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COVID-19: Raising capital in the current Canadian private market

On March 11, 2020, the World Health Organization declared the global outbreak of COVID-19 a worldwide pandemic. This rapidly spreading disease has resulted in tens of thousands of deaths globally, with more expected. A significant number of countries have declared emergencies and implemented drastic public health and safety measures—including closures of factories, distribution centres and ports—resulting in significant global supply chain disruption.

Even before the pandemic, there were indicators of an impending and potentially sustained downturn in the overall economy, both in Canada and globally.

Raising capital: a strategic and ongoing process, not a one-time event

Attracting capital for business is often a difficult undertaking, and is increasingly challenging in the current COVID-19 climate. Whether an emerging business looking for critical next-stage financing, a mature business looking for growth capital or, worse, any business in the current pandemic looking for emergency working capital, chances are that businesses are experiencing substantial additional hurdles to or failing to obtain much-needed financial backing.

Leading up to the current pandemic, with good planning and a compelling business plan, it was possible for private businesses to access sufficient levels of capital required to reach the next level through one or more of the traditional financing alternatives (refer to boxout for common financing structures traditionally available). Before COVID-19, the traditional keys to success for a business seeking capital included:

  • a keen understanding in the current market of what minimum terms investors would require
  • engaging the business’ legal and financial advisors well in advance of the next required capital raise
  • considering the implications of the business’ proposed financing on the longer-term capital requirements, projections and milestones

The economic shock resulting from the social and physical isolation measures currently implemented across Canada and globally to mitigate the pandemic threatens significant revenue loss for businesses. It also signals short- and potentially longer-term job losses for millions of Canadians, and will undoubtedly compel senior management across a broad range of industries (including essential services) to consider and plan for survival to manage cash outflows and business expenditures, including payroll. Such financial planning will necessitate consideration of all available government-sponsored aid programs in addition to traditional financing options.

COVID-19 Economic Response Plan (Support for Canadians and Businesses)

In response to the pandemic, the Government of Canada has taken immediate and significant action intended to support Canadian individuals and businesses facing financial hardship as a result of the pandemic’s economic impacts. The Government of Canada's coordinated approach and proposed stimulus package delivered as part of its COVID-19 Economic Response Plan (Support for Canadians and Businesses) is intended to support and stabilize the economy and the financial sector. It includes the following economic and tax measures:

  • the Governor of the Bank of Canada has reduced the interest rate to 0.25 per cent
  • the Superintendent of Financial Institutions has announced measures in support of an additional $300 billion in lending capacity by major banks
  • a new Business Credit Availability Program is being established to make more than $10 billion available to Canadian businesses in financing and credit insurance solutions through Export Development Canada (EDC) and the Business Development Bank of Canada (BDC), as more particularly described herein below
  • the Canada Revenue Authority (CRA) is allowing all businesses to defer, until after August 31, 2020, the payment of any income tax amounts, including tax balances due, as well as installments, under Part I of the Income Tax Act (Canada), that become owing on or after March 18, 2020 and before September 1, 2020, without any interest or penalties applicable to any such amounts during the prescribed period

The Office of the Superintendent of Financial Institutions (OSFI) has lowered the Domestic Stability Buffer requirement for domestic systemically important banks by 1.25 per cent of risk- weighted assets, effective immediately. This action is intended to increase the lending capacity of Canada’s large banks and support the supply of credit to the economy during the period of disruption related to COVID-19. The release of the buffer is expected to support in excess of $300 billion of additional lending capacity.  Jeremy Rudin, the Superintendent of Financial Institutions, has made clear his expectation that banks must use the additional lending capacity provided by recent proposed government actions to support Canadian businesses and households.

On March 13, 2020, the Government announced the establishment of a Business Credit Availability Program (BCAP) to help Canadian businesses obtain financing during the current pandemic. The BCAP is intended to support access to financing for Canadian businesses in all sectors and regions. Through this program, Export Development Canada (EDC) and the Business Development Bank of Canada (BDC), both financial Crown corporations, are expected to be in a position to provide more than $10 billion in direct lending and other types of financial support at market rates to “businesses with viable business models” whose access to financing would otherwise be restricted. By working in close cooperation with financial institutions, under this program EDC and BDC will fill gaps in market access and leverage additional lending by private sector institutions.

Effective immediately, new relief measures being offered by BDC to qualified businesses to provide relief to business owners impacted by the spread of COVID-19 as part of the BCAP include:

  • working capital loans of up to $2 million with flexible terms and payment postponements for up to 6 months for qualifying businesses
  • postponement of payments for up to six months, free of charge, for existing BDC clients with total BDC loan commitment of $1 million or less
  • reduced rates on new eligible loans

Additional details regarding BCAP measures, including industry-specific support, are expected to be announced in the coming days and can be found at BLG’s COVID-19 Resource Centre. Businesses seeking support through BCAP should contact the financial institution(s) with whom they have a pre-existing relationship to assess the client’s financial request. If the needs of the client exceed the level of support the financial institution is able or willing to provide, the financial institution will work alongside BDC or EDC to improve access to financing, including accessing additional resources the Government has made available under BCAP.

All credit-worthy businesses with viable business models whose activities fall within the mandate of either BDC and/or EDC are eligible to benefit from BCAP. BCAP is currently available and interested businesses should contact their financial institution for more information.

The BCAP is steered by an oversight group of representatives of the Department of Finance, EDC, BDC and Canadian financial institutions. The steering group meets regularly to share information and search for more effective ways to collaborate in order to maximize the initiative’s positive impact on businesses and the economy. The Government will monitor BCAP with participating lenders to ensure the program is meeting its objectives.

In addition, to support and assist businesses with cash-flow challenges and difficulties in the coming months of the COVID-19 pandemic and related economic crisis:

  • the Canada Revenue Agency is deferring income tax payments until August 31, 2020
  • the Government is deferring Goods and Services Tax/Harmonized Sales Tax (GST/HST) remittances and customs duty payments to June 30, 2020
  • the Government announced a temporary three month wage subsidy for small business employers

Effective immediately and for a period of three months retroactive to March 15th, eligible employers, including businesses, charities and non-profit organizations that pay remuneration to an employee, such as salary, wages, or taxable benefits, that suffer at least a 30 per cent drop in revenue due to the pandemic, qualify for the Government of Canada’s recently announced seventy per cent wage subsidy program. While we understand additional details and employer instructions regarding this wage subsidy program will be made available by the Government this week, the announced wage subsidy is expected to be equal to 75 per cent of the remuneration paid by an employer between March 15, 2020, and June 15, 2020, up to a maximum of $847 weekly per employee and without limit on the number of employees an organization has during such period. In a previous announcement for an earlier proposed version of this subsidy program, the Government has indicated that eligible employers receiving this subsidy must report the total amount received as income in the year in which the subsidy is received.

Observations from working with successful management teams raising capital

Give investors what they want. Investors are interested in measures taken to enhance the sustained earning potential of your business. Generally, investors will respond more favourably to long-term management and key employee stability. In advance of initiating the next financing round, consider whether the business has sufficiently incentivized management and taken effective steps to keep key talent on board. Consider preparing a cash flow statement to demonstrate near term cash requirements, including sensitivity analysis to show the impact of the pandemic on the business.

Put your best foot forward. Businesses seeking financing should ensure all relevant corporate books and records and legal documentation is up-to-date, complete, accurate and readily available for investors and their advisors to conduct comprehensive due diligence investigation. A well-organized, complete data room is one basic but effective tactic for mitigating additional financing costs arising from perceived investment risk.

Plan ahead: bring your advisors in early. Businesses often wait too long to engage their professional advisors in the capital-raising process and all related preparations, or they switch advisors between financing rounds and do not allow for a successful transition. In not having legal and financial advisors engaged early, a business increases the risk of an unfavourable outcome, including its current shareholders potentially facing greater dilution on a reduced valuation, failing to attract sufficient capital to support the business’s current and short-term funding requirements or having to settle on more restrictive and costly financing terms.

Involving your legal team from the outset allows you to plan ahead, including consideration of all relevant third-party rights arising from the proposed financing. You may require a consent, approval or waiver from existing lenders, debt holders and shareholders to proceed with the required financing. Having your legal team already in position to identify and provide you with advice regarding third party rights is essential.

Set your sights on the future. When it comes to cash management, it is important to plan ahead and properly work out the business’s financial time horizon. Successful businesses raise enough financing to accommodate their current and near-term needs. Taking steps to increase the chances that your financing will support your strategic plan, including planning sufficient lead-time pending receipt of the required funds, allows you to negotiate from a position of greater strength, rather than a state of quasi-financial distress. Additionally, a more strategic approach to financing should allow for any necessary adjustments throughout including any temporary amendments to existing credit facilities to increase operating lines or gain flexibility with repayments to minimize cash outflows.

Prudent cash management. In the current pandemic crisis, in concert with critical fund raising efforts that will almost certainly take additional time to achieve, businesses require well developed and implemented protocols and policies to manage and conserve cash, including expense reduction, enhanced monitoring of accounts receivable and restrictions on extending further credit to customers. In addition, continued open and positive engagement with existing lenders is critical to maintaining liquidity and ensuring against threatened enforcement of any short-term covenant breach.

Raising capital and prudent cash management are the lifeblood of a business and must be viewed as a continuous process. By prioritizing such measures and learning how to successfully deploy the vast array of tools available to you, your management can focus on the more critical aspects of the business, operations, growth of sales and profitability. 

Classic structures to attract financing

To get the most out of fundraising efforts, a business should start by conducting an analysis of its available financing options and determining which alternatives provide the best return and lowest risks. Below, we outline eight popular capital-raising options.

  • Equity investment: A monetary investment from private equity or other equity investors (e.g., venture capitalists, angel investors, etc.) made in exchange for a percentage of the business.
  • Debt investment: A form of financing provided by lenders who generally want the ability to withdraw their money in priority to equity investors. Debt gives lenders a guaranteed yield, so it can be attractive to certain investors. It is also attractive to businesses because it does not dilute ownership.
  • Bank secured financing: Money that is lent by a traditional lender or bank according to specific terms (e.g., term loan, line of credit).
  • Capital markets: A financial market where equity-backed securities and long-term debt are bought and sold.
  • Joint ventures/alliances/partnerships: A customized, and often temporary, financing arrangement that allows two businesses to share costs, risks and rewards. For instance, a business may offer much-needed expertise in exchange for capital on a specific project or venture.
  • Balance sheet unlocking: This structure may include any innovative financing transaction, such as sale leasebacks, securitization or factoring of receivables.
  • Working capital improvements: This structure may involve increased cash flow by relaxing terms with suppliers and other trade creditors and tightening trade terms with customers with the intention of paying invoices slower and collecting receivables faster.
  • Deferred payment to shareholders: Most common in a family business setting, this option could be employed during an intergenerational transition. In this scenario, investors—including founders—help finance business growth.

 

For further questions on raising capital in the current Canadian private market, please contact any of BLG’s Private Company team members listed below. BLG has created a COVID-19 Resource Centre to assist businesses on a variety of topics, including investment management, leasing, contractual risks, public disclosure requirements and criminal law.

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