Ford government’s first fiscal update sees Ontario changing business tax policies

The Ontario government proposed on Thursday to take steps to try to shore up the province’s competitiveness for business investment.

A fiscal and economic update tabled Thursday at the Ontario legislature says the province would mirror the federal government if Ottawa opts to offer companies accelerated expensing of depreciable assets, which is a policy that corporate Canada has been requesting.

“This would support jobs and growth opportunities in Ontario and strengthen Ontario’s competitiveness in the global economy,” noted the province’s 2018 economic outlook and fiscal review, a sort-of mini-budget tabled Thursday at Queen’s Park.

The province’s finance and economic development ministers had already written to the federal government calling for the accelerated depreciation. There have also been rumblings that Ottawa is preparing some measures aimed at Canada’s competitiveness in its own upcoming fall update.

Ontario’s update said Thursday that reform in the U.S. have wiped out the province’s “tax advantage” and made the province less attractive for business investment.

Yet in keeping with the work of new Premier Doug Ford, the Ontario update also proposes to try to undo some of the work of the province’s previous Liberal government.

For example, today’s Progressive Conservative government at Queen’s Park says it is proposing to break ranks with Ottawa on another measure: phasing out access to the federal small business tax rate based on how much passive investment income is earned by a corporation.

Ontario had proposed to match this measure for the province’s own small business deduction, which the government estimated would have hiked taxes on those smaller firms by about $160 million a year by 2020-21. Now, the Tories say they plan on ditching this move, and not paralleling Ottawa’s decision.

The new government also says it will be reviewing its research and development-related tax support and will not implement the previous regime’s plan to link the rates of an R&D and innovation tax credit to a company’s level of investment.

This is all in addition to the savings that the new regime says they are providing to businesses by cancelling the province’s cap-and-trade carbon-pricing system, as well as by freezing Ontario’s minimum wage at $14 per hour. Businesses are also set to pay less in the way of Workplace Safety and Insurance Board premiums.

Under the watch of Premier Ford, Ontario would also no longer “stand in the way” of pipelines transporting oil to or through the province from Western Canada, the update says.

Fedeli’s remarks to the legislature said that Ontario would “unilaterally relinquish our veto over new pipeline construction within our borders.”

“Pipelines create good jobs, both in Ontario and across the country,” added the update. “In every way possible, Ontario will support its partners looking to expand oil distribution, and at the same time, protect their competitiveness from the federal carbon tax.”

Ontario’s former Liberal government had projected a $6.7-billion deficit for 2018-19 in its spring budget, with no plan to balance the books until 2024-25. The Liberals had also forecast a $600-million surplus for 2017-18.

But Ford’s government had ordered up an independent inquiry into the province’s finances after winning a majority in June’s election. The commission of inquiry revised the province’s financial figures, pegging the projected deficit for 2018-19 at $15 billion, and the Tories declared that Ontario actually ran a $3.7-billion deficit for 2017-18.

The fall update now says that the province is projecting a $14.5-billion deficit for 2018-19, down $500 million from what the inquiry laid out. When the province would return to a balanced budget under Ford, or if it would this term, remains to be seen.

Also in the province’s fall update was a new tax measure for lower-income Ontarians, the Low-income Individuals and Families Credit, or LIFT credit, which the government said would result in a single, full-time worker making minimum wage would pay no provincial personal income tax in Ontario.

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Stelco shares climb more than 10% as CEO downplays tariff impacts

Shares of Stelco Holdings Inc. climbed more than 10 per cent Wednesday in mid-afternoon trading after the company downplayed expected impacts of U.S. tariffs as it shifts focus further into the Canadian market.

The Hamilton, Ont.-based steel producer paid about $39 million in tariffs in the third quarter, but Stelco chief executive Alan Kestenbaum said in an earnings conference that he expects that to drop in the fourth quarter.

“In Q4 we will already see a meaningful drop in tariff costs,” he said.

He said the company will look to shift its current 24 per cent of production exposed to U.S. tariffs closer to zero by selling more into the Canadian market.

Those efforts have been helped by Canada’s retaliatory tariffs on U.S. producers, and Stelco’s investments to expand product offerings and fill voids in the Canadian market created by those retaliations.

The renegotiated North American trade deal could also leave the company better off, said Kestenbaum.

“I believe as a result of the new NAFTA, or USMCA, it is quite possible that the Canadian industrial markets we serve will actually improve its competitiveness and expand, giving us even more demand than just the void left by the retreating supply from the targeted sources.”

The bullish stance of tariff impacts helped push the company’s share price up $1.75, or 9.70 per cent, to close at $19.80 on the Toronto Stock Exchange.

Kestenbaum said the company is also looking to create more value on the real estate side. Stelco bought more than 1,200 hectares of land in June, including nearly 324 hectares in the Toronto-Hamilton area.

“Strategically, we are continuing to advance our efforts to maximize value of our assets,” he said.

“During the third quarter, we advanced in our strategy to see that land developed for its highest and best purpose by starting to hire experts in real estate development, developing a master plan for land development and beginning to market some of our vacant buildings to the very hot Greater Toronto industrial market.”

After market close on Tuesday, the company had reported adjusted earnings of $135 million or $1.52 per share, compared with analyst expectations of $164 million or $1.54 per share according to Thomson Reuters Eikon.

Revenue came in at $619 million, an 84 per cent increase from the $336 million it pulled in for the same quarter last year as volumes shipped surged more than 42 per cent to 586 million tons.

Stelco says higher prices helped offset tariff costs, as its average selling price was $980 per net ton, up from $793 per net ton for the same quarter last year.

Bombardier investors spurn CEO optimism as bonds, stock drop

Bombardier Inc. bonds are joining the company’s stock plunge on fresh concern over cash-flow prospects at the manufacturer of planes and trains.

The market swoon underscored investor anxiety about Bombardier’s prospects despite Chief Executive Officer Alain Bellemare’s upbeat 2020 outlook at an investor conference Tuesday — his first public comments since the company lost a quarter of its market value after reporting earnings last week.

Canada’s largest aerospace company surprised investors Nov. 8 by saying it would need to tap proceeds from the sale of its Downsview facility in Toronto to meet a goal of breaking even on a cash-flow basis this year, plus or minus $150 million. Next year’s goal of break-even cash flow, plus or minus $250 million, fell short of analyst estimates.

“A lot of people are still scratching their heads about the cash-flow forecast,” David Tyerman, a Cormark Securities analyst, said by telephone from Toronto. “They have a fair bit of debt so anything that negatively affects cash flow would be a drag.”

The cost of insuring Bombardier’s five-year notes against default widened 57 basis points to 514 basis points, the highest since December 2016, according to data provider CMA. Bombardier’s Class B stock also plunged, falling 10 per cent Tuesday to the lowest in a year.

Investors and analysts focus on free cash flow because of the company’s need to pay its debt. Bombardier, based in Montreal, had about US$9.5 billion of adjusted debt as of Sept. 30, with its next major maturity coming in March 2020, when US$850 million comes due.

“We’re disappointed” about the cash flow miss, Bellemare said at a Scotiabank conference in Toronto, citing “a little bit of a setback” in the company’s train unit. But he insisted that the company was on track for longer-term targets.

“We have clear line of sight to delivering on our 2020 goal” and generating US$750 million to US$1 billion of cash that year, he said. Analysts expect free cash flow of about US$781 million for 2020, according to the average estimate compiled by Bloomberg.

Separately, Quebec’s financial markets regulator, Autorite des Marches Financiers, will look at the recent movements in Bombardier’s share price as part of a customary review, spokesman Sylvain Theberge said. Bombardier is based in Montreal, the largest city in the province of Quebec.

“This is not a formal investigation,” Theberge said Tuesday in a telephone interview. “We are not on the Bombardier case. Our teams do these kinds of systematic checks anytime a stock has an unusual move. If we have to go further, we will.”

Bloomberg News

In EV era, Brookfield and Caisse place $13-billion bet on conventional car battery maker

The rapid growth of the electric vehicle industry may be drawing headlines, but when it comes to drawing major investments, the internal combustion engine remains on solid footing.

In a deal that highlights the breadth of the traditional automotive industry, two Canadian investment funds on Tuesday announced a US$13.2-billion deal to purchase the leading global manufacturer of lead-acid batteries.

Toronto-based asset manager Brookfield Business Partners and pension manager Caisse de dêpôt et Placement du Quebéc (CDPQ) along with other investors will jointly acquire 100 per cent of Ireland-based Johnson Controls’ automotive business — which shipped 154 million automotive lead-acid batteries in 2017.

Although the buyers described the asset as positioned to benefit from growth in electric vehicles, analysts said its business remains tied to vehicles with internal combustion engines.

“As positioned right now they’re not an electric vehicle type play,” said Brian Bernard, an analyst at Morningstar Research who covers Johnson Controls.

It is Brookfield Business Partners largest acquisition to date since the unit went public in 2016. The stock rose 2.3 per cent on the Toronto Stock Exchange to $50.03.

Johnson Controls has a leading share in the global market for the lead-acid batteries used in traditional vehicles, at about 36 per cent, and has also been growing its absorbent glass mat batteries segment, Bernard said.

The latter segment, known as AGM batteries, allow vehicle engines to shut off at red lights and other stop points, and then quickly restart. That function creates better fuel economy for vehicles, which automotive manufacturers are increasingly seeking, said Bernard.

“The growth in those things has been double-digits phenomenal,” said Bernard, adding, “A lot of their investment has been building capacity for that.”

Such batteries are also necessary to meet increased power demands as automakers add screens, computers and other functions inside cars, he said.

The deal is expected to close by June 30, 2019. It will be funded through a mix of US$3.2-billion equity and US$10.2-billion in long term debt financing, with Brookfield and CDPQ each putting up 30 per cent of the equity and the balance funded by other institutional investors who were not named.

Brookfield declined to make an executive available for comment, and CDPQ said no one was available to speak.

In announcing the deal, the investors stressed the strength of the Johnson Controls’ Power Solutions’ business: market leading position, stable cash flows, diverse customer base.

The buyers also emphasized that Johnson Controls’ Power Solutions “is well-positioned to benefit from growth in demand for advanced batteries in all vehicle powertrains including electric vehicles.”

Bernard said that although Johnson Controls’ has a lithium-ion battery facility in Michigan, it’s not a significant player in that market.

Indeed, the company has been moving away from its automotive roots after spinning out its car-seat unit in 2016. The latest sale completes its transformation to a “pure-play” provider of fire, security, climate control and building-management systems.

Chris Berry, of House Mountain, an adviser to companies that mine battery metals, said that the lithium-ion battery in electric vehicles is not comparable to the lead-acid batteries found in internal combustion vehicles.

“The lead acid battery — OK, it’s been around forever,” said Berry. “On the lithium-ion side, you have a number of different chemistries and there’s a tremendous amount of intellectual firepower that’s going into building a lithium-ion battery that will take you further on a single charge.”

In the battle to build the next great lithium ion battery, most of the major players are in Asia, in particular China, said Berry. It is investing billions of dollars every year to develop a supply chain for battery grade material such as lithium and cobalt, and then build facilities that can manufacture batteries.

“They know they’re not going to compete with the West, which has 100 years of internal combustion engine technology,” said Berry, “So they’re saying why not dominate the EV industry?”

Some analysts project electric vehicles could account for as much as 15 per cent of all vehicles in a decade or so, up from around one per cent now, said Berry. But even under that scenario, traditional vehicles would account for 85 per cent of the market.

Jose Lazuen, an analyst at Roskill who focuses on advanced transportation, said Johnson Controls has a strong clientbase and stable cash flows.

While growth in the electric vehicle market may excite people, Lazuen said Brookfield and CDPQ’s decision to purchase Johnson Controls’ Power Solutions likely came down to basic fundamentals.

“They saw an investment opportunity to make returns,” he said.

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Meridian Credit Union clears key hurdle to launching new national bank

The biggest credit union in Ontario has cleared a key hurdle in its path to opening a new national bank, which it is calling “motusbank.”

Meridian Credit Union Ltd. announced plans to open a Canada-wide digital lender in August 2016. A notice published in the Nov. 10 edition of the federal government’s newspaper, the Canada Gazette, said letters patent had been issued under the Bank Act to incorporate a “Motus Bank,” effective Oct. 3.

Following questions from the Financial Post, a spokesperson said on Tuesday that Meridian is the parent company to “motusbank.”

“We are very pleased to confirm that OSFI (the Office of the Superintendent of Financial Institutions) issued motusbank with Letters Patent,” said Teresa Pagnutti in an email. “This means that we are one step closer to taking the Meridian banking experience beyond Ontario’s borders and making it available to all Canadians.”

Meridian initially targeted a 2018 opening date for the bank, but its chief executive said in an April update that it is now eyeing 2019 to launch the lender.

“Our specific launch date remains flexible,” Pagnutti said, “as it is contingent on final approval from OSFI.”

A spokesperson for OSFI, the federal banking regulator, said that letters patent are issued following a review by the watchdog, which makes a recommendation to Canada’s finance minister. The minister decides whether or not to issue the letters patent, they said.

After a lender has been created through the issue of its letters patent, they must then obtain an “Order to Commence and Carry on Business,” which is issued by the superintendent.

“A newly incorporated federally regulated financial institution may not commence operations until it completes the second step, which is there to ensure the federally regulated financial institution in question has the necessary systems, management structure, control processes and regulatory compliance management systems in place,” OSFI spokesperson Annik Faucher said in an email.

The word “motus” means a movement or motion in Latin. Meridian has also applied to trademark the “motusbank” name, according to a federal registry.

Meridian has said its bank would not be publicly traded and would ultimately be owned by Meridian members. Pagnutti added that the bank would be a separate legal entity that operates independently with its own member base and banking system.

“Like Meridian Credit Union,” said a 2016 press release on the bank, “it will not be hostage to quarterly earnings per share targets the way that publicly traded banks are, and will therefore take a long term view in terms of how it invests to serve its customers.”

The bank would also be entirely digital, with no physical branches “for the foreseeable future.”

“We believe, and our research shows, that there is a clear desire in the marketplace for an innovative digital bank that offers a true full-service alternative to the big banks,” Meridian CEO Bill Maurin said in the 2016 press release.

Meridian is already ranked as the third-largest credit union in Canada, with more than 300,000 members, 90 Ontario-based branches and $20 billion in assets under management as of Sept. 30.

“Creating a bank will bring more Canadians into the Meridian family and will generate new revenue, diversify sources of funding, and provide economies of scale,” said Meridian in its update on the bank’s progress.

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Canada gets it right on cannabis, wrong on oil, GMP Capital CEO says

The roll-out of legal cannabis is a prime example of how Canada can get things right. Energy shows how the country sometimes gets it wrong.

That’s the view of GMP Capital Inc.’s Harris Fricker, who is seeing deal-making in marijuana and blockchain eclipsing the traditional industries of energy and mining that were once bread-and-butter businesses for the Toronto-based financial services firm.

Canada has become a world leader in cannabis, with initial support from Canadian investors giving way to capital inflows from the U.S., Europe and Asia thanks to a welcoming regulatory environment, according to Fricker. That’s a stark contrast to Canada’s oil-and-gas sector, where major pipeline projects have failed to get off the ground, leading to a record price discount for the nation’s oilsands crude.

“Cannabis is a poster child for how to do it,” GMP’s chief executive officer said Monday in an interview at Bloomberg’s Toronto office. “Oil-and-gas is a poster child of how not to do it.”

GMP is benefiting from interest in blockchain and cannabis, with two-thirds of its investment banking business coming from outside natural resources, Fricker said Friday after releasing third-quarter results. GMP had a 72 per cent surge in revenue in the quarter from a year earlier, led by strong investment-banking activity. Fricker said cannabis and blockchain “admirably” filled the void of a beleaguered commodities division.

Staggering Run

The cannabis sector provides the greatest immediate potential, with what Fricker describes as a “staggering” five-year run ahead of it. Canadian investment banks like GMP and Canaccord Genuity Group Inc. are benefiting from a surge in listings in Canada by domestic and U.S. pot companies while cannabis remains illegal at the federal level south of the border.

Opportunities in blockchain — the distributed digital ledger technology that underpins Bitcoin — will start to materialize in five to seven years, he said. Fricker predicted a year ago that as many as 50 blockchain-related companies would go public in Canada. The plunge in bitcoin prices this year has cooled that market for now, he said.

GMP Capital CEO Harris Fricker.

“Blockchain has more potential because you’re talking about changing the way value is transmitted,” Fricker said, calling that shift from a 200-year-old traditional accounting system the “Holy Grail.” “As it takes root, its ability to profoundly change society is greater.”

GMP, which is hosting a blockchain technology conference in Toronto Tuesday, is better positioned to provide investment-banking services to these emerging industries than the bank-owned investment banks and U.S. firms because his company is more agile and nimble, Fricker said.

No Salad

“If they’re a cruise ship, we’re a Viking ship,” Fricker said. “I tell my guys never, never get the two confused because there’s no salad bar on a Viking ship.”

As a part of the strategic shift, GMP now has 15 bankers working in the cannabis space, and another 10 on blockchain. Staffing in the energy sector, traditionally the bank’s focus along with mining, has been cut in half, he said.

Canada has become a world leader in cannabis, with initial support from Canadian investors giving way to capital inflows from the U.S., Europe and Asia.

Still, Fricker said Canada shouldn’t turn its back on resources, and efforts to move away entirely from oil-and-gas are misguided.

“We have been blessed with one of the great caches of resource wealth in the world and harvesting that responsibly — including the gold standard and environmental — should absolutely be the rule that governs,” Fricker said. “But harvest it we must.”

Advance Energy

Fricker expressed frustration at Canada’s inability to advance energy infrastructure, including pipelines to deliver oil and gas out of land-locked Alberta. The impasse has led to record discounts of more than US$50 a barrel for some Canadian crude relative to global benchmarks. The federal government was forced to take over the Trans Mountain pipeline expansion in May after Kinder Morgan Inc. halted work amid rising opposition from environmental groups and the British Columbia government.

“We are at an historic high in the differential and we can’t pipe oil product — which is our single largest revenue source in this country — to either coast.”

Canada’s energy woes haven’t helped GMP’s stock, as many investors link the company to that sector. GMP has dropped 40 per cent this year, more than six times the decline in Canada’s benchmark stock index, cutting its market value to about $150 million (US$113 million).

Beyond investment banking, Fricker said he wants to expand the Richardson GMP wealth-management division by attracting more advisers to its platform. He has a five-year goal of lifting assets under management to $50 billion from its current level of $30 billion.

“Given the changes the banks are making in their wealth-management businesses, we’re optimally positioned to attract large book investment advisers who want to be in the advice delivery game,” he said. “That’s where we’re seeing our growth come from.”

Bloomberg.com

Brookfield and Caisse to buy Johnson Controls’ car battery maker for $13.2 billion

Brookfield Business Partners L.P. and Caisse de dépôt et placement du Québec today announced that they have reached an agreement to buy Johnson Controls’ Power Solutions business for approximately US$13.2 billion.

The business produces batteries for global automakers and retailers for use in nearly all types of vehicles, including hybrid and electrical models.

Johnson Controls expects to deploy $3.0 to $3.5 billion of proceeds towards debt paydown and retain an investment grade credit rating, the company said in a statement.

More to come …

With files from Reuters

Mawer Investment Management hires Scotiabank to explore options, including a sale

Closely held Mawer Investment Management Ltd. has hired Bank of Nova Scotia to explore options such as a sale, following a wave of transactions involving Canadian money managers.

“Given recent activity in the industry, Mawer has engaged an adviser to obtain more information on the options available to the firm as part of our strategic planning process,” Michael Mezei, Mawer’s president, said in an emailed statement Sunday. “No decision has been made to change firm ownership. Our focus remains on delivering excellent long-term investment results for our clients.”

Joanna Crozier, Mawer’s marketing manager, confirmed in an email that the Calgary-based firm was working with Scotiabank.

Canada’s big banks have been among the most active buyers of wealth management companies. Earlier this month, Toronto-Dominion Bank completed the $792 million (US$600 million) purchase of Greystone Capital Management as part of a push to become the largest Canadian money manager. Scotiabank itself last month acquired MD Financial Management for about $2.6 billion, having earlier snapped up Montreal-based Jarislowsky Fraser Ltd.

Founded in 1974, Mawer oversees more than $50 billion for individual and institutional investors across all major asset classes.

Mawer adheres to what it calls a “boring” approach to money management. Dubbed “Be Boring. Make Money,” the strategy “means ignoring fads and taking a long-term view of investing,” according to a note posted on the company’s website. “It means consistently sticking to a systematic, disciplined, bottom up investment approach no matter what the market outlook.”

Reuters earlier reported that Mawer was working with Scotiabank to explore a potential sale.

Bloomberg.com