Overview: Regulation of bank loan facilities in Canada


Equity and liquidity requirements

Describe how capital and liquidity requirements affect the structure of bank loan facilities, including the availability of related facilities.

Due to applicable capital and liquidity requirements, unfunded liabilities can be costly for banks. As a result, a bank may require a borrower to pay a ticking fee on commitments (which are not yet subject to a hold fee). Similarly, a bank may limit commitments (and in particular extensions of commitment) to a period of one year or possibly to successive periods of one year.

Disclosure requirements

For public enterprise debtors, are there any disclosure requirements applicable to bank loan facilities?

A public company must file its material contracts on the Electronic Document Analysis and Retrieval System, except for those entered into in the normal course of its activities. If the bank loan facility is material to the debtor public company, then it must file a copy of the loan agreement. However, if the loan agreement is entered into in the normal course of business of the debtor public company, the debtor is not required to file the agreement, subject to certain exceptions.

There are restrictions on the provisions that can be redacted from a contract when it is filed: generally, if disclosure of a provision would seriously harm the interests of the public company or violate confidentiality provisions, the provision can be redacted. However, debt covenants and ratios, events of default and other terms necessary to understand the impact of the material contract on the business of the public company cannot be redacted.

Use of loan proceeds

How is the debtor’s use of bank loan proceeds regulated? What liability could investors be exposed to if the debtor uses the product contrary to the regulations? Can investors mitigate their liability?

Economic sanctions, anti-corruption and anti-terrorism legislation may apply to restrict the use of loan proceeds in the hands of the borrower. The ramifications for the lender of a breach of these restrictions by the borrower will depend on whether the lender has knowledge of the breach (actual or implied knowledge, including willful blindness, such as failure to due diligence where there are indications of potential violations) such as that the lender is committing an offense by facilitating, aiding or abetting unlawful conduct. The reputational risk associated with financing a borrower found guilty (or simply accused) of violating these laws can also be a significant concern.

The borrower must not engage in money laundering or other criminal activities, as this could result in payments to the lender being proceeds of crime. Lenders will generally exercise due diligence and require the borrower to make detailed representations and covenants regarding itself and its affiliates, its compliance with economic sanctions, anti-corruption, anti-terrorism and anti-money laundering legislation money and the use of the proceeds of the loan in accordance with these laws. If the lender has compliance issues, they should discuss them immediately with a lawyer.

Cross-border loans

Are there regulations that limit an investor’s ability to extend credit to debtors organized or operating in particular jurisdictions? What liability do investors incur if they lend to these debtors? Can investors mitigate their liability?

Pursuant to regulations enacted under the United Nations Act, the Special Economic Measures Act, the Justice for Victims of Corrupt Foreign Officials Act and the Criminal Code, Canada has adopted economic sanctions against the Belarus, Central African Republic, People’s Republic of China, Congo, Iran, Iraq, Lebanon, Libya, Mali, Myanmar, Nicaragua, North Korea, Russia, Somalia, South Sudan, Sudan, Syria, Ukraine, Venezuela, Yemen and Zimbabwe, and it has prohibited the financing of listed and unlisted terrorist activities. organisms. Sanctions vary by jurisdiction and applicable law, but generally prohibit persons in Canada and Canadians abroad from providing financial services or dealing in the property of designated entities or persons related to the relevant jurisdiction. In most cases, there is no general prohibition against dealing with all persons in the jurisdiction. Violation of economic sanctions or anti-terrorism law is a criminal offense and can result in fines or imprisonment. Facilitating, aiding or abetting breaches by a borrower is also a criminal offence.

Lists of designated persons can be found on government websites and on the UN website (UN designations are incorporated into Canadian law under the United Nations Act). In addition, a lender can use a third-party verification service to confirm that its borrower and its shareholders, directors, officers and material employees are not on a list of designated persons.

Typically, a lender will require the borrower to make representations in the loan documentation with respect to itself and its affiliates (and key individuals) that they are not (and are do not deal with) sanctioned persons and that they undertake that the borrower will comply with the laws on economic sanctions and will not use the proceeds of the financing in violation of these laws. If the lender has compliance issues, they should discuss them immediately with a lawyer.

Debtor leverage profile

Are there limits to an investor’s ability to extend credit to a debtor based on the debtor’s debt profile?

In general, lenders are not regulated in their ability to extend credit to a debtor based on their debt profile. A notable exception is for residential mortgages issued by federally regulated financial institutions, where the debtor may be required to meet certain debt service coverage ratios..

Interest rate

Do regulations limit the interest rate that can be charged on bank loans?

The Criminal Code makes it an offense to enter into an agreement to pay interest at a criminal rate. It is also an offense to receive interest at a criminal rate. The “criminal rate” is defined as an annual rate of interest determined in accordance with generally accepted actuarial principles that is greater than 60% per annum. For these purposes, “interest” is broadly defined to include virtually all elements of the cost of borrowing, regardless of how those elements are characterized by the parties to the loan. This issue may require special consideration where warrants or other “equity” are part of the financing.

Other legal restrictions on the rate of interest include restrictions under the Interest Act which limit the rate of interest which may be charged on arrears of principal or interest secured by a mortgage on immovable property at the interest rate applicable to principal or non-overdue interest.

Additional regulatory restrictions apply in the context of consumer loans.

Currency restrictions

What are the limits on investors funding bank loans in a currency other than the local currency?

There are no legislative currency restrictions in Canada that would prevent a lender from funding loans in a currency other than the Canadian dollar.

Other regulations

Describe any other regulatory requirements that impact the structuring or availability of bank lending facilities.

Regulation exists at both the federal and provincial level to the extent that a lender is carrying on business in Canada. At the federal level, there is a law that requires lenders to obtain a license (or operate through an approved Canadian branch) if they are carrying on business in Canada. There are also provincial laws that require any entity doing business in the province to obtain an extra-provincial license from the province, and some provinces ‒ including Saskatchewan ‒ impose additional registration requirements on entities doing lending business in the province. province. . These licensing requirements should be considered when identifying potential lenders.

Additional regulatory considerations may apply in connection with consumer loans and mortgage loans.

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