Information in: Español - Français - Deutsch - Português - Russian - Japanese - Svenska - Italiano - Suomi

The Canadian Press : October 18, 2002

Billions at risk after Ottawa's EDC funded Nortel, Bombardier customer loans

TORONTO - Bombardier Inc. and Nortel Networks Corp. did not become multibillion-dollar global leaders just by making cutting-edge products: they also helped many of their biggest customers to buy them _ using big loans from Export Development Canada.

Almost half of the Crown corporation's $21-billion loan portfolio is to clients of Nortel and Bombardier, whose share prices have dropped by 90 per cent and 64 per cent respectively this year.

In other words, the same sickly customers who have caused so much grief to two of Canada's largest companies owe about $10 billion to the federal taxpayers, thought Ottawa's export financing arm.

Vendor financing _ lending or securing loans to customers to enable them to buy your wares _ has fuelled concerns that easy credit distorted the economics of their industries.

For example, EDC provided several Bombardier customers with billions of dollars in loan guarantees to buy regional jets, largely in response to similar action by Brazil to backstop sales by its planemaker Embraer.

The spectacle of billion-dollar penalties and trade wars masked another important debate: whether either Bombardier or Embraer could have sold nearly as many jets without government help.

"Are taxpayers stepping in and financing what could have been losses on some of these deals?'' wonders Canaccord Capital analyst Bob Fay.

"It's highly unlikely Air Wisconsin (a Bombardier customer that received a $ 1.5-billion-US loan guarantee from Canada) would have been able to order such a large number of aircraft on its own.''

Banks likely wouldn't risk capital on such deals but EDC is no ordinary lender. It has the ultimate safety net _ the taxpayer.

If the Crown corporation ever got into serious difficulty, a federal bailout would be guaranteed. And serious financial difficulty is not unthinkable. The $ 10 billion is about five times EDC's shareholders equity of $2 billion.

"The worst thing is government financing usually comes late in the game,'' said Fay. "The government is financing the lower half of the credit chain, usually because those are the guys who had trouble getting money. You end up creating overcapacity.''

Nortel's experience in financing its customers has been a disaster. Between 1997 and 2000, Nortel provided $4.1 billion US in vendor financing to clients with shaky finances and uncertain prospects. In many cases the lending was backed by EDC.

As customers faltered, Nortel has had to write off receivables _ admitting it won't be paid after all, but getting stuck with the debts.

EDC, which provides loans to foreign buyers of Canadian products, still may recover its money, but the chances of that have lengthened; the major banks have had to write down the value of their loans to the technology sector.

"EDC should not be as highly leveraged in two sectors,'' Patrick Lavelle, EDC chairman until the end of last year, said in an interview.

"One could sense, in terms of Bombardier, that we were so heavily weighted toward it that one day it was going to come home to roost.''

While EDC does not specify its exposure to specific companies, Lavelle confirmed its aerospace exposure is "overwhelmingly'' to Bombardier customers. "The same is true in the telecommunications sector. It's Nortel.''

Lavelle estimates that close to $10-billion of EDC's $21-billion in loans are to customers of those two companies.

Ian Gillespie, chief executive of EDC, discounted worries about this exposure.

"It's within the risk-management parameters that have been set by the board,'' he said, adding that EDC has set aside $4.1 billion for loan losses and has an additional $2 billion in retained earnings and capital.

Gillespie said it is no surprise that Bombardier and Nortel are major clients, because they have been among the country's largest exporters.

Bombardier (TSX:BBD.B) has faced repeated accusations of using Liberal political connections to leverage billions of dollars of support from Ottawa. The multibillion-dollar use of EDC by Nortel (TSX:NT) has received less attention.

EDC reported a profit of $58 million last year after facilitating business worth $44.5 billion.

Home | What are ECAs? | The Problems | Goals | Take Action! | Press Room | About Us

For Questions or Comments, email info_at_eca-watch.org
To report broken links and/or technical difficulties, email webmaster_at_eca-watch.org
View our Privacy Statement