demand for cost-effective mode of shipping, various industries will continue to lease box cars for delivering commodities. Box cars will therefore remain the most selling railcar type as compared with hopper cars globally. However, gondolas as compared to other railcars is projected to reflect a relatively high CAGR in the global market through 2022.

Diverse application of railcar types For transporting chemical or petroleum-

CANADIAN EQUIPMENT FINANCE | SUMMER 2018 | canadianequipmentfinance.com

based commodities to the end users, various industries continue to lease tank cars. As railcars continue to represent a lucrative opportunity, several oil companies are leasing railcars in order to transport their commodities to other places.

However, the application of tank cars has diversified to transporting food and beverages industry-related commodities.

At the same time a combination of flatcars, gondolas and boxcars are being used to transport several commodities including oil, lumber and coal products.

Competition tracking Leading market players operating in the global railcar leasing market include Beacon Rail Leasing, GATX Corp, Touax Rail, VTG, CIT, American Railcar Industries, Infinity Rail, Progress Rail Services, GLNX Corporation and Chicago Freight Car Leasing.

To buy the report visit https://www.factmr.com/checkout/264/S.

Market Report

obust railcar usage is being reflected in the third fiscal quarter report ending May 31, 2018 for the U.S.-based Greenbrier Companies.

“Greenbrier produced strong operating and financial results,” said William A. Furman, chairman and CEO, “highlighted by healthy gross margins, a strong balance sheet and the highest quarterly order activity this fiscal year.”

R

Results highlights ◉◉ Net earnings attributable to Greenbrier for the quarter were $33 million, or $1.01 per diluted share, on revenue of $641.4 million. Quarterly results include $9.5 million, net of tax, ($0.29 per share) impact associated with a non-cash goodwill impairment charge recorded by GBW, its 50/50 joint venture with Watco Companies, LLC.; ◉◉ Adjusted net earnings attributable to Greenbrier for the quarter were $42.4 million or $1.30 per diluted share; ◉◉ Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the quarter was $86.9 million, or 13.6 per cent of revenue; ◉◉ Orders for 6,000 diversified railcars were received during the quarter, valued at over $600 million. Book-to-bill of 1.1x is the highest since May 2017; ◉◉ New railcar backlog as of May 31, 2018 was 24,200 units with an estimated value of $2.3 billion; ◉◉ New railcar deliveries totalled 5,600

Courtesy The Greenbrier Companies, Inc.

Greenbrier reports strong 3Q results units for the quarter; ◉◉ Board declares quarterly dividend of $0.25 per share, payable on August 9, 2018 to shareholders as of July 19, 2018; ◉◉ Cash provided by operating activities was $87.3 million for the quarter; and ◉◉ Annual earnings guidance of $5.00 per diluted share is reaffirmed. Guidance excludes $0.29 per share related to the goodwill impairment and includes the Q2 $0.70 per share non-recurring net benefit from the 2017 Tax Cut and Jobs Act (“Tax Act”).

Business outlook Based on current business trends and production schedules for fiscal 2018, Greenbrier believes: ◉◉ Deliveries will be approximately 20,000-21,000 units including Greenbrier-Maxion (Brazil) which will account for up to 10 per cent of deliveries; ◉◉ Revenue will be approximately $2.5 billion; and ◉◉ Diluted EPS (earnings per share) will be $5.00 excluding $0.29 per share related to the GBW goodwill impairment and including the Q2 $0.70 per share non-recurring net benefit from the Tax Act. “Greenbrier’s strategy is to strengthen core North American markets while making demonstrable advancements in international railcar markets,” said

Furman. “This strategy is succeeding.

With North American railcar loadings increasing and improving indicators for the U.S. and global economies, current industry fundamentals remain favourable for most of Greenbrier’s business segments. GBW continues to underperform expectations. We intend to eliminate this headwind to Greenbrier’s financial performance and will soon share plans to resolve GBW’s challenges.”

Furman continued, “We are encouraged by the 6,000 new railcar orders we received in the third quarter.

Order activity continues to be broadbased and diversified, originating primarily in the improving North American market.

“Looking forward, we expect to see continued order strength in North America and internationally, but do not expect order activity to be linear. Backlog is a key indicator of future earnings and cash flow generation. At quarter-end, Greenbrier had diversified backlog of 24,200 units with an estimated value of $2.3 billion.”

Furman concluded, “Greenbrier’s flexibility and creativity allow us to navigate the current market environment successfully. We remain confident in our long-term strategy and integrated business model. We are narrowing and reaffirming the guidance targets laid out earlier in the year.”

canadianequipmentfinance.com | SUMMER 2018 | CANADIAN EQUIPMENT FINANCE

19

Your Business

Canadian/U.S. cross-border lending Issues to consider to avoid potential costs and delays Enforceability of cross-border guarantees

By Dan Flaro and Jason Arbuck

he management of mid-market companies domiciled in Canada (or the U.S.) who consider embarking on business expansions south (or north) of the border often assume their incumbent lender will be readily able to finance such an expansion with reasonable notice. Their incumbent lender has operations in both countries, knows the company’s business well and is best positioned, in theory, to react to such a request. Often, the company expects that its line of credit can be extended crossborder, enabling it to direct borrowings to either entity, to finance the working capital needs in each country as required.

However, there are several material legal, tax and practical banking issues that could come into play and should be considered by both the borrower and the lender(s), respectively.

Examples of some of these potential considerations include:

T

Lending to foreign jurisdictions

Although the legal systems in the U.S. and Canada are very similar, some lenders are not willing to give value to tangible assets or receivables located outside their home jurisdiction. The reason for this is that the lender may not have assessed the risks, including potential super-priority risks relative to its security position, or ways to mitigate those kinds of risks that are associated with lending in “foreign” jurisdictions.

This process may involve obtaining legal, regulatory and tax advice, as well as special internal approvals for a lender to consider lending cross-border. Some lenders are not willing to undertake such an exercise.

20

In order for a U.S. entity to provide a secured guarantee of its parent’s obligations, the U.S. guarantor entity must demonstrate that its balance sheet can support the guarantee and that it has received proper consideration for extending the guarantee. These considerations are irrelevant if both the parent and the subsidiary are Canadian entities.

In most situations, there is a degree of risk associated with the enforceability of an upstream guarantee from a U.S. subsidiary that cannot be eliminated.

A lender to the Canadian parent would need to assess the risk of the upstream guarantee from the U.S. subsidiary or consider restructuring the loan to make the U.S. subsidiary a co-borrower.

Tax implications

Interest paid by a Canadian borrower to an arm’s-length U.S. lender is not subject to Canadian withholding tax, provided the interest is not “participating debt interest” (generally, interest that is not based on profits or financial performance of the borrower in some way).

If a U.S. lender is not dealing at arm’s length with a Canadian borrower (for example, where the lender also has an equity interest in the borrower), there may be withholding tax payable in Canada on interest payments. If a Canadian corporation guarantees a loan made to a U.S. parent, the parent needs to pay the Canadian subsidiary a commercially reasonable guarantee fee. If this guarantee fee is not paid, the Canadian guarantor will be considered to have provided a benefit to the U.S. parent and may be subject to Canadian withholding tax as well.

If a U.S. loan involves pledges or guarantees involving Canadian subsidiary stock or assets, the U.S. borrower could be subject to deemed dividends under Section 956 of the Internal Revenue Code, resulting in an

CANADIAN EQUIPMENT FINANCE | SUMMER 2018 | canadianequipmentfinance.com

expensive tax consequence. In many situations, this undesired result can be avoided if the pledges and/or guarantees are properly structured.

Banking

If a company determines that it requires standalone banking facilities in both Canada and the U.S., then there are some practical banking considerations. If the lender is a deposit taking institution in both countries, it will have separate credit adjudication processes for each credit facility (even if cross-guaranteed).

Some institutions will take a holistic view of the credit exposure while others will adjudicate the exposure independently, using the applicable credit committee domiciled in each country.

If the lender has a lending license in only one of the jurisdictions, then it will have one credit adjudication process, which would be ideal from a relationship perspective. The borrower group will also want to consider whether its lender offers cash management services in both countries or has agency relationships with domestic banks for these services.

If a management team is contemplating a cross-border expansion they should try to identify sensitive issues and/or potential barriers surrounding cross-border financing structures early in the process. Surprises late in the process can add significant costs and delays to the transaction.

Otherwise, mid-market borrowers should take comfort that there is always a solution to finance cross-border expansion with proper professional advice and notice.

About the authors Dan Flaro is senior vice president and country executive, MB Business Capital Canada. He leads MB Financial’s efforts in expanding its midmarket asset based lending (ABL) platform in Canada. His ABL expertise is complemented by a broad range of mid-market lending experience derived from roles with institutional lenders providing traditional commercial revolving facilities, equipment lease, industrial real estate and subordinated debt financing.

Jason Arbuck is partner and chair of the financial services group at Cassels Brock & Blackwell LLP in Toronto, Ontario. Jason’s practice is devoted to commercial and asset-based lending transactions, banking, factoring, and securitization transactions. A significant portion of his practice involves cross-border transactions.

Your Business

Managing B2B national accounts credit and payments systems

By Brandon Spear

ost businesses have a natural aversion to risk, experience resource constraints and they often have a need to cater to customers who use disparate merchant networks. This poses a huge challenge to scalability. As demand shifts towards adopting seamless and frictionless digital payments the need to differentiate using a consumer-like, ubiquitous customer experience becomes paramount.

Case in point is managing national accounts programmes in-house. This practice is extremely complex, requiring ongoing capital outlays, large investments in resources and technology to provide a seamless customer experience.

Leveraging MSTS’ Credit as a Service (CaaS) solution can accelerate the growth of a programme while reducing costs, driving efficiencies and increasing customer loyalty. CaaS attempts to fill a void in the market for manufacturers who would like to outsource and automate certain aspects of B2B credit and payments with a digital solution.

To illustrate, a Fortune 500 manufacturer of medium- and heavyduty commercial vehicles, with a global presence, currently uses CaaS to provide consistency to its end-customers. The solution includes dynamic pricing controls to validate contract pricing to the SKU (stock keeping unit) level and integrates with its ERP (enterprise resource planning) systems to automate reconciliation. To end-customers the process is seamless because a branded managed services team of professionals handles customer service and collections on behalf of the manufacturer.

There are four other ways to improve efficiencies and effectively globalize B2B credit and payments systems for national accounts programmes:

M

1. Add omnichannel capabilities.

Omnichannel has become a major trend. Today, consumers expect to be able to access their favourite brands via mobile, web, retail and any new touchpoint that emerges.

B2B customers are no different. Like B2C, B2B customers want flexibility in selecting and paying for inventory and receiving service. According to a 2017 Forrester Research report1 the most successful B2B companies will prioritize their buyers’ experience across channels, focusing on creating more omnichannel customers.

Business customers also want pricing levels, credit, terms and invoicing customization that meets their needs. Companies that deliver this as part of their B2B offering will deepen customer relationships and increase loyalty to peak levels.

2. Deeper, holistic analysis. Another benefit of digitization is the ability to convert every interaction into data. This opportunity is often unrealized because consolidating such data and analyzing it is a complex and difficult endeavour.

An integrated CaaS model allows companies to view and analyze transaction data to provide insight into customers’ purchasing activities and behaviour. By harnessing this kind of business intelligence, organizations are able to more effectively plan sales activities. Business intelligence dashboards can be used to read and analyze customer transaction data in real-time. Decision-making based on this up-to-date data results in better operational performance, lower costs and higher profits.

3. Analytics, AI and automation in the cloud.

Cloud-based delivery of credit solutions serves as the bedrock of this shift to real-time intelligence, just as it has in banking and software. Advancements in

data analytics, artificial intelligence (AI) and automation creates a seamless shift for services and infrastructure, and this is where CaaS can assist. For instance, if a customer wants a line of credit, AI-driven intelligent credit technology can now be used to review past history to determine credit worthiness and proactively adjust credit lines. AI can also analyze social media and other alternative data to make more informed decisions.

4. Cross-border transactions. The globalization of business has added an additional layer of complexity for companies looking to engage in global commerce. Regulations, currencies, languages and other factors make cross-border transactions difficult.

CaaS can help mitigate these burdens by enabling fleet companies to leverage relationships with financial partners in other countries and in large global regions and then bring them together into one platform. CaaS enables companies to navigate the complex patchwork of country-specific policies, languages, currencies and regulatory requirements when sending and receiving payments between countries.

Tying it all together To date there has been no seamless, endto-end payment and credit management solution for B2B companies. For many manufacturers CaaS presents a new opportunity to address age-old problems, combating the challenges they face with a way to authorize credit lines and dynamically adjust pricing controls across boundaries and via disparate currencies.

Brandon Spear is president of MSTS, a global B2B payment and credit solutions provider. To learn more about Credit as a Service, please visit www.msts.com.

1 Forrester Research, “B2B ecommerce will reach $1.2 trillion, 13.1% of U.S. B2B sales, by 2021”, press release, June 1,2017.

canadianequipmentfinance.com | SUMMER 2018 | CANADIAN EQUIPMENT FINANCE

21

Management Strategy

Transitioned to the lease accounting standard?

Most Canadian companies haven’t started: survey usinesses are facing deadlines to adopt the International Accounting Standards Board’s new lease accounting standard: 2019 for public companies and 2020 for all other organizations.

Even among companies that have moved to adopting the standard, much work remains, according to Robert Half and Protiviti. Two in five respondents at these organizations (40 per cent) reported having started but not completed an assessment of how much needs to be done.

The results may not be surprising.

The road to adoption is filled with challenges, namely training staff, diagnosing the necessary changes and finding professionals who have the requisite expertise, according to financial executives surveyed.

“With the adoption date just around the corner, companies can’t afford to underestimate how intensive an undertaking the new lease accounting transition will be,” said David King, president of Robert Half Management Resources. “Firms that have yet to assess for key technologies, personnel and processes, risk overlooking significant compliance requirements in their rush to get the new standard in place.”

B

Revenue recognition work as stepping stone The research suggests financial leaders see previous revenue recognition work as a stepping stone for lease accounting. 72 per cent of financial executives reported the revenue recognition transition has been the more challenging of the two and 86 per cent expect to apply at least some of the learnings from that process to the 22

lease accounting adoption.

“Companies may be tempted to pause and take a breath after completing their revenue recognition work, but time is a luxury they don’t have,” said Chris Wright, managing director of the financial reporting remediation and compliance practice for Protiviti, a Robert Half subsidiary.

“Adopting the new standard requires a substantial effort to prepare a firm’s people, processes and systems. For example, identifying and implementing a lease administration system and abstracting relevant data from leases require a significant investment of time

and resources. Although lessons learned from the revenue recognition transition are valuable, not every organization was as impacted by that standard as they will be by new lease accounting rules.”

Added King: “Consultants who have experience implementing new accounting initiatives are an excellent resource for companies feeling overwhelmed by the changes. Not only can these professionals help develop procedures, they can also provide expertise not available internally and support training efforts to ensure staff are equipped to navigate the standard post-transition.”

Research highlights by company size ◉◉ Only 18 per cent of the smallest companies, which have 20-49 employees, have started the lease accounting adoption process. Conversely, 49 per cent of firms with 1,000 or more employees have begun the transition; ◉◉ Firms with 100-249 employees report finding employees with the needed skills as their top challenge with the transition; and ◉◉ The two largest sizes of organizations, 500-999 and 1,000 or more employees, are more able to apply most of their revenue recognition learnings to the lease accounting transition.

Source: Robert Half Canada

Research highlights by industry ◉◉ Finance firms are most likely to have begun the transition (54 per cent); ◉◉ Only 16 per cent of manufacturing executives said their organizations are currently working on adopting the new standard; ◉◉ Business services firms struggle the most with updating technology, while finance companies have issues adequately training staff; and ◉◉ Professional services and construction companies are least able to apply their learnings from revenue recognition to the lease accounting transition.

Source: Robert Half Canada

CANADIAN EQUIPMENT FINANCE | SUMMER 2018 | canadianequipmentfinance.com

Reach marketers & financial executives Our magazines are must-reads for key executives in core corporate competencies.

Can you help our readers: • Create a strong financial structure and healthy economic ecosystem to ensure capital and cash flow keep their engines running?

• Determine who their customers should be, how they can reach them most effectively, and how they can turn data-driven marketing into profitable sales?

• Build efficient and effective financial systems to enhance payments and billings between their companies and their customers and vendors?

• Convert all the data and information they collect from every contact point into tangible benefits that increase revenue and reduce costs?

• Equip their companies with the tools, technology, systems and hardware needed to manage their operations, to create new services or products, and deliver them to their market?

• Manage their customers with smoothly functioning support departments that are properly staffed and equipped to solve problems, foster loyalty and retain customers?

• Make any or every step in that chain better, faster, cheaper, and more profitable?

We can help you tap into the ecosystem at the points that will drive your campaigns.

To advertise or get more information and media kits:

Mark Henry 905-201-6600 ext 223 | 1-800-668-1838 | mark@dmn.ca Visit our websites:

Direct Marketing magazine, www.dmn.ca Contact Management magazine, www.contactmanagement.ca Payments Business magazine, www.paymentsbusiness.ca

Canadian Treasurer magazine, www.canadiantreasurer.com Canadian Equipment Finance magazine, www.canadianequipmentfinance.com Financial Operations magazine, www.financialoperations.ca.