Credit availability in Canada

2009 AVAILABILITY 2011 FORECAST

CREDIT AVAILABILITY IN CANADA

CREDIT AVAILABILITY IN CANADA

ACKNOWLEDGEMENTS We gratefully acknowledge the efforts of our survey respondents and our forum participants who took valuable time away from their day jobs to participate in this work. We are particularly grateful to our research partner, Ernst &Young, without whom this study would not have been possible.

Copyright 2011 by Canadian Financial Executives Research Foundation (CFERF).

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This report is designed to provide accurate information on the general subject matter covered. This publication is provided with the understanding that the author and publisher shall have no liability for any errors, inaccuracies, or omissions of this publication and, by this publication, the author and publisher are not engaged in rendering consulting advice or other professional service to the recipient with regard to any specific matter. In the event that consulting or other expert assistance is required with regard to any specific matter, the services of qualified professionals should be sought.

First published 2011 by CFERF. 1201-170 University Ave. Toronto, ON M5H 3B3 ISBN# 978-0-9866833-1-2

CONTENTS Executive Summary / 2 Research Methodology / 6 Availability of Working Capital Financing / 8 Availability of Long-Term Financing / 12 Difficulty of Process for Obtaining Credit / 15 Cost of Credit / 18 Impact of the Economy and Lending Conditions on Small Companies / 20 Difficulty of Raising Funds Through Equity Markets / 22 Focus on M&A / 24 Awareness and Use of Government Programs / 27 Conclusion /30 Appendix A: Demographics / 32 Appendix B / 36

CREDIT AVAILABILITY IN CANADA

EXECUTIVE SUMMARY The global recession triggered by the collapse of the housing bubble and subsequent subprime mortgage crisis in the United States resulted in worldwide tightening in the business world’s access to capital. Even financially healthy corporations saw an impact, as financial institutions failed and other banks were bailed out.

Financing through the capital markets was made even more difficult as stock markets plummeted.

Fortunately, Canada was among the countries least affected, in part due to its healthy banking system, and it was also among the first to bounce back. By mid-2009, the Bank of Canada announced the recession was coming to an end, and the chill gradually lifted from the frozen credit markets.

Credit Availability in Canada, prepared by the Canadian Financial Executives Research Foundation, highlights some perspectives of senior financial executives who worked through the crisis and have shared their insights into present and anticipated future lending conditions. It attempts to articulate financial executives’ assessments of the stability of the overall Canadian economy, and, in particular, their perceptions of whether and how the credit landscape may have been transformed.

Senior executives find that working capital financing was far more available than at the trough in March, 2009, and conditions continued to improve between September, 2009 and September, 2010. Not surprisingly, the level of difficulty of infusing a company with day-to-day operating funds has not loosened to the degree seen prior to the downturn. Indeed, survey respondents report that no category of financing or capital market activity has returned to pre-2008 levels. As a result, the business of managing one’s capital and ensuring a well-maintained balance sheet is a priority for most. Even though conditions are seemingly more promising, debt structure, cash balances, asset performance, covenant controls and strict oversight of working capital continues to be the primary focus. Nevertheless, all of the above were viewed in the fall of 2010 and well into 2011 as easier to control, negotiate and obtain, and thus more available and less costly than in March, 2009. /2

EXECUTIVE SUMMARY

Similarly, confidence in obtaining access to long-term financing, particularly when compared to survey results from March, 2009, has recovered considerably in the latter months of 2010. On the other hand, senior financial executives remain cool about further gains into September 2011. Most expect the level of availability to improve, but at a pace that is steady and in step with what one finance executive described as “a mood in keeping with what should now be de rigueur for all of us: prudence and caution when divining plans for the road ahead.�

In fact, the research identifies a rather significant dampening on future spending and its associated financing. Most respondents, of course, kept a close eye on their cash positions as they weathered the recession – many even building healthy war chests for expansion in sunnier times. Despite this, the appetite for M&A has tapered off since a heart-warming upsurge in acquisition activity through August of 2010. Nagging concern over a sluggish global economy has resulted in three-quarters of companies polled preferring to look inward at organic growth.

When they do venture into the marketplace, most respondents have found the arduous process for obtaining credit to have eased significantly since March of 2009. The cost of credit followed a parallel course, with large public companies reporting the least pain at the pump. Fuelling the coffers was deemed far more costly for small public companies. In fact, throughout the survey, small public companies stand in stark contrast, faring far worse in all areas of credit availability. Curiously though, compared to their counterparts in this study, small public companies see a ray of hope when they forecast the state of difficulty (restrictions, terms, length of time to arrange loans) of obtaining credit into the end of 2011.

The survey also asked respondents what types of financing they planned to seek in the next year, helping to shed some light on future activity in the capital markets.

Most of those surveyed (68%) were planning a line of credit/medium-term notes.

About a quarter were looking at private placement debt, and fewer expected to seek private placement equity (14%). Other categories included high yield bonds, angel financing and seed capital. /3

CREDIT AVAILABILITY IN CANADA

While government programs are available to give wing to or supplement credit infusions, a significant number of companies were either not well versed or unaware of such assistance. More than half gave a thumbs-down to federal government efforts to raise awareness of these programs. Reviews were mixed about the effectiveness of these programs, and comments at times caustic when some small companies turned the discussion to their travails when dealing with government bureaucracy and the complexity of lending requirements.

BUDDY, CAN YOU SPARE A DIME? For a significant minority (38%), the economic crisis has sparked permanent change in the financial sector. They believe changes in credit conditions to be structural in nature and not, according to the majority (58%), driven by cyclical factors. They cite the severe culling of certain key lending institutions and the implementation of the new regulatory framework, Basel With all these high-powered American financial institutions III, as factors that will have a simply, “poof,” gone – and so many for good reason and good permanent impact on how they riddance (greed and short-term view) – surely there has got will approach capital markets to be fundamental and long-lasting change. Have we not in the future. learned anything?

“

”

Carl Gauvreau, Chief Financial Officer & Vice President Finance, Hartco Inc.

“

We sprinkle between retail and institutions. After the crunch, a lot of the institutions for a small cap dried right up. There are very few left.

”

Edward Jonasson, Chief Financial Officer, Intertainment Media Inc.

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EXECUTIVE SUMMARY

“

What we found in late 2008/2009 [was] that all the European and U.S. banks that we had had disappeared; and that was pretty evident because we were trying to take over a company at that point, and we needed a lot of money, and we were looking to arrange a bridge. We had one particular non-Canadian bank that offered us a billion and a half, then it was a billion, then it was $500 million, then it was: ‘I’m sorry, we don’t have any money.

Bruce Waterman, Senior Vice President & Chief Financial Officer, Agrium Inc.

”

“

The capital markets had gotten quite heady and most likely needed a good shake-up. But a permanent change? I don’t think so; surely it’s more of an evolution... What is clear is that we all are going to have to be more on-the-ball and fast on our feet in the future.

”

Tyrone Cotie, Director of Corporate Finance & Investments, Clearwater Seafoods Income Fund

“

We’ve had to look at a lot more innovative ways of accessing capital, diversifying our sources – Canadian capital markets in addition to U.S., looking at Asian markets where there are some good pools of capital. So I think going forward we’re going to be looking for a lot more creativity, a lot more diversity in our supply of capital.

Darren Andruko, Treasurer, Husky Energy Inc.

”

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CREDIT AVAILABILITY IN CANADA

RESEARCH METHODOLOGY Credit Availability in Canada: 2010 was prepared by CFERF and was sponsored by Ernst & Young Canada. The intent of the research was to provide a detailed analysis on how financial executives viewed lending conditions between December 2007 and September, 2010, along with forecasts of prospective conditions into 2011.

It comprises the results from CFERF’s October 2010 survey of senior financial executives across Canada; the results from an FEI Canada survey of members conducted in March, 2009; the insights through an Executive Research Forum held on February 1, 2011 and an October 2010 survey, Capital Confidence Barometer, conducted by The Economist Intelligence Unit, on behalf of Ernst & Young.

The data from the two surveys was aggregated for the purpose of developing a credit availability timeline. The first survey was done in March 2009 and covered December, 2007; December, 2008 and March, 2009. This survey effectively traced the decline from boom times to recession, and the results were presented at the March 31, 2009 meeting of the House of Commons Standing Committee on Finance.

The second survey was done in October, 2010 and questioned executives about conditions in September, 2009, September, 2010 and asked them to outline their expectations for September, 2011. This survey traced the recovery from recession back to better times in late 2010 and a forecast of even better times by late 2011 (but not quite back to the 2007 boom times). The results of this present survey were complemented by an Executive Research Forum held simultaneously in Toronto and Calgary on February 1, 2011. Additional statistical analysis is supplied by a parallel October 2011 survey, Capital Confidence Barometer, conducted by The Economist Intelligence Unit for Ernst & Young.

The survey keyed on a number of crucial components speaking to the issue of credit availability in Canada, but concentrated on four major areas: accessibility of credit for businesses; the difficulty of accessing equity markets; views on the stability of the Canadian economy as a whole; and, in an attempt to glimpse the

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RESEARCH METHODOLOGY

future landscape of capital markets, respondents were asked what type of financing they planned to seek in the next year.

The analysis was based on responses from 176 senior financial executives, representing all sectors of the Canadian economy. These respondents were broken down into four categories: Large and small public companies (29%), subsidiaries of public parent companies (10%); and large and small private companies (61%). 59 companies reported their revenues at less than $50 million; 64 respondents had revenues between $50 million and $499 million; and 18 were bracketed between $500 million and $999 million. The largest companies participating in this survey totalled 35 and reported revenues at $1 billion or above.

The last phase of the research methodology included capturing feedback from senior financial executives who took part in a half-day Executive Research Forum. The purpose of the forum was to allow for a free-flowing dialogue between company experts who were provided with specific questions in advance. A broad section of Canadian industry was represented including; agriculture, oil & gas, printing and publishing, new media, IT, telecom, consumer and personal care products and retail.

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CREDIT AVAILABILITY IN CANADA

AVAILABILITY OF WORKING CAPITAL FINANCING With relief from the stranglehold on credit now passing its first year in Canada, companies are more confident in their positioning vis-à-vis pursuing organic growth opportunities. Whether it is a revitalized interest in re-tooling equipment and plant infrastructure or expansive plans to reach beyond core business and into new product lines and markets, there is far less concern that working capital – its access and the strictures to its use – will be jeopardized well into 2011.

The availability of working capital in September, 2010 has improved since the trough in March, 2009, and prospects for 2011 are bright. However, although it is freely available in comparison with the bottom of the recessionary trough, working capital availability (indeed, all forms of capital availability) has not and is not expected by the end of 2011 to fully rebound to the levels of access seen in pre-credit-crunch conditions in 2007 and early 2008.

Company structure and size will determine the degree to I’ve been about 2 ½ years with the company. Before that I which Canadian business has was in a much, much larger company. When I came in mid to recovered in terms of its credit late 2008, I started calling a lot of my usual suspects and got position. Large public companies a very different response than I was used to. Really the doors reported the most robust gains were shut in my face. back towards their standing in Scott Browne, Chief Financial Officer, TeraGo Networks, Inc. December 2007. Large private companies also fared well – and of the four categories, they are the nearest to recouping their working capital positions prior to the start of slowing availability in early 2008. Small public and private companies bring up the rear, showing gains compared to the bottom of the curve, yet farther from the levels reported in December 2007. As Chart 1 illustrates, access to working capital for small public companies was low compared to their counterparts (not unusual given that small public companies generally have lower credit ratings). The dip in their fortunes was far more precipitous during the downturn.

Capital markets, understandably wary of damage done to the bottom-line stability

“

”

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AVAILABILITY OF WORKING CAPITAL FINANCING

of small public companies, are clearly still reticent about “partnering” up in this category. Access to capital for small public companies was consistently lower compared to the other categories throughout the entire period during studied, and they were most affected at the bottom at the curve. As seen in FEI Canada’s March, 2009 member survey, small private companies are entirely dependent on lenders and do not have alternative sources of revenue in the capital markets. In comparison, small public company financing from the capital markets is more vulnerable to the boom and bust of the economic cycle. If small public companies were neglecting their bankers, the chickens come home to roost during the downturns.

CHART 1 – AVAILABILITY OF WORKING CAPITAL FINANCING 3 = Very available, 2 = Somewhat available, 1 = Not very available, 0 = Not at all available 3.00

2.50

2.00

1.50

1.00

OVERALL LARGE PUBLIC SMALL PUBLIC LARGE PRIVATE SMALL PRIVATE

0.50

0.00 DEC 2007

DEC MAR 2008 2009

SEPT 2009

SEPT 2010

SEPT 2011

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CREDIT AVAILABILITY IN CANADA

In both 2009 and 2010, small companies struggled. Only 50% of small public companies described working capital access as available or very available in 2009. By 2010, availability rose to 67%. Small private companies were even worse off when it came to working capital financing: they started at 46% in September 2009 yet made more gains than their public counterparts, jumping to 71%. One can see that the small company category faced extraordinary challenges it battled to remain afloat throughout the crisis.

Large public and private companies, by contrast, marched in lock-step to record very healthy returns to viability in the eyes of their lenders. With respective 98% and 94% levels of confidence in their ability to attract cash, availability of working capital in Sept 2010 for these two categories became a non-issue.

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AVAILABILITY OF WORKING CAPITAL FINANCING

But projecting into Sept 2011, large public and private company confidence in availability slips a bit, eroding slightly to 93% and 92%. It is small public and private companies who charge forward with a strong upward forecast of 83% and 77% respectively. This difference in anticipated future lending conditions between the large and small could perhaps be attributed to expectations from a battered small enterprise category that believes there is nowhere to go but up. The bottom of the trough, March 2009, remains a vivid and stark near-past that reverberates into their present day business activity and the confidence of their prospective lenders.

“When it comes to borrowing, for the most part we don’t do a lot of business with the Canadian banks,” says Clearwater Seafoods’ Tyrone Cotie. “They’re more focused on capital markets and foreign exchange with some doing asset based lending and as a result really don’t have many borrowing alternatives to offer us.”

TABLE A – AVAILABILITY OF WORKING CAPITAL FINANCING, SEPT. 2009, SEPT. 2010, SEPT. 2011 (FORECAST) Available or very available 09/09

Available or very available 09/10

Large public

75%

98%

93%

Small public

50%

67%

83%

Large private

72%

94%

92%

Small private

46%

71%

77%

Overall

62%

84%

85%

Company type

Available or very available 09/11 (forecast)

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CREDIT AVAILABILITY IN CANADA

AVAILABILITY OF LONG-TERM FINANCING Long-term lending, which is so inexorably tied to collateralized assets and the ability to provide a solid set of financial statements as leverage for loan consideration, has, even in the best of times, remained a challenge for many businesses. In periods of recession, the ability to articulate future viability is particularly difficult for small public companies. As shown in Chart 2, large public and private companies (and small privates to a lesser degree) were on the rebound between March and September 2009. All My CEO gets very cranky if he wants to buy something and the while, small public companies I tell him I don’t have the money. We just bought something in Australia and I went out for about $500 million just before the continued their slide during year end and we got the best pricing we’ve ever gotten on any this period. Clearly, lenders issue, a little over 6% for 30-year money, and we were overremained cautious about longsubscribed, I think there was $4.2 billion of bids from interested term agreements with potentially parties. So I would love to have had a reason to borrow more fragile entities whose repayment money in the public markets. plans were necessarily linked

“

”

Bruce Waterman, Chief Financial Officer, Agrium Inc.

to possibly tenuous projected profit and cash flow.

TABLE B – AVAILABILITY OF LONG-TERM FINANCING BETWEEN SEPT. 2009 AND SEPT. 2010 Available or very available 09/09

Available or very available 09/10

Large public

78%

95%

93%

Small public

25%

50%

77%

Large private

70%

94%

94%

Small private

47%

69%

77%

Overall

60%

81%

85%

Company type

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Available or very available 09/11 (forecast)

AVAILABILITY OF LONG-TERM FINANCING

Once again, all four categories saw gains across the board in their prospecting for long-term financing. Compared to September of 2009, where 60% of all respondents rated long-term financing as available or very available, 2010 data offers a significant jump in access to 81%. Small public companies were far more upbeat after being almost locked out of the capital markets in September of 2009 (at 25%) as they rose to a modest 50% when asked a year later whether lenders were ready to welcome them back.

CHART 2 – AVAILABILITY OF LONG-TERM FINANCING 3 = Very available, 2 = Somewhat available, 1 = Not very available, 0 = Not at all available 3.00

2.50

2.00

1.50

1.00

OVERALL LARGE PUBLIC SMALL PUBLIC LARGE PRIVATE SMALL PRIVATE

0.50

0.00 DEC 2007

DEC MAR 2008 2009

SEPT 2009

SEPT 2010

SEPT 2011

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CREDIT AVAILABILITY IN CANADA

Forecasting into September, 2011, the level of availability of long-term lending is expected to remain consistent with September, 2010 at 85%. The overall forecast increase over two years from September, 2009 to September, 2011 is bolstered by considerable optimism by small public companies.

Having scraped the bottom What you find in Canada – it’s kind of interesting – is that a of the barrel during Sept single major bank’s capital markets group will do $40 million.

Between $40 and 80 million, you’re probably looking at two, 2009, and with nowhere to maybe three institutions. Beyond that, maybe three, maybe go but up, small public comfour. If you want to do a $100 million and up, they’ll probably panies predict a remarkable push you, or they’ll try to push you to high yield. We’ve done lender turnaround, with 77% one of those and it wasn’t that easy. But where I see the gap is of survey participants in this if you’re a sub-$40 million deal, it’s hard to get capital markets category expecting credit to groups really terribly interested. If you’re sub-$20 million, it’s be available or very available almost impossible. And that’s why I think the smaller guys are credit by September, 2011. really suffering.

“

”

Tim Zahavich, Chief Financial Officer, St. Joseph Communications Small private companies were also not immune to the extra hurt of non-confidence as they emerged from recession. In December, 2007, small private companies were not that far behind their large enterprise counterparts in terms of availability of long-term financing. But by Sept 2009, despite a strong uptick over the year, a significant gap between large private and small private companies had developed (Chart 2). Large public companies have soldiered on, reaching levels of long-term availability very close to the euphoric apex of credit access in Dec 2007. And in fact, large private companies report having surpassed the level of long-term access experienced during those heady days before the fall.

For companies overall, however, long-term lending conditions have not been perceived to be as available as they had been at the highest point seen in Dec 2007.

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DIFFICULTY OF PROCESS FOR OBTAINING CREDIT

DIFFICULTY OF PROCESS FOR OBTAINING CREDIT The recession’s fangs sank deep into Canadian business through 2008 and much of 2009, with the credit crunch inflicting much of the damage. The combined bite on credit availability, the process of obtaining that credit and the cost of credit was a venomous mix. Given its potency, relief from the sting of the credit crunch in roughly 18 months (March, 2009 through September 2010) has been remarkable.

The difficulty of the process required obtaining credit, such as length of time to arrange financing, covenant restrictions, and refinancing terms, were all rated as much easier in 2010 than in 2009. Respondents remain hopeful, forecasting moderate improvement in the process into 2011.

Large public and private companies reported the largest gains when navigating this process. Large private companies, for example, felt the warmest embrace from onetime standoffish lenders, with only 26% of companies reporting difficult or very difficult credit terms and conditions in September, 2010, compared to 56% in 2009. Again, by contrast, while improving from their low-point of 75%, half of all small public companies still reported the process to be onerous in terms of speed, terms and restrictions.

TABLE C – DIFFICULTY OF PROCESS FOR OBTAINING CREDIT, SEPT. 2009 AND SEPT. 2010

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CREDIT AVAILABILITY IN CANADA

While small private companies clung tenaciously to the curve of lessening difficulty led by the large companies (especially in comparison to the dispiriting gap that developed between small publics and the three other categories from December, 2008 into September, 2009), their progress is tempered as we look back to process difficulty in pre-credit crunch 2007 (Chart 3). Small private companies had reported an equal level of difficulty in this period with their large private brethren, and were near to par with large publics. The gap between large and small by 2010 had widened significantly; and forecasts into September, 2011 show the trend continuing, with all categories straight-lining from September, 2010 into next year with their projections.

CHART 3 – DIFFICULTY OF PROCESS FOR OBTAINING CREDIT 3 = Very difficult, 2 = Somewhat difficult, 1 = Not very difficult, 0 = Not at all difficult 3.00

2.50

2.00

1.50

1.00

OVERALL LARGE PUBLIC SMALL PUBLIC LARGE PRIVATE SMALL PRIVATE

0.50

0.00

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DEC 2007

DEC MAR 2008 2009

SEPT 2009

SEPT 2010

SEPT 2011

DIFFICULTY OF PROCESS FOR OBTAINING CREDIT

It is important to note that despite the uplifting downward curve in process difficulty, the time and legwork required of financial executives – along with credit terms and restrictions they must face and reconcile to their operational I believe there is cash out there, but it is pretty hard to get. needs – is still deemed far And the banks are being very rigid with their rules. You have greater than the pre-crunch to meet the rules or they won’t give you any cash. I found it far period ending at Dec 2007. easier to get a personal loan than a business loan.

“

”

Nancy Lala, Chief Financial Officer, About Communications

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CREDIT AVAILABILITY IN CANADA

COST OF CREDIT The cost of credit from September, 2009 to September, 2010 experienced a modest decline as the general economy emerged from recession. Overall, the majority of companies in this survey were impressed by the renewed availability of credit from the banks and capital markets, but these facilities still come at a price. Large public companies realized the sharpest decrease in costs, followed by large private companies and small private companies. Small public companies, not to break the trend, languished once again, with 50% finding credit costly or very costly. “The price of credit right now, I think on an absolute basis is favourable from my years of experience in banking,” admits Derrek Wong, now Senior Vice President and Chief Financial Officer of One Earth Farms Corp., a small private company based in Saskatoon. “But there’s also a need that the banks want all of your business, so they want all the cash management, they want all your treasury, and all your investment banking to assist the profitability from actually doing loans. So they’re trying to increase the rate of return on each client through fee-based business.”

Yet small publics join their large counterparts in forecasting better days ahead. So optimistic are small public companies that only 25% view credit as being costly or

TABLE D – COST OF CREDIT FROM LENDERS, SEPT. 2009–SEPT. 2010 Company type

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Costly or very costly 09/09

Costly or very costly 09/10

Costly or very costly 09/11 (forecast)

Large public

43%

23%

20%

Small public

58%

50%

25%

Large private

40%

32%

28%

Small private

46%

49%

42%

Overall

43%

37%

31%

COST OF CREDIT

“

You have to do your own homework also. Have a healthy balance sheet which will put you in a better position to negotiate. And that’s critical, even for a big company like us. On the other side, I think bank use the current environment to get fees. They say at the end the cost of funds is not higher for you because the BA (rate) is low. I agree, but the BA rate will not stay there forever, we know that, so I hope that enough pressure, even on Canadian banks, will make them reduce their fees.

”

François Vimard, Chief Financial Officer, Sobeys Inc.

very costly into Sept. 2011, compared to 58% in September of 2009. Large companies are by far the most optimistic about the future, with only one-third expecting credit to be costly or very costly in Sept. 2011. Only small private companies look to the future and predict little change in the cost of credit.

CHART 4 – COST OF CREDIT 3 = Very costly, 2 = Somewhat costly, 1 = Not very costly, 0 = Not at all costly 3.00

2.50

2.00

1.50

1.00

OVERALL LARGE PUBLIC SMALL PUBLIC LARGE PRIVATE SMALL PRIVATE

0.50

0.00

DEC 2007

DEC MAR 2008 2009

SEPT 2009

SEPT 2010

SEPT 2011

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CREDIT AVAILABILITY IN CANADA

THE IMPACT OF THE ECONOMY AND LENDING CONDITIONS ON SMALL COMPANIES Small companies – in particular, small public companies – have had a more difficult time rebounding from the economic downturn.

Lingering barriers to credit are cited as the primary reason for their poorer rate of recovery. For explanation, many small companies point to their greater exposure to external factors, such as the overall state of the economy; the number of businesses (and customers) failing overall; the level of debt in both public and private sectors; commodity prices and industry risk. These factors triggered the following less than stellar lending conditions: • lower credit offered at higher rates; • tighter restrictions around terms (shorter duration); • requests for more documentation; • requirements for more detailed business cases; • requirements for more security and collateral (i.e. fixed assets or real estate); • more requests for personal guarantees

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IMPACT OF THE ECONOMY AND LENDING CONDITIONS ON SMALL COMPANIES

A number of small company senior executives voiced their frustration throughout the CFERF survey.

“

Yes, banks are being more stringent on having the proper documentation and business case to lend money makes it harder for the small guy to cope.

”

Survey Respondent

“

All lenders want greater security for credit.

This is exceptionally difficult for IP companies with no hard assets other than accounts receivable.

Survey Respondent

“

”

Terms are more restrictive and will continue to be more restrictive and required security has increased and will continue. Credit is available but the costs have increased exponentially.

Survey Respondent

”

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CREDIT AVAILABILITY IN CANADA

DIFFICULTY OF RAISING FUNDS THROUGH EQUITY MARKETS Raising capital within equity markets has always been problematic for small companies. Survey results show that attracting interest in this post-recessionary period has been a challenge even for larger entities.

25% of small public company respondents reported their ability to fund their needs through the equity markets as very difficult or that equity was not available in Sept. 2010, compared to 33% in 2009. Small public companies expect increased interest into September 2011, with only 8.3% anticipating that access to funds through equity markets will be very difficult or that equity will not be available.

The majority of large and small private companies were not familiar with the state of the equity markets during the periods of 2009 into 2011, but those who did approach this market saw gains in access and interest.

Not surprisingly, large public companies had the best response from the equity markets. In September 2009, 20% reported “very difficult (equity not available)�.

This fell in September, 2010 to 13%. Only 3% anticipated their prospects to be this challenging in September, 2011.

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DIFFICULTY OF RAISING FUNDS THROUGH EQUITY MARKETS

CHART 5 – DIFFICULTY OF RAISING FUNDS THROUGH THE EQUITY MARKETS 3 = Very difficult, 2 = Somewhat difficult, 1 = Not very difficult, 0 = Not at all difficult 3.00

2.50

2.00

1.50

1.00

OVERALL LARGE PUBLIC SMALL PUBLIC LARGE PRIVATE SMALL PRIVATE

0.50

0.00 SEPT 2009

SEPT 2010

SEPT 2011

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CREDIT AVAILABILITY IN CANADA

FOCUS ON M&A Activity in mergers and acquisitions has progressed in fits-and-starts. In contrast to the appetite for M&A activity seen between the fall of 2009 and the spring of 2010, companies in Canada and abroad have cooled to the strategy of expending precious capital on external expansion. According to the October 2010 Ernst & Young Capital Confidence Barometer, 38% of companies globally were actively exploring M&A in April, 2010. The fall-off in interest dipped to 29% in October of 2010. When asked how likely they were to execute acquisitions in the next six months, 28% were contemplating this in October, 2010, compared to 47% in April, 2010. Companies reported they were more focused on organic growth during this period.

CHART 6 – FOCUSED ON ORGANIC GROWTH 100%

75%

50%

“

We’re always on the lookout for acquisition targets. Our corporate philosophy around what is a good target is a little tighter than some of our competitors.

”

Godfrey Nthunzi, Vice President, Finance, Colgate-Palmolive (Canada)

75% of respondents to the E&Y survey of senior financial executives worldwide see 0 tending to the good health of APR OCT NOV 2008 2011 2007 their own houses as a priority – and primarily through allocating capital to internal performance improvement and developing strategies for further cost efficiencies. The cause of this reticence to pursue new deals centers on concern that there continues to be significant barriers to stable growth within the global economy. Senior executives cite austerity measures, increasing regulation and currency conflicts as primary issues undermining confidence in the global economy.

25%

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FOCUS ON M&A

Once these conditions are addressed and the risks assessed – a process predicted to take a further six months – M&A activity is expected to rise once again. Yet, capital availability for M&A has markedly improved according to those surveyed, up from 26% in April 2010 to 36% in October 2010. Globally, capital conditions vary, with senior executives perceiving the BRIC (Brazil, Russia, India and China) nations to be in a healthier state than nations with more mature markets. For example, in the U.S., only 33% of respondents believe capital conditions have improved.

The outlook in the UK is brighter at a modest 47%. The E&Y survey shows a clear trend in M&A interest away from low-growth developed markets. The focus is now on emerging markets with high-growth potential. “I think we’re looking at the long term outlook, we’re looking at a period of probably between 10 and 30 years of rapid economic expansion in developing nations,” says Bill Ross, Vice President of Finance at Enbridge Pipelines. “And therefore, the need for energy will continue and will grow quite significantly.” Yet Ross is also looking with interest at security issues in Northern Africa, and is not hedging his bet that the U.S. will CHART 7 – HOW LIKELY IS YOUR COMPANY TO EXECUTE ACQUISITIONS IN THE FOLLOWING TIME PERIODS? 100%

75%

50%

25%

0

0-6 MONTHS 6-12 MONTHS 1-2 YEARS NOV 2007

APR 2010

OCT 2010

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CREDIT AVAILABILITY IN CANADA

not amp up domestic oil production. “So you have all of these sorts of trends playing in the market on a very, very global scale,” he says. “So what’s going on in the Middle East is very important to all these discussions.”

“

Research finds that between A lot of company are sitting on cash. In the retail business November 2009 and October between the three major companies in Canada we have close to 2010 acquisitions in developing $3 billion of cash. There’s a lot of cash available and company will nations rose from 21% to 31%. do something with it. But what and when is still a big question.

Hence, the research strongly François Vimard, Chief Financial Officer, Sobeys Inc. points to a “two-speed” recovery with investors increasingly worried about the continuing global downturn, while preferring to explore acquisitions within emerging markets over those in the developed world.

”

CHART 8 – ACQUISITION IN EMERGING MARKETS

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AWARENESS AND USE OF GOVERNMENT PROGRAMS

AWARENESS AND USE OF GOVERNMENT PROGRAMS The business community’s awareness of the Government of Canada’s efforts to provide assistance to the financial sector through a myriad of funding programs is rather sketchy, according to survey respondents. 48% were somewhat familiar (with the number, types and dollars available – including terms and conditions), while 31% admitted to being not familiar at all. Only 4% stated that they were very familiar with federal assistance programs.

“Well, you have to put the effort in! Become acquainted with all their requirements and then decide whether the process is worth your while,” says Tyrone Cotie, Director of Corporate Finance & Investments at Clearwater Seafoods Ltd. Clearwater has made extensive use of Export Development Corporation (EDC) and Business Development Bank of Canada (BDC) financing over the past few years. “They’ve both been extremely effective in supplementing our lending needs at a time when we needed them most.”

Participants at the CFERF Executive Research Forum offered the full spectrum of experience when it came to government programs. Edward Jonasson, Chief Financial Officer at the small public company, Intertainment Media Inc. had garnered nothing but frustration in his dealings with BDC. “They say they’re there for small companies, but they’re not. ... It was not productive time for me. And they weren’t creative at all. I tried to come back and say what about this avenue or what about this alternative, what about this covenant? And they just couldn’t get their heads around,” he said. “We tried to get them to understand our business and it just really didn’t go very far.” Nancy Lala, Chief Financial Officer at About Communications, a small private company, has made extensive use of the SR&ED program as a key component in bolstering financing objectives. “I think there’s a lot of support out there for small businesses,” she says enthusiastically. “The IRAP program has been good for funding a few people. SR&ED and IAF are good programs in the technology area. And there is a lot of support you can get from people doing SR&ED credits.” / 27

CREDIT AVAILABILITY IN CANADA

Whether they praised or derided the government’s assistance programs, Executive Research Forum participants were unanimous in their confusion about what programs are on-offer, qualifications required and how to begin the process of application. As savvy financial executives, well schooled in the art of both finding and deploying dollars – and at the best possible rates – they were rather puzzled at this particular blind spot.

Their reaction was consistent with the CFERF survey results, which revealed that the government’s efforts to promote awareness of its programs were poor (44%) or “somewhat good” (32%). Only 12% of all respondents said that promotion of these assistance programs were very good or good.

As to the effectiveness of government assistance to the Canadian financial sector in terms of increased stability in our financial system, opinions were mixed. 44% stated that stability had increased (with another 2% convinced that it had “significantly” increased). Meanwhile, the next two largest groups stated that either they did not know (27%) or that there was no change (26%). A tiny minority of 1% believed government intervention via these programs has created less stability in Canada’s financial system.

/ 28

AWARENESS AND USE OF GOVERNMENT PROGRAMS

CHART 9 – EXTENT GOVERNMENT ASSISTANCE PROMPTED INCREASED STABILITY 3 = Very much increased, 2 = Somewhat increased, 1 = Not increased very much, 0 = Not at all increased 3.00

2.50

2.00

1.50

1.00

OVERALL LARGE PUBLIC SMALL PUBLIC LARGE PRIVATE SMALL PRIVATE

0.50

0.00 MAR 2009

OCT 2010

/ 29

CREDIT AVAILABILITY IN CANADA

CONCLUSION If the results from the detailed statistical analysis in Credit Availability in Canada: 2010 are as accurate as the trends predicted in CFERF’s 2009 report, credit conditions will continue to rebound from the bleak period of credit-crunch in 2008-2009.

Survey respondents and guests at the February 2011 Executive Research Forum were buoyed by the upturn, and fully expected credit availability to loosen at least into the near future.

Still, survey respondents articulated a concern that lending institutions remain far too conservative and risk averse. Indeed, survey respondents report that no category of financing or capital market activity has returned to pre-2008 levels. In particular, they complain that the banks’ mindset is to operate in a lending environment that is far too broad in terms of selectivity.

This perceived resistance to dealing with companies on a case-by-case basis is The primary responsibility of a CFO is: Don’t run viewed as a significant barrier to even out of money. And it’s amazing how many people thought that reducing your cost to capital two-tenths greater improvements to credit access of a per cent was more important, and that, boy, the and general economic growth in Canada. people really learned equity is kind of important.

Fueling the coffers was deemed far more

“

”

Bruce Waterman, Chief Financial Officer, Agrium Inc. costly for small public companies than in other categories. In fact, throughout the survey, small public companies stand in stark contrast, faring far worse in all areas of credit availability.

Looking ahead to future activity in the capital markets, most survey respondents were planning a line of credit/medium-term notes. About a quarter were looking at private placement debt, and fewer expected to seek private placement equity.

Other categories included high yield bonds, angel financing and seed capital.

/ 30

CONCLUSION

While government programs are available, a significant number of companies were either not well versed or unaware of such assistance, and more than half gave a thumbs-down to federal government efforts to raise awareness of these programs. Reviews were mixed about the effectiveness of the system, and comments were at times caustic when some small companies turned the discussion to their travails when dealing with government bureaucracy and the complexity of lending requirements.

“

CFOs and treasurers get fired if the money is not there, not if the cost of capital is a little too high. It’s more about making sure we have it and not getting in a squeeze when your $3-billion dollar credit facility comes due in six months and the market is going into the tank.

Darren Andruko, Treasurer, Husky Energy

�

Survey and forum participants expressed a desire for further improvements to ensure a lasting recovery. Some respondents hope for an expansion of tax incentives promoting venture capital activity; others look to greater development of the high-yield bond market; while still others encouraged the government to ease the lending criteria and red tape of its assistance programs. Two CFERF Executive Research Forum participants put the quest for liquidity in rather succinct terms.

/ 31

CREDIT AVAILABILITY IN CANADA

APPENDIX A: DEMOGRAPHICS CORPORATE STRUCTURE

60% 10%

30%

Private Public* Other *including a subsidiary of a public company / 32

APPENDIX A: DEMOGRAPHICS

STOCK EXCHANGE

TSX VENTURE: 3% OTHER FOREIGN STOCK EXCHANGE: 2%

A STOCK EXCHANGE IN THE US: 6%

TSX: 24%

/ 33

CREDIT AVAILABILITY IN CANADA

MARKET CAP

27% 46% 30% 10% 17%

LESS THAN $100M $100M TO $249M $250M TO $1B OVER $1B / 34

APPENDIX A: DEMOGRAPHICS

ANNUAL REVENUE - LAST FISCAL YEAR

100%

75%

50%

25%

0

LESS THAN $50M

$50M TO $99M

$100M TO $499M

$500M TO $999M

$1B OR ABOVE / 35

CREDIT AVAILABILITY IN CANADA

APPENDIX B FEBRUARY 1, 2011 EXECUTIVE RESEARCH FORUM PARTICIPANTS Forum Chair Mark Walsh – Vice Chair, Canadian Financial Executives Research Foundation Moderators Christian Bellavance – Vice President, Research & Communications, FEI Canada Michael Conway – Chief Executive & National President, FEI Canada Joe Telebar – Partner and Transaction Support Leader, Ernst & Young Experts Terry Kelly – Canadian Markets Leader, Transaction Advisory Services, Ernst & Young Brian Allard – Partner and Senior Vice President, Transaction Advisory Services, Ernst & Young Toronto Participants Scott Browne – Chief Financial Officer, TeraGo Networks Inc. Edward Jonasson – Chief Financial Officer, Intertainment Media Nancy Lala – Chief Financial Officer, About Communications Godfrey Nthunzi – Vice President, Finance, Colgate-Palmolive Canada Inc. Bill Ross – Vice President, Finance, Enbridge Pipelines Inc. Francois Vimard – Chief Financial Officer, Sobeys Inc. Tim Zahavich – Chief Financial Officer, St. Joseph Communications

/ 36

APPENDIX B

Calgary Participants Darren Andruko – Treasurer, Husky Energy Bruce Waterman – Senior Vice President, Finance & Chief Financial Officer, Agrium Inc. Derrek Wong – Senior Vice President & Chief Financial Officer, One Earth Farms Interviews: Carl Gauvreau – Chief Financial Officer, Hartco Inc. Tyrone Cotie – Director of Corporate Finance & Investments, Clearwater Seafoods Income Fund Observers Gord Graham – Partner, Ernst &Young Sheryl-Ann Stanjeck – Business Development Executive, Ernst & Young FEI Canada Melissa Gibson – Communications & Research Manager, FEI Canada

/ 37

CREDIT AVAILABILITY IN CANADA

THE CANADIAN FINANCIAL EXECUTIVES RESEARCH FOUNDATION (CFERF) is the non-profit research institute of FEI Canada. The Foundation’s mandate is to advance the profession and practices of financial management through research.

CFERF undertakes objective research projects relevant to the needs of FEI Canada’s 2,000 members in working toward the advancement of corporate efficiency in Canada.

Further information can be found at www.feicanada.org.

FINANCIAL EXECUTIVES INTERNATIONAL CANADA (FEI CANADA) is the all industry professional membership association for senior financial executives. With eleven chapters across Canada and 2,000 members, FEI Canada provides professional development, thought leadership and advocacy services to its members.

The association membership, which consists of Chief Financial Officers, Audit Committee Directors and senior executives in the Finance, Controller, Treasury and Taxation functions, represents a significant number of Canada’s leading and most influential corporations. Further information can be found at www.feicanada.org.

ERNST & YOUNG LLP is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit ey.com/ca.

We would like to thank Megan Gibson, for designing this report / 38

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