On May 13, 2020 we published COVID-19 Access to Credit for Large-Cap Energy Companies to provide a general overview of the Large Employer Emergency Financing Facility (LEEFF), a program instituted by the Government of Canada to provide short-term liquidity assistance in the form of interest-bearing term loans to large Canadian employers who have been affected by the COVID-19 outbreak. On May 20, 2020, applications for LEEFF opened and further details regarding the program were announced.
The intent of LEEFF is to provide bridge financing to large Canadian employers to help such enterprises preserve their employment, operations and investment activities until they can access more traditional market financing. LEEFF will be delivered through Canada Enterprise Emergency Funding Corporation (CEEFC), a newly formed subsidiary of Canada Development Investment Corporation, in cooperation with Innovation, Science and Economic Development Canada (ISED Canada) and the Department of Finance.
LEEFF will be open to large for-profit Canadian enterprises who:
A. have a significant impact on Canada’s economy, as demonstrated by:
i. having significant operations in Canada, or
ii. supporting a significant workforce in Canada;
B. can generally demonstrate approximately $300 million or more in annual revenues; and
C. require a minimum loan size of $60 million.
While LEEFF requires a minimum loan size of $60 million, the federal government has not put a cap on the amount of an applicant’s loan, and has indicated that an applicant’s actual loan size will be assessed on a case-by-case basis, taking into consideration the applicant’s cash flow needs for the next 12 months.
It should be noted that certain not-for-profit enterprises, such as airports, may also be eligible under LEEFF. Also, companies that have been found guilty of tax evasion will not be permitted to access financing under the program.
Companies considering accessing LEEFF must apply by completing the online enquiry form and emailing the completed form to email@example.com. Applicants will then be contacted by representatives from CEEDC and ISED Canada to complete the application process, which will include signing a non-disclosure agreement and completing an application form.
Applications for LEEFF will remain open while the current economic situation persists.
Terms and Conditions to Financing
The key terms of LEEFF financing are as follows:
1. Size/Principal Amount - The loan will be provided by way of two loan facilities: an unsecured facility equal to 80% of the aggregate loan amount (the Unsecured Facility) and a secured facility equal to 20% of the aggregate loan amount (the Secured Facility). The loan will be advanced in tranches over 12 months.
Companies seeking support must also commit to minimizing the loss of employment and sustaining their domestic business activities, and must demonstrate that funding under LEEFF forms part of their overall plan to return to financial stability. Broader sectoral dynamics for LEEFF applicants will be considered through processes led by ISED Canada.
2. Interest Rate - With respect to the Unsecured Facility, the interest rate will be 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.
3. 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.
4. Operating Requirements - The borrower will be subject to certain operating requirements while the loan is outstanding, including:
a. prohibitions on dividends, capital distributions and share repurchases; and
b. certain executive compensation restrictions.
5. Affirmative Covenants - The borrower will be subject to certain affirmative covenants while the loan is outstanding, including:
a. performance of obligations under existing pension plans;
b. performance of material obligations under applicable collective bargaining agreements; and
c. 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 goal of net zero by 2050.
6. Governance - CEEFC will reserve the right to appoint an observer to the board of the borrower.
7. Conditions Precedent - Certain conditions will need to be satisfied before the initial advance of funds, which will include certain waivers from existing lenders or bondholders of the borrower.
Compensation of CEEFC
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 with the option to purchase the borrower’s (or parent public company’s) common shares totalling 15% of the principal amount of the loan (the Warrants) or receive cash consideration equivalent to the value of the Warrants. The Warrants will enable CEEFC to share in the upside of the borrower’s recovery. These Warrants may be settled with the borrower prior to being exercised or sold to third party buyers after the loan is repaid.
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 Warrants for public company borrowers.
LEEFF Requirements and Covenants
When LEEFF was first announced on May 11, 2020, the federal government’s requirement for climate-related disclosure specifically referenced the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (the TCFD), which is viewed as the international benchmark for this type of disclosure. Interestingly, the updated LEEFF information does not contain a reference to the TCFD, but rather a requirement to publish “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 goal of net zero by 2050”. Under the Paris Agreement, Canada committed to reducing its GHG emissions by 30% below 2005 levels by 2030.
Currently, reporting issuers in Canada are required to disclose material risks associated with climate change in their periodic disclosure. However, reporting issuers are not required to disclose how their corporate governance strategies, policies and practices will contribute to achieving Canada’s commitments under the Paris Agreement or its goal of achieving net zero by 2050.
While the newly announced details regarding LEEFF’s climate disclosure requirements no longer specifically reference the TCFD, it appears that the current climate disclosure regime applicable to Canadian reporting issuers could potentially be inadequate to satisfy the requirements imposed by the federal government under the LEEFF program. We will continue to monitor this issue as more details on the climate-related financial disclosure requirements under the LEEFF program become available.
As stated above, borrowers will be required to adhere to certain executive compensation restrictions. Although details of such restrictions have not yet been released, we expect they will include limits on total compensation that may be paid to executives of the borrower including, perhaps, a requirement that no executive be paid more in total annual compensation while the loans under LEEFF are outstanding than he or she received prior to the company’s participation in the program.
Application to Alberta’s Energy Industry
Provincial Government Response
In response to the newly announced details regarding LEEFF, Alberta Premier Jason Kenney announced that the Government of Alberta agrees with the principle that any company participating in LEEFF should be subject to the operating requirements outlined above. He further agreed that the public interest must be protected and any credit provided to participating companies should be advanced for the core purpose of ensuring that the company can survive.
With respect to the right of CEEFC to receive Warrants and to appoint an observer to the board of the borrower, Premier Kenney noted that he will need to see more details on these measures before commenting specifically, but generally it is the Government of Alberta’s position that the federal government should not have an ability to direct or otherwise micro-manage the operations of participating companies in the LEEFF program. Interestingly, Premier Kenney also indicated that the Government of Alberta is getting close to reaching a final decision on whether it will implement its own form of credit facility or other backstop program for large Alberta companies.
 The test for materiality is objective. The Canadian Securities Administrator Staff Notice 51-333 (Environmental Reporting Guidance) and Staff Notice 51-358 (Reporting of Climate Change-related Risks) provides that an assessment of materiality in relation to climate change-related risks may require issuers to adapt their existing approaches to risk assessments.