October 18, 2002
Former leader’s warning: Bombardier, Nortel customers dominate.
Ottawa — Nearly half the $21-billion loan
portfolio of the government’s export financing arm is tied up in
customers of two troubled Canadian giants, Nortel Networks Corp. and
the aviation arm of Bombardier Inc., the former chairman of Export
Development Canada warned federal officials last year.
EDC, which provides loans to foreign buyers of Canadian products, may
recover all the money if no buyers default, but the chances of that
have lengthened as conditions in the two sectors continue to worsen.
Recently, some of the country’s major chartered banks have had to write
off loans to the technology sector.
Patrick Lavelle, chairman of EDC until Dec. 31, 2001, wrote to the
federal deputy minister of trade in March, 2001, to warn the Crown
corporation was overexposed to the aviation and information technology
sectors, and in particular to customers of the two companies.
Since then, both companies have been hit by severe slumps in their
markets – some customers of Nortel’s equipment have gone bankrupt and
revenues at major airlines have been decimated.
As a result, Nortel has become a penny stock and Bombardier shares have dived as well.
“EDC should not be as highly leveraged in two sectors. The proof is
what has happened recently,” Mr. Lavelle 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.”
EDC’s 2001 annual report shows 51% of its lending, or $10.7-billion, is
in the air transportation and information technology sectors. The
agency does not name any companies, and has never provided totals of
its exposure to particular firms.
But Mr. Lavelle confirmed the aerospace exposure is “overwhelmingly” to
Bombardier’s customers. “The same is true in the telecommunications
sector. It’s Nortel,” he said.
Mr. Lavelle estimates that close to $10-billion of EDC’s $21-billion in loans are to customers of those two companies alone.
Ian Gillespie, chief executive of EDC, said in an interview the corporation is not worried about the level of exposure.
“It’s within the risk management parameters that have been set by the
board,” he said, adding EDC has set aside $4.1-billion for loan losses
and has an additional $2-billion in retained earnings and capital it
can call on in an emergency.
“We have a very extensive risk management framework which limits the
amount of money that individual borrowers owe us,” he said.
Mr. Gillespie said EDC has no intention of backing away from aerospace
lending until the sector represents a smaller proportion of total
“We are there to support Canadian companies of all shapes and sizes in markets around the world,” he said.
Mr. Gillespie said it is no surprise Bombardier and Nortel are major
clients since they have been among the country’s largest exporters.
But Mr. Lavelle said as a financial institution, EDC has a
responsibility to balance risk across sectors. His letter to Robert
Wright, deputy minister of trade, refers to the “dependence” of certain
sectors on EDC, and says “the risk management committee [of the board]
has raised this matter with management on a number of occasions over
the past year.”
“We all agreed the government should fully understand the exposure,” Mr. Lavelle wrote.
The letter, acquired under the Access to Information Act by researcher
Ken Rubin, is heavily censored to eliminate all references to
companies, the level of exposure and Mr. Lavelle’s specific concerns.
A government memo to Pierre Pettigrew, the Minister responsible for
EDC, advised him in June, 2001, to tell Mr. Lavelle “that you see a
need to be kept abreast of the Corporation’s exposure.”
Anther government memo said the issue required further study before
recommending any changes, but also indicated others in government were