Canada Development Investment Corporation Clarifies Certain Aspects Of The Large Employer Emergency Financing Facility Program – Corporate/Commercial Law – Canada – Mondaq News Alerts

On May 20, 2020, Canada Development Investment
Corporation (CDEV) clarified certain aspects of the Large Employer
Emergency Financing Facility (LEEFF) program which was announced by
Canada’s federal government on March 11, 2020, including (i)
the terms and conditions that would apply to the loans provided to
large Canadian businesses under the LEEFF program and (ii) the
compensation payable by such businesses in exchange for the loans
provided under the LEEFF program.  

The following is a summary of the material terms of the LEEFF
program. The information below is based on press releases issued on
May 11, 2020 by each of the Prime Minister’s office (
here), the Business Development Bank of Canada (
here) and the Export Development Canada (
here), as well as a factsheet issued on May 20, 2020 by CDEV
(here).

Background

The Government of Canada has created the LEEFF program pursuant
to which large Canadian employers may be eligible to receive bridge
financing support. The LEEFF program will be aimed at ensuring
eligible companies can continue their operations, retain workers on
payroll and avoid bankruptcy. The LEEFF program will be
administered by the Canada Enterprise Emergency Funding Cooperation
(CEEFC), a subsidiary of CDEV, in cooperation with two federal
government departments: Innovation, Science and Economic
Development Canada and the Department of Finance.  

LEEFF Eligibility  

The following LEEFF eligibility criteria have been
announced:

• LEEFF relief will be available to for-profit businesses (with
  the exception of those in the financial sector) and certain
  not-for-profit businesses (such as airports), provided annual
  revenues are generally in the range of $300 million or higher;
• Eligible businesses must be seeking financing of about $60
  million or more;
• Eligible businesses must have significant operations or
  workforce in Canada and must commit to sustain their domestic
  business activities;
• Eligible businesses may not be involved in active insolvency
  proceedings;
• Cooperation of applicants’ private sector lenders is
  required;
• Eligible businesses must commit to minimizing the loss of
  employment; and
• Eligible businesses must demonstrate that funding under LEEFF
  forms part of their overall plan to return to financial
  stability.

Additionally, in considering a company’s eligibility for
assistance under the LEEFF program, an assessment may be made of
its employment, tax, and economic activity in Canada, as well as
its international organizational structure and financing
arrangements.

LEEFF Restrictions

Support under the LEEFF program will not be available to
companies if:

• The company has been convicted of tax evasion; and/or
• The company has the capacity to “manage through the
  crisis” without LEEFF relief.

Companies that receive funding under LEEFF may not use the
funding proceeds to resolve insolvencies or restructure firms.
Further, while the loan is outstanding, the borrower will be
subject to certain operating requirements, including prohibitions
on dividends, capital distributions and share buy-backs, as well as
executive compensation restrictions.

Loan Terms

The key terms and conditions of the loans to be provided to
eligible companies under the LEEFF program are as follows:

Principal amount

The minimum aggregate loan will be $60 million. The loan will be
provided by way of two loan facilities: (i) an unsecured facility
equal to 80% of the aggregate loan amount, and (ii) a secured
facility equal to 20% of the aggregate loan amount. The loan will
be advanced in tranches over 12 months.

Interest rate

With respect to the unsecured facility, the interest rate will
be cumulative at 5% per annum payable quarterly in arrears. The
interest rate will increase to 8% per annum on the one-year
anniversary and will increase by a further 2% per annum each year
thereafter. To reduce cash pressures, interest may be paid in-kind
for the first two years of the loan.

For the secured facility, the interest rate will be based on the
interest rate of the borrower’s existing secured debt.

Term

The duration of the unsecured facility will be five years. The
duration of the secured facility will match that of the
borrower’s existing secured debt. The borrower may prepay the
loan at any time without penalty.

Covenants

The borrower will be subject to certain affirmative covenants
while the loan is outstanding, including (i) performance of
obligations under existing pension plans, (ii) performance of
material obligations under applicable collective bargaining
agreements, and (iii) 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 how these practices contribute to
achieving Canada’s commitments under the Paris Agreement and
goal of net zero emissions by 2050.

Governance

CEEFC will reserve the right to appoint an observer to the
borrower’s board.

CEEFC Compensation

Businesses that receive loans under the LEEFF program will be
required to compensate CEEFC in exchange for such loans. The
compensation required is dependent on whether the borrower is a
public or private company.

Public companies

In addition to the security interest on the secured facility and
the interest rate charged for the loans, if the borrower is a
Canadian public company (or the private subsidiary of a Canadian
public company), the borrower must issue warrants to CEEFC. The
warrants must provide CEEFC with the option (i) to purchase the
such number of the borrower’s (or parent public company’s)
common shares as is equal to 15% of the principal amount of the
loan provided under the LEEFF program or (ii) to receive cash
consideration equivalent to the value of the warrants. These
warrants may be settled with the borrower prior to being exercised
or sold to third party buyers after the loan is repaid.

Private companies

In addition to the security interest on the secured facility and
the interest rate charged for the loans, borrowers without
publicly-traded shares will be required to provide CEEFC with
compensation in the form of additional fees at a level commensurate
to the value of the above-mentioned warrants for public company
borrowers.