FRIDAY, APRIL 3, 2020 | THE GLOBE AND MAILO REPORT ON BUSINESS| B5
Flavio Volpe, president of the Au-
to Parts Manufacturers Associ-
ation, which played a crucial role
in bringing together the assist-
ance for O-Two, said one option
would be akin to sharing assemb-
ly of a Lego kit with a 30-page in-
struction manual. “It might be
the best way to get to 10,000 ven-
tilators is five pages belong to Li-
namar, you get your current med-
ical suppliers to do five pages, you
get Magna to do five pages and
then Martinrea to do five pages.
By the time we get to page 30, the
product is being assembled in-
side O-Two’s facilities.”
The O-Two contract is one of
three ventilator project streams
that Linamar is working on right
now. They’re also helping Toron-
to-based Thornhill Medical Inc.
produce 500 ventilators for the
federalgovernment. Linamar is
in charge of final assembly and
managing the supply chain for
this deal. Also, Linamar is making
components for a variety of cus-
tomers that are producing their
own ventilators.
Brendan Sweeney, managing
director of the Trillium Network
for Advanced Manufacturing,
said the pivot that the auto-parts
sector is undertaking into helping
medical manufacturers makes
sense. “They are really good at
scale. They have relatively big
plants. They are good at manufac-
turing thousands of complex
products with no defects,” Mr.
Sweeney said. “A big part of auto
manufacturing is taking widget
A, widget B and widget C and
bringing them all together in the
right sequence. There’s both an
art and science behind it.”
Ms. Hasenfratz said efforts to
help Canadians cope with the im-
pact of COVID-19 has produced a
great morale boost for the com-
pany as it copes with the econom-ic impact of the shutdown of auto
industry production in North
America. She said about 400 em-
ployees have returned to work to
help. “It’s given us something to
focus on. We’ve been able to bring
folks back from layoffs for these
different programs we’re working
on. And given them something to
do that they actually feel really
good about.”She said one longer-term bene-
fit of this is that it might help
companies such as O-Two ramp
up their business and find a place
on the global stage.
O-Two Medical did not re-
spond to interview requests from
The Globe and Mail on Thursday.
A statement on its website said all
employees were working
“around the clock” on Ontario’sorder, and “as such will not be do-
ing media interviews.”
In the United States, General
Motors Co. began a similar part-
nership with American ventilator
manufacturer Ventec Life Sys-
tems on Mar. 20 to build 10,000
ventilators a month. General Mo-
tors of Canada Co. spokesman Da-
vid Paterson said GM provided
advice to the Canadian initiative
based on its early experience with
Ventec, but is not directly in-
volved.
Mr. Paterson added that venti-
lators are complex medical de-
vices subject to strict regulation.
Their manufacturers, however,
typically produce in small quanti-
ties. GM helped Ventec select a
model of ventilator that could be
produced rapidly. Over three
days, the two companies identi-
fied the device’s 700 components
and drew up a plan for how they
could produce each one at a
much higher volume.
GM then assigned auto-parts
makers with relevant expertise to
make some of those parts, which
in turn sourced subcomponents
from their own supply chains. GM
set up tooling and manufacturing
space at its plant in Kokomo, Ind.
Ventec and GM say they’re poised
to deliver ventilators as soon as
later this month.
“Where we can really help
them is to achieve scale quickly,”
he said, “because we know how to
do logistics and supply chains
probably better than any other
industry.”Ventilators:HelpingCanadianscopewithpandemicisboostingmoraleatLinamar
FROM B1Linamar CEO Linda Hasenfratz, seen in 2018, says, in some ways, an engine and a ventilator are not that
different. ‘Both are complex assemblies full of very critical, precisely manufactured parts that need to be
assembled in a certain way – and then the full assembly needs to be tested.’FRED LUM/THE GLOBE AND MAILAnd so far, bank executives are telling investors not to worry.
“At this time, I don’t see a change in TD’s dividend policy,”
chief executive Bharat Masrani said in an interview with re-
porters after the bank’s annual meeting on Thursday.
Toronto-Dominion Bank has “more than adequate cap-
ital” to confront the crisis, Mr. Masrani said. He suggested
Canadian banks’ conservative appetites for risk, and tenden-
cy to avoid some of the most risky lending undertaken by
global banks, give them an extra margin of safety.
“All governments are trying their bestto make sure that
individuals do have the liquidity, that they do have the mon-
ey, and they’re trying to introduce various programs to deliv-
er that,” he said. “And to say that ‘alright, we’ll take this
away,’ seems contradictory to that objective by elected offi-
cials.”
Banks are facing significant pressure from an anticipated
spike in loan losses in the long run, as well as widespread
demand from companies to draw down funds on credit lines
immediately. But bankers and regulators are keenly aware
that bank stocks are widely held by millions of Canadians,
some of whom depend on them as retirement income. Some
worry that cutting off dividends could worsen the economic
hardship from the crisis.
“About 77 [per cent] to 80 per cent of our shareholders are
Canadian, either institutional or retail, so the construct of
our shareholder base is very different than would be a Eu-
ropean bank,” said Bank of Nova Scotia CEO Brian Porter on
Tuesday. Mr. Porter and Bank of Montreal CEO Darryl White
both said they have no plans to slash their banks’ dividends.
Several banking analysts agree that Canadian bank divi-
dend cuts are unlikely, at least in the near term, and some
suggested banks would be more likely to raise equity to bol-
ster capital levels.
The Big Six are coming into
this crisis in a strong position,
Bank of America Securities ana-
lyst Ebrahim Poonawala said on
Wednesday. On average, the
banks have a common equity
Tier 1 (CET1) ratio of 11.6 per cent- a key measure of a bank’s resil-
ience – or 2.6 per cent above the
minimum level set by OSFI. That
gives banks room to absorb loss-
es, Mr. Poonawala wrote in a note
to clients.
“While the current crisis could
be worse given the state of the en-
ergy sector and an over-leveraged
consumer, we believe that the bar for dividend suspension/
cuts is extremely high,” he said.
OSFI has already freed up an estimated $300-billion in
lending capacity by lowering the domestic stability buffer,
which serves as an extra cushion of capital amassed in good
times, by 1.25 percentage points. Officials from the regulator
said they have leeway to reduce the buffer further if neces-
sary to free up more capital.
For now, banks are likely running stress testing models
multiple times a week, and giving frequent updates to the
regulator. But it has become far more difficult to make accu-
rate predictions as banks grapple with the speed of the un-
folding health crisis, as well as estimate the effects from an
unprecedented response fromgovernments.
“The biggest challenge is trying to understand how long
the crisis is going to be, and then trying to overlay what will
be essentially an unprecedented level of government sup-
port and trying to understand how this will impact the recov-
ery,” said Mark Hughes, a former chief risk officer at Royal
Bank of Canada who now chairs the Global Risk Institute in
Toronto.
Canadian banks also differ from their British and Europe-
an counterparts, which are tightly regulated. Many European
banks are still building capital buffers under new rules in-
troduced after the last financial crisis, and cleaning up bad
loans on their balance sheets.
European banks’ dividend payments have also been more
variable historically compared with Canadian bank divi-
dends, which are considered “locked in,” said Gabriel De-
chaine, an analyst at National Bank Financial Inc., in a note
to clients.
And Canadian banks are in a different position politically,
after some British banks neededgovernment bailouts in the
last crisis, said Laurence Booth, professor of finance at the
University of Toronto’s Rotman School of Management.
“The Canadian banks do not have the bad reputation that
the European and the U.K. banks have got, so it’s not like the
government can lean on them and say, ‘Look, we’ve bailed
you out, you’re bad guys, do what we say, you’ve got to re-
build your reputation,’ ” Mr. Booth said. “So that moral sua-
sion component is missing in Canada.”
Dividends
FROM B1Banks are facing
significant pressure
from an anticipated
spike in loan losses
in the long run, as
well as widespread
demand from
companies to draw
down funds on
credit lines
immediately.The meeting ended in failure,
and Saudi Arabia and Russia in-
creased their output in a battle
for market share. With the price
war and a drop in demand of
millions of barrels a day, the
world’s storage tanks quickly fil-
led. Market prices tumbled to
their lowest in almost two dec-
ades, with some regional grades
dropping below zero in recent
days.
Mr. Trump said on Twitter that
he had spoken to Saudi Crown
Prince Mohammed bin Salman,
who had talked with Russian
President Vladimir Putin about
ending the price war that has
sent the global oil sector into a
financial tailspin.
Mr. Trump said he “expects
and hopes” the two countries
will reduce production by 10 mil-
lion to 15 million barrels a day.
Saudi Arabia did not say it was
close to such a deal.
Deputy Prime Minister Chrys-
tia Freeland was circumspect
when asked whether Ottawa
would meet with Saudi Arabia
and its fellow cartel members.
“It’s too early to say how this
situation is going to develop, but
we’re very closely engaged,” she
told reporters on Thursday. “And
I would also like to say [Alberta]
Premier [Jason] Kenney is very
involved and he has also been
personally involved in conversa-
tions with the U.S. and that has
also been very helpful.”
She said she has been in close
contact with U.S. Secretary of
State Mike Pompeo about the
disruptions in the oil market
that have hit the energy sector in
both countries hard.
Canadian oil producers have
reduced output by as much as
700,000 barrels a day for eco-
nomic reasons, and that number
may surpass one million this
month as available storage fills
up, analysts have said. Canada –
which does not have a state-con-
trolled oil company it can order
to adjust output – has not partic-
ipated in OPEC-led efforts to sup-
port prices before.
Mr. Kenney, whose province
has one of the world’s largest oil
reserves, has spoken with U.S. of-
ficials to propose a continent-
wide solution to what he has
called the predatory dumping of
cheap foreign crude by Saudi
Arabia and Russia. He has, how-
ever, resisted any calls for his
government to impose deeper
output cuts on companies, say-
ing they will make such deci-
sions on their own.
The price of West Texas Inter-
mediate oil jumped US$5.01 to
US$25.32 a barrel, its highest in
two weeks. Western Canada Se-
lect heavy oil blend, a proxy for
the Alberta oil sands, nearly dou-
bled to US$8.65, according to NE2
Group.
Even with the gain, the price
does not allow most operations
to break even. Still, the S&P/TSX
capped energy index jumped 9
per cent, as investors showed op-
timism that has been rare since
the crisis began.
“Keep in mind, COVID-19 de-mand destruction has not gone
away,” Bank of Nova Scotia ana-
lyst Michael Loewen said in a
note to clients.
“A potential 10-15 million [bar-
rels a day] supply cut would go a
long way to re-balance the mar-
ket and prevent some [storage
capacity] concerns, but we’re not
out of the woods yet. A global
economic slowdown is taking
place.”
The federal government is
working on a rescue package for
oil companies struggling with
dwindling cash flow as debt and
other cost obligations pile up. Fi-
nance Minister Bill Morneau has
talked about providing a back-
stop for banks that lend to the
sector.
Royal Bank of Canada’s securi-
ties arm on Thursday proposed a
measure thegovernment could
consider to help companies
faced with having to shut off
production.
In what RBC analysts referred
to as a “shut and swap,” Ottawa
could pay companies a fixed
price now for oil output that
would be curtailed, providing
revenue so companies don’t
have to borrow to stay in oper-
ation.
Companies could sell the oil
when markets recover and oper-
ations resume, presumably at
higher prices, and repay tax-
payers.
“Shut and swap avoids the
double-whammy impact that
lower production and prices
could have on revenue streams,”
RBC said.Oil:Canadianproducershavereducedoutput
byasmuchas700,000barrelsaday
FROM B1While former Bank of Canada
governors have traditionally
shied away from publicly judg-
ing their successors’ actions, Mr.
Dodge willingly brings his exper-
tise and experience to the public
discussion. He heads up a “crisis
working group” recently formed
by the C.D. Howe Institute, an ec-
onomic think tank, to quickly as-
sess and recommend Bank of
Canada and government re-
sponses to the COVID-19 crisis.
“Let’s just call this simply
what’s going on: We’re printing a
lot of money to provide liquidity
in the system,” Mr. Dodge says
with characteristic bluntness.
“Every country has issues when
they print money. It will require
inordinately deft management
as we move out,” he says.
The primary worry around
this kind of central bank money
creation is its potential to ignite
inflation. That’s something of
particular concern to the Bank of
Canada, which has long been
one of the world’s leading propo-
nents of using low and stable in-
flation targets as the guiding
principle of monetary policy.
It’s notable that one of the key
goals of past QE programs, from
the Fed and others, was to ac-
tually stoke inflationary fires;
they were fighting against a very
real danger that the economy
would slip into deflation. But
Canada entered the current crisis
with inflation already essentially
at its 2-per-cent target.
Even though the impact of the
crisis will likely be generally dis-
inflationary in the short term,
there is a danger that a QE-in-
fused money supply will contrib-
ute to inflation significantly
overshooting the bank’s target
when the economy rebounds – a
rebound that many economists
still believe could be quick and
powerful when it comes, based
on the enforced nature of the
slowdown.
Mr. Dodge notes that the U.S.
Fed’s greatly expanded balance
sheet hasn’t proved to be the in-
flationary problem that many
had feared, even when the U.S.
economy returned to full capac-
ity and continued to grow
strongly. But he also wonders
whether the United States, by
virtue of having the world’s re-
serve currency, may be in an ex-
ceptional position in global mar-
kets to withstand the after-ef-
fects of QE.
“It’s not clear that all the rest
of us – other than maybe China –
can do that, without havingsome real repercussions,” he
cautions.
One of Mr. Dodge’s key con-
cerns is that the economic stim-
ulus being provided by the Bank
of Canada, at the same time as
the federalgovernment’s huge
aid package, will accelerate de-
mand in the Canadian economy- at a time when the COVID-19
economic shock, by its nature,
has shut down the supply of
goods and services.
“You’ve cranked up domestic
demand without supply to meet
it – so you’re [faced with] meet-
ing it with foreign supply. That
requires foreign capital inflows,”
he says.
“All of a sudden, you’re then
beginning to run into balance-of-
payments issues.”
A key, he says, will be restor-
ing Canadian production of
goods and services relatively
quickly once the enforced shut-
downs are rolled back, to meet
all the supply that fiscal and
monetary policy will fuel.
“If we can snap back reason-
ably quickly, and have goods and
services available, and get people
back to work, then we’ll work
our way though it.”
“If we can’t do that, then it
ends up being a really big prob-
lem.”
Parkinson:BoCfocusedonliquidity,butinflation
riskswillrequiredeftmanagement,Dodgesays
FROM B1