Long term recovery from COVID-19: A primer on LEEFF and its current impact on economic recovery
As part of the multi-faceted response implemented by the federal government to deal with the economic fallout of the COVID-19 pandemic, a new program was created last May called the Large Employer Emergency Financing Facility (“LEEFF”) to provide bridge financing to large employers whose businesses have been impacted by the pandemic. In addition to the usual financing covenants and restrictions on distressed borrowers, the Government took the opportunity to include additional requirements under the program with respect to climate-related financing disclosures.
Ten months after LEEFF was launched, we consider the program’s framework, including the requisite climate-related financial disclosures, and the uptake on the program by targeted large employers. When LEEFF was first introduced, there were no takers. After ten months, has the response evolved?
What is LEEFF and who is eligible to apply for assistance?
LEEFF is intended to provide short-term liquidity assistance to large Canadian companies should they have trouble accessing more traditional financing in the market as a result of the pandemic. The program is being delivered through Canada Enterprise Emergency Funding Corporation, which is a subsidiary of Canada Development Investment Corporation, in connection with Innovation, Science and Economic Development Canada and the Department of Finance.
To be eligible, a borrower must meet the following requirements:
- be a commercial entity incorporated under Canadian federal, provincial or territorial law;
- have approximately $300 million or more in consolidated annual revenue;
- have a significant impact on Canada’s economy by having significant operations in Canada or supporting a significant workforce in Canada;
- have not made any filing, or had any filing made against it, under any bankruptcy or insolvency legislation, and was solvent as at December 31, 2019; and
- its most recent financial statements must not have included certain qualifications.
Certain entities are ineligible for LEEFF assistance, including public institutions, Crown corporations, unions, charitable organizations, and entities that are partially owned by an individual holding Canadian political office, have been convicted of tax evasion or promote violence, incite hatred or discriminate on prohibited grounds.
How are LEEFF loans structured and are there any restrictions on use of loan proceeds?
Each approved LEEFF loan is structured as two distinct facilities: an unsecured facility and a secured facility, equal to 80% and 20% of the aggregate loan amount respectively. The minimum aggregate loan for a borrower that will be approved under LEEFF is $60 million.
Since the stated purpose of LEEFF is to help struggling enterprises preserve employment, operations and investment activities, it is not surprising that LEEFF requires borrowers to use reasonable commercial efforts to minimize the loss of employment and to sustain its domestic business activities. While LEEFF loans are not permitted to be used to repay existing indebtedness, a borrower can use the proceeds to fund expenditures with respect to existing or new capital projects that are outlined in an approved loan application.
What restrictions and covenants are imposed upon LEEFF borrowers? Are there specific environmental commitments to which a borrower must adhere?
LEEFF borrowers are subject to restrictions on dividends, distributions, share repurchases and executive compensation, and are required to perform obligations under existing pension plans and under applicable collective bargaining agreements, in all cases while any loans remain outstanding.
Importantly, borrowers are required to submit “an annual climate-related financial disclosure report highlighting how their 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.” These reports should follow the recommendations of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosure (the “TCFD”). The disclosure framework outlined in the TCFD recommendations fall broadly into the following four categories: governance, strategy, risk management and metrics & targets.
It is important to note that compliance with the TCFD recommendations is becoming more commonplace in more traditional market financing. Even if an organization is not in need of LEEFF financing, it is critical for all organizations to start working on compliance with the TCFD recommendations as that compliance is likely to become expected, or event mandated, in due course.
Ten months after its inception, have any LEEFF loans been granted?
Notwithstanding that the COVID-19 pandemic wreaked havoc upon many business’ ability to operate in the normal course, only one LEEFF loan was approved in the first six months of the program’s existence. That initial loan was extended to First Gateway Casino & Entertainment Limited. As the second wave of the pandemic took hold, several more loan applications were approved in quick succession:
- in January, Conuma Resources Limited, a mining company; and
- more recently, Sunwing Vacation Inc. and GoodLife Fitness Centres Inc.
Each of these borrowers operates in a different segment of the economy, illustrating that support is needed across a variety of industries, all which have been decimated by the pandemic.
Since LEEFF is considered to be a lender of last resort, it may be some time before the financial situation of more companies deteriorates to the point where they need to seek a LEEFF loan. It remains to be seen what impact LEEFF may eventually have on Canada’s economic recovery.
As we approach the one-year anniversary of life under COVID-19 in Canada, an unanswered question remains: how many other companies will turn to LEEFF to save their business from the economic fallout from the pandemic?