Canadian Lenders Assurance Facility

The CLAF was one component of the broader $200 billion Canadian EFF, which sought to “strengthen the capacity of Canadian financial institutions to expand credit and to respond to gaps in credit markets.” Other programs in the EFF included the Insured Mortgage Purchase Program, in which the government expressed intent to buy National Housing Act Mortgage-Backed Securities, the Canadian Secured Credit Facility, which the government could use to purchase up to $12 billion of term asset-backed securities backed by loans and leases on vehicles and equipment, and other budgetary increases to expand access to financing for Canadian businesses (Department of Finance Canada 2009a).

When the CLAF was first announced, the Canadian Parliament had not yet authorized the Minister of Finance to make payments under the guarantee from the Consolidated Revenue Fund, as required by sections 26 and 29(1) of the Financial Administration Act. However, Canadian authorities believed that they possessed existing authority to purchase guaranteed instruments. To ensure that payments could be made even if the facility opened before Parliament had acted, the legal documentation of the CLAF included a provision allowing payments through alternative purchase commitments. Through these commitments, if an investor made a demand for payment under the guarantee, the Minister of Finance would purchase from the investor “all or an undivided interest in the related Guaranteed Instrument… for a purchase price equal to the amount required to be paid under the Demand” (Canadian Lenders Assurance Facility Participation Agreement).

The need for alternative purchase commitments under the terms of CLAF was rendered obsolete by the passage of Bill C-10, “an Act to implement certain provisions of the budget tabled in Parliament on January 27, 2009 and related fiscal measures” (Parliament of Canada 2009).  This act, which was passed on March 12, 2009, amended the Financial Administration Act to allow the Minister of Finance to guarantee any debt, obligation, or financial asset in an effort to promote financial stability, and to pay any amounts owed resulting from such a guarantee out of the Consolidated Revenue Fund (Parliament of Canada 2009).

The Canadian government did not establish a cap for the amount of guarantees that could be issued through CLAF. CLAF was part of the larger Extraordinary Financing Framework, which was granted $200 billion under Canada’s Economic Action Plan, but there was no amount specifically allocated for CLAF (Department of Finance Canada 2009a).

All federally regulated deposit-taking financial institutions were deemed eligible for participation in the facility. Any provincially regulated financial institution had to be specifically approved by the Minister of Finance (Department of Finance Canada 2008d). One provincially regulated central cooperative credit society, Caisse Centrale Desjardins, did apply and was deemed eligible shortly after CLAF was announced. As part of the deal reached with the Minister of Finance for Quebec, Caisse Centrale Desjardins could participate under the same commercial terms as the federally regulated institutions, but the Government of Quebec would be liable for any losses incurred by the Canadian government as a result of issuing any insurance on the bank’s debt (Government of Canada 2008a).

Regardless of eligibility, any financial institution wishing to access CLAF had to apply to participate. The application’s focus was on establishing the maximum amount of instruments issued by an institution that could be guaranteed through the facility (Department of Finance Canada 2008d).

Once a financial institution’s application was granted and its participation limit established, it was required to apply for a separate guarantee certificate for each eligible instrument it sought to guarantee. Once the guarantee certificate was granted, the institution had to issue the instrument within 30 days, otherwise the guarantee would be withdrawn (Department of Finance Canada 2008d).

Under the terms of the CLAF, the government agreed to guarantee new senior unsecured marketable wholesale debt instruments, including newly issued commercial paper, bearer notes and senior unsecured bonds and notes, and Bankers Acceptances (Department of Finance Canada 2008d).

The government also set a minimum issue size for instruments, which was tied to the maximum participation limit established by the financial institution’s application to CLAF and the currency denomination of the instrument, as outlined in Figure 1 (Department of Finance Canada 2008d).

Figure 1. CLAF Participation Limits and Minimum Issuance Size, by Currency of Instrument

Source: Department of Finance Canada, Terms of Canadian Lenders Assurance Facility.

Instruments were eligible for guarantee only if they had a minimum three-month maturity. Instruments were guaranteed through their maturity, unless they had a maturity of more than three years, in which case the guarantee covered only the first three years (Department of Finance Canada 2008d).

The Canadian government permitted guarantees of instruments issued in Canadian dollars, US dollars, euros, pounds sterling, and Japanese yen. However, instruments issued in eligible currencies other than Canadian dollars were subject to additional requirements. No matter the institution’s participation limit, the minimum issuance size for instruments denominated in these currencies was set at $10 million. Additionally, any institution applying for insurance on instruments issued in a currency other than Canadian dollars were charged a 20 bps surcharge (Department of Finance Canada 2008d).

These limits all had to be approved by an outside auditor.

For all institutions, the base pricing of the guarantee fee was the product of 110 bps, the term of the guarantee, and the gross proceeds of the instrument. This base pricing was augmented based on the institution’s credit rating.

Institutions with senior unsecured medium-term debt obligations that had a set minimum credit rating from at least two rating agencies paid the base price (see Figure 2).

Figure 2: Minimum Credit Ratings for Senior Unsecured Medium-Term Debt Obligations

Source: Department of Finance Canada, Terms of Canadian Lenders Assurance Facility..

Those institutions that did not have credit ratings from two agencies that met these standards were required to pay an additional 25 bps fee. As stated, additional fees were charged for instruments issued in currencies other than Canadian dollars (Department of Finance Canada 2008d).

This guarantee fee calculation reflects a change introduced in early November 2008, shortly after the program was announced. At that time, the government sought to make CLAF more competitive by reducing the base commercial pricing by 25 bps and waiving an across the board 25 bps surcharge. This had the effect of lowering the base price to 110 bps from 160 bps. The surcharge for institutions unable to meet the credit rating requirement and for debt issued in foreign currency remained in effect (Parappally 2008).

The calculation of guarantee fees under CLAF reflected the government’s desire to offer guarantees to lenders on commercial terms, which would not result in any fiscal cost to the government (Department of Finance Canada 2008c). This was consistent with the government’s desire that the EFF, of which the CLAF was one component, generate a positive return and not result in any losses for the Canadian government (Department of Finance Canada 2009a).

Program documents contained no other references to conditions for participation.

Under the terms of the guarantee, the government agreed to pay any investor in the event that an issuer participating in CLAF failed to pay any guaranteed obligation under the terms of the instrument guaranteed by the program (Schedule 1.1(16), Canadian Lenders Assurance Facility Guarantee, Article 2). The payment was triggered by the investor’s demand of payment under CLAF made in writing to the Department of Finance (Canadian Lenders Assurance Facility Participation Agreement). This “timely payment” replaced the initial proposal by the government for a 30-day waiting period between the demand and payment to investors (Cotnoir et al. 2009).

Originally, the government would only accept guarantee applications until April 30, 2009. In January 2009, the terms of the CLAF were amended to extend this deadline to December 31, 2009 (Department of Finance Canada 2009a). The Minister of Finance had the authority to terminate the facility before this deadline with 30 days’ notice, but the facility was allowed to expire at the end of 2009 (Department of Finance Canada 2008d).