CANADA FINANCE-Canada businesses, banks adjust to credit gaps
* Withdrawal of shadow-bankers hurts business credit
* Big banks trying to fill the gap
TORONTO, June 29 (Reuters) - Heath Everett was about to open his first restaurant when the credit crunch hit and his financing disappeared. As his lender pulled out of Canada, the 40-year-old entrepreneur found himself at the mercy of Canada's Big Five banks.
"I was absolutely panicked, to be truthful. I was past the point of no return," said Everett, remembering the events of last fall as he prepared for the grand opening of the first Chili's Grill & Bar in Ontario.
Like many business owners, Everett had arranged financing with a non-bank lender, part of a shadow banking sector that accounted for about 45 percent of all consumer and business loans in Canada until late last year.
"I approached all of the major Canadian financial institutions, the big banks, and with the exception of RBC none would even entertain a sit-down conversation with me," Everett said. "(They said) restaurants are too risky, this is a first-time venture, there's no proven record with Chili's in Ontario. One said they didn't have credit available."
Everett is not alone. While global credit has started to thaw after billions of dollars of global government assistance, the disappearance from Canada of major foreign non-bank lenders, including GE Money, Household Finance and GMAC, has left businesses short of cash and banks struggling to fill the gaping hole in lending.
"About 20 to 22 percent of our members really are suffering -- they don't quite have enough credit facilities to carry on in a reasonable way," said Ted Mallett, chief economist at the Canadian Federation of Independent Business, which represents some 105,000 small businesses across the country.
The North American restaurant business is particularly hard-hit, with many casual dining chains like Brinker International Inc's (EAT.N) Chili's hurt by a drop in consumer spending and a glut of restaurants from the boom years.
Automobile dealers have also been sideswiped by the withdrawal of captive financing arms like GMAC and other sector-specific lenders who dominated lending for years.
While Everett declined to name the lender who backed out on him, the father of two said he'd arranged to finance about 80 percent of the restaurant, with the rest his own money.
All that changed when his lender disappeared. He was grateful to get a C$2.5 million credit facility with Royal Bank of Canada (RY.TO), but the loan cost about 2 percentage points more than his original financing, and only covered about 50 percent -- not 80 percent -- of his costs.
"It's been very stressful ... But I'm very happy RBC was willing to step up for me," Everett said.
While Canada's major banks have come under fire by the government and Bank of Canada for not lending as much as businesses may need, they argue they have done their share.
Total business credit fell 0.8 percent in May and is down 0.2 percent in the last three months, according to the Bank of Canada. But business groups and the banks alike say the decline is due in part to a drop in demand -- not supply -- as firms hunker down in the uncertain recession.
"Business are really scaling back on their credit exposure, they are paying back as much as they can right now," said the CFIB's Mallett. "They want to make sure they are in as liquid a position as possible."
Mike Cussen, vice-president of business financing products at RBC, Canada's largest bank, echoes the observation.
"We're finding a whole bunch of companies sitting on their cash and not investing in inventory or new equipment and waiting for a turnaround in the economy," Cussen said.
But Cussen and rival banks say they are very much in the hunt for new loan customers, ready to use some of the fat capital cushion that had buffered Canadian banks from the worst of the global financial meltdown.
"We are very much open for business -- there are no capital constraints with respect to lending to our business clients," said Bob Bissett, a senior vice president for commercial banking at Bank of Montreal (BMO.TO) in Toronto.
Still, RBC's Cussen said there is little question borrowers have fewer options and may find lenders have less of an appetite for risk than during the credit boom. But while risk premiums are now higher, lending is still cheaper than it once was because official interest rates are at all-time lows.
"People who approach us who have financing and are seeking cheaper financing -- we can't always match those types of requests," he said.
BMO's Bissett said the bank has also increased its due diligence on loan applications by about "25 percent" -- and noted some sectors, including restaurants and hotels, were inherently more risky. But he said if BMO cannot come up with the financing, it tries to find other options.
"A client may come in tomorrow morning and ask me for C$5 million. I may be happy with 3 million of that, but I may introduce them to EDC or BDC, perhaps some other strategic partner of ours," Bissett said.
The Canadian government in its January budget unveiled federally funded financing assistance through Crown corporations including Export Development Canada and Business Development Bank of Canada.
But even as credit begins to flow again, Mallett warns shortages will likely persist even when the economy turns up.
"We think this is probably going to have a longer lifespan than the business cycle itself," Mallett said.
As for Everett, he's scaled back plans to open a second, third or fourth Chili's, despite doing "fantastic" business in the five weeks since his restaurant's opening. Having spent all of the money he could scrape together to start one franchise, he'll have to wait to open another.
"One of the things I'm learning is the chartered banks have certain rules they follow for lending money," said Everett. (Reporting by Andrea Hopkins; Editing by Frank McGurty)
