reason for US fragmentation. While
factoring and other non-bank-related
companies do exist in Canada,
short-term credit and lending is still
predominantly done by commercial
banks. In the US, factoring, leasing,
asset-based lending, and debtor-inpossession financing by non-banks
are common practice. The US market
also includes much larger and more
liquid institutional loan and high-yield
bond markets, which some Canadian
companies use as well. Over the past
few years, even highly leveraged
companies with weak credit ratings
have accessed financing, whether from
commercial banks or other sources of
capital.
Canadian companies that borrow from
Canadian banks on demand terms
are often surprised to discover that
they can access committed facilities
of one to three years in the US. For
Canadian finance teams, a different
approach is required when negotiating
credit agreements. In Canada, loan
covenants and ratios are generally
set closer to company benchmarks,
with lenders showing a willingness
to provide flexibility and restructure
the loan if there are any minor
breaches. The descriptions of covenant
calculations in credit agreements are
more principles-based and may leave
room for interpretation. As part of an
audit or review engagement, external
accountants in Canada will often ask
the bank to confirm how they will treat
an unusual item; especially if there is a
chance it could create a breach.
I n the US, definitions in credit
agreements are usually very detailed
and use a rules-based approach. In
one US credit agreement, for example,
the definition of “earnings before
interest, taxes, depreciation, and
amortization” (EBITDA) ran a page and
a half and contemplated a seemingly
endless array of ”normalizations” or
adjustments. For companies that
represent a good credit risk, covenants
are set “loose” to allow significant
room before the covenant would be
breached. A breach of covenant for any
reason may result in the termination of
the facility and an immediate demand
for full repayment. For this reason, it
is essential to push for cure periods
and negotiate aggressively for the
maximum latitude in the ratios and
definitions in a US credit agreement.
The Same, Just Different
The more prescriptive rules-based
approach to financing is consistent
with the general business climate
in the US. In considering whether
to provide financing for a Canadian
company, it is common for a Canadian
b a n k to re v i e w t h e c o m p a ny ’s
demands and add additional financing
since many Canadian finance teams
have a tendency to be conservative.
Conversely, when seeking financing in
the US, a company’s requests will likely
need to be scaled back.
Similarly, Canadians often mistakenly
assume a lack of regulation was to
blame for the US financial crisis. In
realit y, the US had much more
regulations than Canada both before
and after the crisis. A principlesbased approach provides brevity
and establishes broad expectations
whereas a rules-based approach
can lead to a process that is focused
on finding and closing loopholes.
As regulations increase in ever y
industry, legislators, regulators, and
management need to ensure that
compliance requirements do not
reduce business’s ability to identify
and mitigate new risks.
Raising Debt
in the US
ADVANTAGES
1) S borrowing rates are lower,
U
providing cheaper equivalent
interest costs.
2) inking collection and
L
disbursement to funding
can improve the efficiency of
working capital.
3) hird-party funding may
T
reduce the applicability of thin
capitalization rules and the
likelihood of an IRS challenge to
intra-company interest charges.
DISADVANTAGES
1) dditional negotiation and legal
A
expenses for US legal expertise.
2) raining and experience gaps for
T
the Canadian finance team.
3) anaging cash across borders
M
and dealing with more complex
repatriation issues.
Finally, the root cause of the US
financial crisis creates a tremendous
opportunity for Canadian companies
– the US is less conservative and,
subsequently, more comfor table
with risk than Canada. This provides a
more dynamic range of outcomes for
companies operating in the US. If your
company can manage the risk while
capitalizing on opportunities to grow,
it will improve your organization’s
resilienc y while simultaneously
accessing the largest consumer market
on the planet.
Simon Philp, CPA, FCMA, is a
director and team leader at CIBC,
CMABC’s Board Chair, and Co-Chair
of the CPABC Transitional Steering
Committee.
FALL 2014
|
page 13