Update on the Federal Government's LEEFF program to support large enterprises

On May 20, 2020 the Federal Government provided additional details on the Large Employer Emergency Financing Facility (LEEFF). We note that the Federal Government's financial support for businesses during the COVID-19 pandemic is evolving quickly, and we will provide further updates as more information becomes available.

Unlike other programs geared to providing support to Canadian businesses during the COVID-19 pandemic through private financial institutions, the LEEFF will be offered directly through the Federal Government. The LEEFF will be administered by the Canada Enterprise Emergency Funding Corporation (CEEFC), a subsidiary of the Canada Development Investment Corporation that has been formed to administer the LEEFF. The fact sheet released by the Federal Government on May 20, 2020 has provided additional details about the terms of the bridge financing that the LEEFF provides—particularly that the LEEFF will be disbursed in the form of interest-bearing loans, intended to preserve large Canadian enterprises' employment, operations and investment capacities (LEEFF Loans).

Eligibility

Businesses looking to obtain LEEFF Loans must generate "approximately $300 million or more" in annual revenues and have a significant impact on Canada’s economy, as demonstrated by:

• having significant operations in Canada; or
• supporting a significant workforce in Canada.

In addition, prospective recipients must "commit to minimizing the loss of employment and sustaining their domestic business activities, and must demonstrate that funding through the LEEFF forms part of their overall plan to return to financial stability".

LEEFF Loans are not earmarked for any particular industry, but they are not available for businesses in the financial sector. Innovation, Science, and Economic Development Canada's (ISED) discretion to distribute LEEFF Loans across the economy has been described by the Federal Government as an assessment of the "broader sectoral dynamics" applicable to applicants for LEEFF Loans.

LEEFF Loans cannot be used to resolve insolvencies or to restructure. Conversely, companies will not be eligible if they have the liquidity and resources to manage through the COVID-19 pandemic and economic downturn. Moreover, the Federal Government has emphasized that LEEFF Loans will not be available to any companies that have been convicted of tax evasion.

Principal amounts of LEEFF Loans

LEEFF Loans will be administered by way of two loan facilities to each successful applicant: one that is secured and one that is unsecured, respectively representing 20% and 80% of the principal amount of the LEEFF Loan The Federal Government confirmed that the minimum principal amount for LEEFF Loans will be $60 million, and that it will assess the amount of each LEEFF Loan on a case-by-case basis. LEEFF Loans will be advanced to recipient companies in instalments over 12 months.

As the administrator of the LEEFF Loans, the CEEFC may require waivers from a LEEFF Loan recipient's existing lenders or bondholders, and may impose other conditions prior to advancing funds.

CEEFC's stake in recipient enterprises

The Federal Government intends for the CEEFC to share in the eventual upside of the enterprises that receive LEEFF Loans. Publicly traded recipients (or recipients that are private subsidiaries of Canadian public companies) will be required to issue stock warrants that allow CEEFC to acquire an ownership stake through the purchase of common shares or cash equivalents — a measure that Finance Minister Bill Morneau said would see Canadian taxpayers share in the benefits to LEEFF Loan recipients if they recover and perform well. The warrants may be settled prior to being exercised or sold to third party buyers after LEEFF Loans are repaid.

The Federal Government's fact sheet states that LEEFF Loan recipients "must issue warrants with the option to purchase the borrower's (or parent public company's) common shares totalling 15% of the principal amount or receive cash consideration equivalent to the value of the warrants".

Minister Morneau also announced that privately traded companies who receive LEEFF Loans will be subject to fees that create a comparable obligation to the warrants required from public LEEFF Loan recipients.

Required covenants

Furthermore, recipients of LEEFF Loans will be subject to certain affirmative covenants while the LEEFF Loans are outstanding, including:

• performance of obligations under existing pension plans;
• performance of material obligations under applicable collective bargaining agreements; and
• publishing an annual climate related financial disclosure report, highlighting how corporate governance, strategies, policies and practices will help manage climate-related risks and opportunities; and contribute to achieving Canada's commitments under the Paris Agreement and the goal of net zero carbon emissions by 2050.

In addition, recipients of LEEFF Loans must limit dividends, share buybacks and executive compensation. A government official stated that companies who receive LEEFF Loans will be required to cap their executives' salaries at $1 million, and any executive currently receiving more than $1 million will be required to accept a compensation cut until the LEEFF Loan is repaid. It is unclear whether compensation cuts apply only to executive salaries, or to executives' total compensation. The Federal Government's update also included the announcement that the CEEFC may, at is discretion, appoint an "observer" to the board of directors of businesses who receive LEEFF Loans. Recipients of LEEFF Loans may also receive support under the Canada Emergency Wage Subsidy.

Interest rates

The unsecured 80% portion of LEEFF Loans will be subject to a cumulative annual interest rate of 5%, which will be payable quarterly. The interest rate will increase to 8% on the one-year anniversary of the LEEFF Loans' initial installment and will increase by a further 2% each year thereafter. Recipients of LEEFF Loans will have the option to pay interest in-kind with additional debt rather than cash, for the first two years of the LEEFF Loan's term.

The interest rate of the 20% secured portion of the LEEFF Loans will be based on the interest rate of the LEEFF Loan recipient's existing secured debt.

Term

The unsecured 80% portion of the LEEFF Loans will have a term of five years. The term of the secured 20% portion will match those of a LEEFF Loan recipient's existing secured debt. Recipient companies may prepay their LEEFF Loan at any time without incurring penalties.

Availability of LEEFF Loans

LEEFF Loans will remain available "as long as the current economic situation persists". The application for LEEFF Loans opened on May 20, 2020. To apply for LEEFF Loans and for additional information on the application process, applicants can register their interest by completing an online enquiry form and following the instructions provided.