BDC offers debt and convertible debt relief programs to SMEs and venture capital-backed companies affected by COVID-19 – Operational impacts and strategy
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Emerging growing companies and small and medium-sized enterprises (“SME“) have been particularly vulnerable to the economic impacts of COVID-19. In some cases, liquidity problems are threatening the short- and long-term viability of these businesses. The Government of Canada has responded to these economic problems by initiating the measures following two debt financing programs:
- the Business Credit Availability Program (“BCP“) for SMEs, which is launched with the support of the Business Development Bank of Canada (“BDC“) and Export Development Canada (“EDC“); and
- BDC’s Bridge Financing Program to support venture capital-backed Canadian companies.
Business Credit Availability Program for Canadian SMEs
The CEAP consists of three programs: the Canada Emergency Business Account, the EDC Loan Guarantee Program and the BDC Co-Lending Program. The programs are available to all legal businesses, including businesses in the cannabis industry and those in the hospitality industry that operate bars and lounges. The BDC and EDC programs aim to help SMEs that were financially viable and revenue-generating before the COVID-19 pandemic. Businesses are encouraged to contact their primary financial institution to apply for one of the three PCE programs.
Canadian Business Emergency Account
This program is fully funded by the Government of Canada and provides up to $40,000 in interest-free credit facilities to small businesses to pay for immediate operating costs such as payroll, rent, utilities, insurance, property tax or debt service. The credit is available to Canadian employers (including not-for-profit organizations) with total payroll between $20,000 and $1.5 million in 2019 and who have been in business since March 1, 2020. Twenty-five percent (25%) of loans (up to a total of $10,000) repaid before December 31, 2022 will be cancelled. Loans outstanding by December 31, 2022 will be converted into a 3-year term loan, with an interest rate of 5%.
EDC Loan Guarantee Program
This program aims to facilitate operating credit and cash term loans for SMEs. Under this program, EDC will guarantee 80% of operating credits or cash flow term loans of up to $6.25 million offered by financial institutions to existing customers. SMEs that receive these loans must use the loan proceeds for their operating expenses. Funds may not be used for the payment of dividends, shareholder loans, bonuses, share buybacks, the issuance of options, increased executive compensation, or the reimbursement/refinancing of other debts.
BDC Co-Lending Program
This program provides term loans for the operational and liquidity needs of SMEs. Loans issued under this program will have a term of ten years and will bear interest only for the first 12 months. Eighty percent (80%) of these loans will be financed by BDC, with the remaining twenty percent (20%) being financed by an SME’s financial institution. The availability of the loan amount is divided into the following categories:
- loans of up to $312,500 are available to businesses with revenues of less than $1 million;
- loans of up to $3.125 million are available to companies with revenues between $1 million and $50 million; and
- Loans of up to $6.25 million are available to businesses with revenues over $50 million.
BDC Capital’s bridge financing program for Canadian companies backed by venture capital
In addition to debt relief programs for SMEs, BDC’s venture financing division, BDC Capital, is launching the BDC Capital Bridge Financing Program (the “CV program“) to meet the short-term liquidity needs of venture capital-backed Canadian companies.
As part of the venture capital program, BDC will match, with a convertible note, an ongoing round of financing from existing and/or new qualified investors. BDC will match new investments by qualified syndicates on an individual basis, up to a maximum of $3 million. The company’s round can be either equity financing or bridge financing (i.e. convertible debt or SAFE).
BDC aims to invest in high-potential companies alongside syndicates of existing investors with knowledge and expertise they can trust, with the ultimate goal of funneling the money into the start-up and growing business ecosystem. emerging growth as quickly as possible.
Here are the eligibility requirements that must be met for a company to qualify for the VC program:
- Company requirements: The company must be Canadian, backed by a qualified venture capital firm, and must have raised at least $500,000 in external capital before applying for the VC program. BDC clarified that the venture capital program is not limited to companies in BDC Capital’s current portfolio. Importantly, there are no restrictions placed on companies applying for the VC program and receiving other government benefits (for example, under the COVID-19 Economic Response Plan benefits or the business credit).
- Qualified Investor: BDC requires that at least one syndicate investor financing a potential business be approved by BDC’s fund team as an accredited investor. Requirements for an accredited investor include: (i) at least $10 million in assets under management; (ii) third party sponsors; and (iii) at least three holding companies. As a result, this relief funding is not intended for businesses backed by angel investors or pre-seed funding. BDC said if a Canadian company has existing Canadian investors, but only has U.S. investors who are willing to fund the company in the current economic climate, it will review the company’s eligibility for the program on a case-by-case basis. case.
- Timing requirements: Transactions that are in the process of closing or that have been closed as early as February 2020 are eligible for the VC program. There is currently no end date set for the VC program, but BDC expects the program to continue for the next six months.
- Other requirements: The business will need to pass BDC’s due diligence review, agree the terms of the investment with BDC and obtain approval from a BDC investment committee.
Convertible Note Terms
BDC Capital will invest in companies through the venture capital program using convertible notes. BDC chose convertible notes because they are simple to implement and independent of valuation. This is beneficial as many companies may have experienced a sharp drop in sales due to COVID-19, which would negatively impact current valuations. Here are the main terms proposed for the convertible notes:
- The interest: Interest will be BDC’s prime rate plus 4%. BDC’s base rate is currently set at 4.5% and is a floating rate that changes with the Bank of Canada’s prime rate. Interest will be calculated annually and will not be compounded.
- Maturity: The convertible notes will have a term of three years. At maturity, companies can choose to redeem the convertible note or convert the note at a 20% discount to the price of the company’s last round of financing.
- Refund per ball: The companies are not obligated to pay interest or principal during the term of the convertible note. Instead, all accrued interest and principal are due and payable in one “bullet payment” at the end of the term of the three-year note. Additionally, we understand that companies can choose to prepay tickets at any time without penalty.
- Payment in kind(“PIK”): The convertible notes will include PIK provisions, which means companies can choose to have interest payments added to the principal balance of the notes in kind.
- Qualified Funding/Liquidity Event:The Notes will also be convertible upon a Qualified Funding or Liquidity Event. In such circumstances, the Notes will convert at a 20% discount to the Company’s share price for the qualifying financing or liquidity event.
- Ranking: The Convertible Notes will rank junior to any existing indebtedness.
- Other: BDC has indicated that the above conditions are base conditions. If a syndicate is able to negotiate more investor-friendly terms, BDC will match those terms.
BDC’s priorities in evaluating the financing request
If demand for the venture capital program exceeds the amount of capital available, BDC has indicated that it will prioritize companies based on the following factors:
- Track: BDC will prioritize companies that have a shorter track with existing funds. For example, companies with only two months of working capital will be given priority over companies with 18 months of working capital.
- Performance: BDC will prioritize companies that were performing well but are currently experiencing financial setbacks due to the COVID-19 pandemic.
- Cut: BDC will take into account the size of the business at risk, and priority will be given to businesses with a larger number of employees.
Companies interested in applying to the VC program have been urged to work with their existing investors to apply for these funds. Venture capitalists interested in exploring the venture capital program and determining if their company is eligible should contact their contacts at BDC or contact [email protected]
Members of the Aird & Berlis Venture Finance group advise investors and lenders seeking investment opportunities in high-growth businesses, as well as companies seeking capital to structure and negotiate domestic and cross-border financing deals. If you have any questions about whether your business or portfolio companies are eligible for this program, please contact a member of our Venture Finance group.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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