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After finding themselves exposed to a sharp escalation in short-term lending, Canadian companies are now facing the added challenge of a falloff in demand and delayed payment for exported goods into the United States.
In the resource sector, firms have temporarily abandoned efforts to raise capital while others are turning to unorthodox or costly measures to obtain the cash necessary to keep their businesses afloat.
For manufacturers, the pinch is now increasingly being felt as cash-starved foreign customers delay payments and cancel orders amid the financial meltdown.
The situation is so dire that at least one executive is calling on the government to provide loans to manufacturers, who have been under enormous strain due to the sharp rise in the Canadian dollar over the past few years.
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Credit dried up for small, privately held Canadian auto parts makers months ago and the problem now amounts to an emergency, said Kacee Vasudeva, president of Maxtech Manufacturing Inc. of Waterloo, Ont.
Mr. Vasudeva called on the federal government to give authority to Export Development Corp. (EDC) and the Business Development Bank of Canada (BDC) to provide loans to parts makers to allow Canadian auto suppliers to innovate and grow.
EDC has the money “and they're very careful, Mr. Vasudeva said.
“They're not going to give money away, but at least if they see some innovation which is going to help exports and keep manufacturing going, they will support a company,” he said.
Finance Minister Jim Flaherty said Tuesday he has not considered allowing EDC and BDC to offer credit to struggling manufacturers.
Such a move is not needed “at this stage,” Mr. Flaherty said, because the government has provided more legislative authority to the Bank of Canada to provide liquidity to Canadian financial institutions.
That move should ease the current tightness in credit markets, he said.
However, borrowing costs between banks are surging around the world, and Canada, while insulated, is not immune.
The cost of borrowing U.S. dollars overnight tripled in London Tuesday to 6.88 per cent, while the cost of borrowing euros for a month leaped to a record 5.05 per cent.
Canada's equivalent rate rose 0.15 of a percentage point to 3.7 per cent.
On top of that, banks are raising the premium or spread they charge customers over top of those rates to protect profit margins, compounding the problem for the economy. The banks are demanding more cushion to offset the risk of bad loans as growth cools and more companies and individuals have trouble repaying.
This summer, Robert Hattin and Edson Packaging Machinery Ltd. were basking in the glow of a huge order backlog and blueprints for a new factory that would add 50 new employees in Hamilton.
Then the credit crisis began walloping big customers in the United States – the destination for 80 per cent of the $750,000 to $1-million paper machines Edson builds. Big projects planned by those U.S. customers were scrapped.
“What you thought you had in January disappeared by July,” Mr. Hattin said Tuesday.
Edson is in good shape, he added. It's debt-free, it's making a profit and has been spending 8 to 12 per cent of its annual revenue on research and development to improve its machines.
Edson's customers? Not so much.
“We deal with blue-ribbon customers, so we're dealing with delay, we're not dealing with ‘we can't pay,'” Mr. Hattin said.
Ben Hume, chairman and chief executive officer of B.C.'s Alco Ventures Inc., counts his company among the lucky ones that have not yet been affected by the U.S. credit crisis. But Mr. Hume is well aware of what's happening, so he's taking action.
“We are moving to insure all our U.S. receivables,” he said. Alco makes aluminum railing systems and screen doors and about 30 per cent of its $20-million in annual sales are exported to the U.S. market.
The delay in payments is flowing through the supply chain to manufacturers, said Jayson Myers, president of the Canadian Manufacturers and Exporters. Manufacturers have already incurred the costs of making the products, so the receivables line on their income statement makes them appear healthy.
“But what it's really doing is eating into cash flow and it's that cash flow that's driving their financing abilities, plus it's that cash flow that they need to make these investments in new products or new markets,” Mr. Myers said.
Last Friday, gold miner NovaGold Resources Inc. managed to secure a $20-million (U.S.) bridge loan to help pay for the start-up of its Rock Creek gold mine in Nome, Alaska. In order to secure the funds, however, the Vancouver company agreed to pay a 12-per-cent annual interest rate on the three-month loan and issue the lender warrants to purchase 750,000 NovaGold shares at $7.18 (Canadian) each, roughly the market price at the time.
“Credit markets have changed,” Greg Johnson, NovaGold's vice-president of strategic development said.
NovaGold intends to pay back the loan with cash flow generated from the mine as well as proceeds from a longer-term debt facility it hopes to secure.
Auramet Trading LLC, the New Jersey merchant bank lending NovaGold the money, has the right to convert the principal amount of the loan at a price of $12.00 per share. NovaGold also pledged the Rock Creek mine as security for the bridge loan.
“Considering the market turbulence that is out there, we feel pretty pleased to be able to have access to this type of lending. In some ways looking out there you might be able to say ‘there is no financing available.' And for many companies there isn't [financing] of any kind at any price,” Mr. Johnson said.
With a file from Queen's Park reporter Murray Campbell
