Financial Post
October 19, 2002

No private-sector financial institution would be allowed to carry the
exposure to a limited number of industry sectors that Export
Development Canada does, financial analysts said yesterday.

(Excerpt)

Ottawa: No private-sector financial institution
would be allowed to carry the exposure to a limited number of industry
sectors that Export Development Canada does, financial analysts said
yesterday.

The export financing Crown corporation has almost half its $21-billion
loan portfolio, $10.7-billion, tied up in customers of two troubled
firms – Nortel Networks Corp. and Bombardier Inc. – the National Post
reported yesterday.

“There is no way that a board of directors would ever allow something
like that,” said Donald Chu, a director at Standard & Poor’s in
Toronto. “Those single-name exposures would vastly exceed the capital
base of a financial institution. Diversity is one of the most efficient
ways to mitigate risk for a financial institution. If you have
single-name exposures that can cause you a lot of grief.”

Mr. Chu said there is little doubt that if the problem gets big enough,
the government will step in. “If it were ever to run into financial
difficulty it would be the government that would have to bail them out,
and ultimately that’s the taxpayers.”

Toronto-Dominion Bank said in July it was setting aside an additional
$600-mi llion for losses on telco loans, and announced a third-quarter
loss of $428-million it largely blamed on bad loans in the sector.
Nortel itself has set aside US$1.49-billion for loans to buyers it
never expects to recoup.

EDC insists its risk management and loan loss provisions are adequate,
and points to its record of returning net income to the government, its
shareholder, every year. EDC has put aside $4.1-billion to cover total
bad loans and insurance claims, and has another $2-billion in retained
earnings and capital it can use in a crisis.

Loan-loss provisions have increased by $700-million over the past year.
In 2001, according to the annual report, EDC wrote off $191-million in
bad loans and rescheduled another $290-million.

It also says taxpayers will not lose a penny because it has the $6.1-billion backstop in place.

James Rajotte, Alliance Party industry critic, said the situation should never have been allowed to develop.

“It is unacceptable they are so heavily leveraged in two sectors,” he
said. “Why is it acceptable for a government institution to be
leveraged to this extent when it’s not acceptable for a private-sector
institution?”

Patrick Lavelle, chairman of EDC until Dec. 31 of last year, said EDC
began in 2001 to try to spread the risk by selling off some debt to
other institutions, a process known as securitization. But the events
of Sept. 11 put a crimp in the market for aviation and telecom debt.

Mr. Lavelle wrote to federal officials last year to tell them of his
concerns with the level of exposure EDC has to information technology
and aerospace sectors. They told EDC to keep them fully informed but
did not recommend any further action.