On January 26, 2021, the federal government announced the launch of the Highly Affected Sectors Credit Availability Program (HASCAP), a new program to provide guaranteed, low-interest loans between C$25,000 to C$1-million per legal entity to a maximum of C$6.25-million for related legal entities to Canadian businesses that were heavily impacted by COVID-19, including those in the hospitality industry.
Although HASCAP was created to provide support to the travel, tourism, hospitality, and arts and culture sectors in particular, it is not limited to certain sectors and is available to businesses in all sectors that meet the HASCAP eligibility criteria.
HASCAP is now available to business owners at participating financial institutions. Interested businesses should contact their primary lender to get more information and to apply. Businesses cannot apply at more than one financial institution. The deadline for submitting HASCAP applications is June 30, 2021.
Eligibility Requirements: Eligibility will be determined by the financial institution that the interested business is applying to, based on the eligibility criteria established by the Government of Canada, including that the business must be a Canadian business that was financially stable and viable and did not have an impaired loan as of March 1, 2020 (i.e., prior to COVID-19) and must be able to demonstrate a revenue loss of at least 50 per cent for at least 3 months within the eight-month period prior to the date of the HASCAP loan application.
Demonstrating Pre-Pandemic Financial Stability and Viability: To apply for a loan between C$25,000 and C$100,000, it is sufficient for the borrower (collectively with the related entities, if applicable) to meet the probability of default requirement (as described in section 6.8.7 in Chapter 6 – Credit Risk - Internal Ratings Based Approach of the OSFI Guideline on Capital Adequacy Requirements) prior to March 1, 2020. To apply for a loan between C$100,001 and C$250,000, in addition to meeting the probability of default requirement prior to March 1, 2020, the borrower (collectively with the related entities, if applicable) must be demonstrated to have generated a minimum of C$500,000 in gross revenues in the 12-month period ending as at the date of the most recent annual financial statements of the borrower (collectively with the related entities, if applicable) prior to March 1, 2020. To apply for a loan between C$250,001 and C$1,000,000, the borrower (collectively with the related entities, if applicable) must meet the minimum debt service coverage ratio requirement of 1.10x (including the HASCAP loan) as of the most recent financial statements of the borrower (collectively with the related entities, if applicable) prior to March 1, 2020 and the borrower (collectively with the related entities, if applicable) must meet the minimum S&P rating of CCC+ prior to March 1, 2020.
Demonstrating Sufficient Revenue Loss: If the interested business is eligible for Canada Emergency Rent Subsidy (CERS) and/or Canada Emergency Wage Subsidy (CEWS) and has not already enrolled in such programs, it will be required to apply to the applicable programs before the business may apply for HASCAP and evidence of enrolment in CERS or CEWS will assist the business in demonstrating sufficient revenue loss for the purposes of HASCAP. If the interested business is not eligible for CERS or CEWS, it will need to provide financial statements that reflect at least three months of monthly year-over-year revenue loss of a minimum of 50 per cent per month within the eight months preceding the loan application. The three months of revenue loss do not need to be consecutive.
Material Loan Terms: The loan is fully repayable with no forgivable portion. Additional terms of the loan include a 4 per cent interest rate, repayment term of up to 10 years, and an up to 12-month deferral of principal payments at the start of the loan. Business Development Bank of Canada (BDC) will provide a guarantee for 100 per cent of the value of the new term loan and no personal guarantee will be required.
Use of Loan Proceeds: Businesses can use the proceeds from the loan to continue or resume operations. This includes payment of normally scheduled monthly (i.e., excluding balloon) and not-yet-due principal and interest payments on the business’s existing debt, as well as ordinary course-of-business lease, equipment or supplier financing payments. However, the loan proceeds cannot be used to refinance or pay down existing business debt. In addition, the loan proceeds cannot be used for dividends unless the dividends are being used as income to shareholders (to a maximum of C$200,000 of distributions that are paid in lieu of a salary to the shareholders and as per historical practices).
Although eligibility for HASCAP is not limited to certain sectors, it has been designed with certain sectors in mind, including the hospitality sector, which has been particularly negatively affected by COVID-19. Allowing HASCAP applicants to demonstrate revenue loss for three non-consecutive months in the last eight-month period prior to the date of the HASCAP loan application accounts for the seasonality of businesses in the hospitality industry and allows applicants greater flexibility in establishing the requisite revenue loss. In addition, HASCAP accounts for the existence of hospitality chains owned by related parties by providing that a maximum of C$6.25-million may be available for related legal entities.
There will ultimately still be certain businesses affected by COVID-19 who will be unable to take advantage of HASCAP. In particular, businesses that began operating during the pandemic are unable to meet the current revenue loss criteria to qualify for HASCAP. Businesses which are not eligible for HASCAP may want to consider other programs funded by the federal government, including The Regional Relief and Recovery Fund (RRRF) and Business Credit Availability Program (BCAP). In addition, as part of the 2021 Ontario budget, the Ontario provincial government recently announced that it would be creating a C$100-million Tourism and Hospitality Small Business Support Grant, giving eligible hospitality-related businesses that do not qualify for the Ontario Small Business Support Grant (with a minimum 20 per cent decline in revenue and less than 100 employees) one-time payments of between C$10,000 and C$20,000 in 2021. The Ontario government also created the Ontario Tourism Recovery Program, spending C$100-million to help “historically successful” businesses, including tourism operators and attractions, with reopening expenses such as marketing and restructuring.