Liquidity programs for Canadian businesses – Large Employer Emergency Financing Facility

In addition to the Business Credit Availability Program, which provides financing support for small- and medium-sized Canadian businesses, the government of Canada has opened the application portal to the Large Employer Emergency Financing Facility. This new program is designed to provide bridge financing to large employers whose needs are not being met through conventional financing during the COVID-19 pandemic so that they can preserve their employment, operations and investment activities until they can access more traditional market financing.

Large Employer Emergency Financing Facility (LEEFF)

The following provides a short summary of the details of the program announced on May 20. Note that many of the key issues will be addressed on a case-by-case basis with borrowers.

Overview of the program

The LEEFF program is designed to provide short-term liquidity support through bridge financing for large for-profit businesses and certain not-for-profit businesses that have been affected by the COVID-19 pandemic. The intent of LEEFF is to help large Canadian businesses preserve their employment, operations and investment activities until they can access more traditional market financing. 

LEEFF provides short-term liquidity assistance in the form of interest-bearing term loans delivered by the Canada Enterprise Emergency Funding Corporation (CEEFC). The program will employ a standard set of economic terms and conditions to ensure timely support.

No deadline for applications has been announced and the LEEFF program plans to remain open while the current economic situation persists. 

How much assistance is available?

• Minimum loan size of $60 million, based on the applicant’s cash flow needs for the next 12 months.
  
  • Actual loan size for each applicant will be assessed on a case-by-case basis based on demonstrated need.

Eligibility criteria

Large for-profit enterprises in all sectors, except for those in the financial sector, can apply for funding under LEEFF. Certain not-for-profit enterprises, such as airports, could also be eligible.

• To qualify for the LEEFF program, the enterprises must: 
  
  • 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;¹
  • can generally demonstrate approximately $300 million or more in annual revenues; and 
  • require a minimum loan size of $60 million.
    
    
• The LEEFF program may not be used to resolve insolvencies or restructure firms, or to provide financing to companies that otherwise have the capacity to manage through the crisis.
  
  
• In addition, companies that have been found guilty of tax evasion are not eligible under the program.

In determining eligibility, an assessment will be made of the applicant business’s employment, tax and economic activities in Canada, as well as its international organizational structure and financing arrangements. 

What are the terms and conditions of the loan?

The terms and conditions will be commercial in nature. The key terms that have been announced are as follows:  

• Size/Principal Amount. The minimum aggregate loan will be $60 million. The loan will be advanced in tranches over 12 months. The loan will be provided by way of two loan facilities: 
  
  • Unsecured facility: equal to 80% of the aggregate loan; and 
  • Secured facility: equal to 20% of the aggregate loan amount. 
    
    
• Interest Rate. 
  • Unsecured facility: cumulative at 5% per annum payable quarterly in arrears, with a step-up to 8% per annum on the one-year anniversary, and a further 2% per annum each year thereafter. 
    • PIK interest (capitalizing interest) will be possible for the first two years of the loan. 
  • Secured facility: interest rate will be based on the interest rate of the borrower’s existing secured debt.²
    
    
• Term. 
  • Unsecured facility: 5 years. 
  • Secured facility: Will match that of the borrower’s existing secured debt. 

The borrower may prepay the loan at any time without penalty.

Certain commitments, governance oversight, covenants and restrictions 

Any business accessing the LEEFF program will be subject to a number of additional requirements while the loan is outstanding under the program.

• General. Companies seeking support must: 
  • commit to minimizing the loss of employment and sustaining their domestic business activities; and 
  • demonstrate that funding under LEEFF forms part of their overall plan to return to financial stability. 
    
    
• Governance. In terms of governance, the CEEFC will reserve the right to appoint an observer to the board of the borrower.
  
  
• Certain Operating Requirements. The borrower will be subject to certain operating requirements while the loan is outstanding, including: 
  • prohibitions on dividends, capital distributions and share repurchases; and 
  • certain executive compensation restrictions.
    
    
• Affirmative Covenants. The borrower will be subject to certain affirmative covenants while the loan is 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 goal of net zero by 2050.
    
    
• Existing Covenants and Restrictions. 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.

Broader sectoral dynamics for LEEFF applicants will be considered through processes led by Innovation, Science and Economic Development Canada.

Additional considerations – warrants and other CEEFC compensation

The LEEFF Factsheet states that it is designed to help Canadian companies but also protect the interests of Canadian taxpayers. Therefore, in addition to the security interest on the secured loan facility and interest rate charged for the loans, the following will be required from the applicant business: 

• Warrants: 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 totaling 15% of the principal amount of the loans, or receive cash consideration equivalent to the value of the warrants. 
  • These warrants may be cash-settled with the borrower prior to being exercised or sold to third party buyers after the loan is repaid. 
    
    
• Private companies: 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.

Program access

The LEEFF program will be delivered by the Canada Enterprise Emergency Funding Corporation (CEEFC), a subsidiary of Canada Development Investment Corporation, in cooperation with Innovation, Science and Economic Development Canada (IESD) and the Department of Finance. 

Any businesses interested in accessing the LEEFF program should register their interest at LEEFF-CUGE@cdev.gc.ca. The applicant business will be contacted by representatives of CEEFC and IESD to begin the process, and will in this first step be provided a non-disclosure agreement, application form and instructions from the CEEFC representative. 

The authors would like to thank Hansik Ha, articling student, for his assistance in preparing this legal update.