After weeks of demanding a federal bailout in the midst of the COVID-19 pandemic, Canadian fossils might be thinking twice about accepting the loans they’re being offered, mergers and acquisitions specialist Jeffrey Jones writes for the Globe and Mail.
“Ottawa has thrown large oil and gas companies the financial lifeline they asked for, and given them lots of reasons not to take it,” Jones says. “The Large Employer Emergency Financing Facility (LEEFF) program is chock full of terms and conditions that complicate a company’s relationship with its current lenders and add a new and stringent layer of reporting on environmental performance.”
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The program is designed for companies outside the financial sector, including fossils, with annual revenues above $300 million, large work forces, and no other options before they declare bankruptcy. “This is a good thing,” Jones writes. “After all, it’s supposed to be lending of last resort.”
But while “airlines and retailers have been front and centre with their struggles,” he explains, fossils were “hit with a double whammy. Oil prices tumbled into the single digits per barrel last month as demand for fuels plummeted. Meanwhile, the drop in consumption caused storage to fill up, forcing companies to shut off large proportions of their output.” With their cash flow running low, “producers ran afoul of the covenants in their credit agreements, or risked doing so, making the notion of taking on more debt either prohibitively expensive or impossible as banking syndicates worried about their exposure.”
That’s where LEEFF is designed to pick up the slack. But from the fossils’ point of view, the fine print laid out last week may be hard to accept.
“The loans, at a minimum of $60 million, carry an interest rate of 5% in the first year, 8% in the second, and increase by 2% each year after,” Jones writes. “As part of the deal, the government would get warrants that it can convert to common shares equal to 15% of the loan value, or, in the case of private companies, the cash equivalent. Also in the fine print, 20% of the debt will be secured, and the government corporation in charge of the program will have the right to appoint observers on boards of directors.”
Those provisions come on top of the restrictions the government established when it first announced the program in April: tight limits on financial benefits to executives and shareholders, plus a requirement to adopt more intensive environmental reporting.
“So it’s anything but free money,” Jones writes. “Some companies have already said they would rather keep trying to work with their own banking syndicates than turn to the government. The largest have received support from the banks.” Moreover, “some lenders are unlikely to welcome the government in with equal seniority and, in fact, existing loan agreements may have to be changed to allow it.” Shareholders may also be unhappy with the idea that the value of their stock could be diluted if Ottawa decides to take shares in a company, at a price to be determined.
Jones says a partial recovery in global oil markets might point to another scenario: if rising prices mean the worst of the pandemic shock is over, “this could put stronger companies in a better position to consider snapping up the weak, in a wave of consolidation that the Canadian oil and gas industry sorely needs after more than five years of downturn and poor market performance.”
But while Alberta Premier Jason Kenney is apparently complaining about the “bureaucratic hoops companies may have to jump through to access Ottawa’s loans, as well as the potential for government to micromanage corporate decisions,” Jones concludes, “the government can’t save every company, and the stipulations attached to the program will partly determine how badly some want to be saved.”
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