BDC snows the Senate part 5

As I go on about The Senate of Canada’s Standing Committee on Banking, Trade and Commerce (“BTC”) BDC report, I fear your patience is running thin.

But, damn the torpedos. Here is another instalment in my cursory review of the Senate Committee report.

According to page 4 of the Senate report:

“The BDC plays a counter-cyclical role by providing financing to businesses from all sectors when commercial lenders may be reluctant to do so. The terms and conditions of these BDC loans account for their relatively riskier nature.”

I love the yarn that BDC’s loan growth efforts are counter-cyclical. That means, one must assume, that BDC grows markedly during bad times, such as when the recent recession struck. The corollary of being a “counter-cyclical” player is that, in good times, BDC’s financing role is less needed. Which means its book of business can shrink as private sector players search for attractive revenue opportunities as the economy grows.

What actually happened to BDC’s loan book prior to the recession?

Between 2003 and 2007, a four year period, BDC grew its loan book by 39%. Those were good economic times, as you may recall. Banks such as RBC, for example, grew their small business and wholesale loan books by 48% during that same period.

Canada’s economy was growing 2-4% a year in those days, and things were bright around the country. The government was in surplus, and unemployment was unusually low. The Royal Bank grew its loan book by almost half over a four year period; a sign of flowing debt capital.

And what did the “counter-cyclical” BDC do? It grew it loan book almost as fast: 39%. Things weren’t all that different between 2005 and 2008, which were also heady economic times, as BDC grew its loan book by 34% over that three year period.

The figure was 46% between 2007 and 2010, which catches a chunk of the recession. But, as compared to the growth in the loan book during non recessionary times, the differences aren’t very dramatic.

So, if you grow your book about the same during bad times and good times, can you claim to be counter-cyclical?

Imperialistic yes. Counter-cyclical? Not so much.

As for the statement that “the terms and conditions of these BDC loans account for their relatively riskier nature”, let me take you to page 95 of the 2010 annual report. According to the details of $1.4 billion of “undisbursed” loan commitments outstanding, some of the loans were promised to clients at a cost of 2.25% (the prevailing Prime Rate at the time). Investment grade SME clients in the private sector certainly weren’t getting money at 2.25% back then.

If these loans are “riskier” in nature, as the Senate reports, does an interest rate of Prime rate serve as a “term and condition” that takes the “relatively riskier nature” of BDC’s business into account?

Somebody call Oxford. We may need to amend the definitions of “counter-cyclical” and “pricing for risk”.

MRM