Anonymised, illustrative composite. A marginal file under this programme cannot be priced into approval. It can be shrunk, secured differently, moved between classes, or declined — and the class it moves into is the one lever most people miss.
At a glance
Two locations, a 12-kilogram roaster, a wholesale book of thirty-one restaurant accounts and a founder who had been the roaster, the buyer and the face of the brand for eleven years. Price $890,000 on an asset basis. The buyer was a hospitality operator with two other sites and a real key-person question to answer. The requested facility was $500,000 — roasting and espresso plant $270,000, leaseholds $80,000, brand and wholesale relationships $90,000, working capital $60,000 — exactly at the $500,000 maximum for purposes other than real property under section 6.1(a) of the Regulations, with intangibles and working capital together at $150,000, also exactly at the maximum nested inside it.
Credit approved the loan and then repriced it. The committee’s view was that the key-person exposure, the wholesale concentration and the buyer’s existing commitments made this a prime-plus-five file rather than a prime-plus-three file. On a conventional loan, pricing is where a lender puts marginal risk. On this programme it is not available, and neither is the usual second move of charging a fee instead.
The restructured deal moved money between classes rather than changing the total. The term loan came down to $350,000 — equipment $270,000, leaseholds $80,000 — at prime plus 3%. The $60,000 of working capital moved into a programme line of credit authorised at $60,000 at prime plus 5%. The $90,000 of intangibles came out of the programme onto a five-year vendor note postponed to the bank.
Blended, the bank ended with $410,000 of programme exposure at an average ceiling of about prime plus 3.3% rather than $500,000 at prime plus 3%. Not the two points the committee asked for, but enough — with a smaller facility and $90,000 of vendor paper behind it — to clear the file. It had a cost: the line attracts its own registration fee of 2% of the authorised amount, $1,200 on $60,000, on top of the $7,000 on the term loan. Two registration fees and a third on renewal works through that arithmetic.
One number in the model was wrong throughout. The lender’s margin at prime plus 3% is not three points: the programme charges the lender an annual administration fee that “is calculated at the annual rate of 1.25% applied” to the loan balances, and the Act provides that “The lender may not charge the borrower for that fee otherwise than through the imposition of interest in respect of the loan.” It comes out of the spread, not off the top.
Section 12 of the Regulations, marginal note Interest Rate, sets a ceiling rather than a rate, and it differs by class. For a floating-rate term loan the maximum is “the aggregate of 3% and the prime lending rate that is in effect at that lender on each day of the loan term”. For a fixed-rate term loan it is 3% plus “the single family residential mortgage or hypothec rate in effect at that lender for the loan term”. For a line of credit, subsection (2) sets it at “the aggregate of 5% and the prime lending rate that is in effect at the lender on each day of the line of credit term”. Two points of difference between the classes is a deliberate feature of the scheme and the only pricing flexibility in it.
The fixed-rate fallback is narrower than it is usually described. Subparagraph 12(1)(b)(ii) substitutes the five-year benchmark only “in the case of a loan term of more than five years if there is no single family residential mortgage or hypothec rate for that loan term”. Both limbs are required. On a three-year fixed loan with no posted three-year rate, subparagraph (ii) does not help.
The second door is closed by the Act rather than the Regulations, which is why it is easy to miss. Section 10 provides that every loan is subject to the condition that “no fee or charge is payable by a borrower in respect of the loan other than” interest, the registration fee, and any other prescribed charge specified in the Regulations. That is a closed list, and section 13(1) fills the third item narrowly: security charges, insurance premiums, conversion and prepayment charges, and — since 1 April 2014 — “any other charge that would be charged by the lender in respect of a conventional loan of the same amount”. Every limb is measured against what the lender would charge on a conventional loan of the same size, so a bespoke risk premium invented for one file fails by definition. The department says the same administratively: “Lenders may charge the same fees (e.g. set-up and renewal fees), that they charge for a conventional loan of the same amount.”
The levers on a marginal file are size, structure, security, class and decline — not price. See covenant packages on an acquisition loan for what remains negotiable.
The facility closed at $350,000 of term debt and a $60,000 line, the equity cheque unchanged. The founder stayed nine months on a consultancy tied to the wholesale accounts, which did more for the credit than any amount of spread.
The line carried conditions of its own: the registration form requires the borrower’s attestation that “the line of credit will only be used to pay for working capital costs”, and its maximum term is “five years beginning on the day on which the line of credit is opened”, after which section 10(6) offers three routes — re-register with a further fee, convert to a term loan of up to ten years, or repay it conventionally. None is automatic.
Charging the higher rate anyway would not void the guarantee, but the cure is conditional and costs the lender the margin it was reaching for. Section 27(1)(c) covers the case where “the rate of interest payable in respect of the loan is greater than the rate provided by section 12”, and subsection (2) requires that the loss was unaffected, that the non-compliance was inadvertent, that “the lender has reimbursed the borrower for any resultant overcharges”, and that it was otherwise remedied. A deliberate reprice is not inadvertent.
It is worth being precise about what the guarantee is worth on one loan. Section 8 of the Act limits the Minister’s liability on a loan to the lesser of “85%, or any prescribed lesser percentage, of its eligible loss, calculated in accordance with the regulations” and a prescribed maximum. That flat 85% is the per-loan figure. Section 6(2) sets a different limit — a tiered cap on the Minister’s liability to a lender across “the aggregate principal amount of the loans — other than lines of credit — made by it during that period that does not exceed $250,000” and higher bands, over each consecutive five-year period. A portfolio ceiling, not a formula for one file.
The tell was the phrase in the credit memo: price for the risk. Here the price is set by regulation and the risk shared by statute, so a file that only works above the ceiling is a conventional file in the wrong queue.
The productive question is which class the money should sit in. Moving working capital from a class capped at prime plus 3% to one capped at prime plus 5% is the scheme working as drafted, and it is the move nobody had considered.
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