The Business Development Bank of Canada (BDC) is one important part of the Canadian government's overall COVID-19 economic response plan. This bulletin will focus on the Bridge Financing Program offered by BDC Capital, which is the investment arm of the BDC. The Bridge Financing Program may serve to assist hesitant investors in closing funds or investments that have stalled as a result of the pandemic.
The Bridge Financing Program is a new convertible note matching program announced on April 9, 2020, and on April 14, 2020, the Canadian Venture Capital and Private Equity Association (CVCA) hosted a webinar presentation by Jérôme Nycz (Executive Vice President of BDC Capital) and Thomas Park (Vice President Operations & Strategy of BDC Capital) for CVCA members to discuss the note matching program in greater detail.
The presentation and BDC Capital's announcement provided the following information. At least some of the requirements set out here will likely evolve with time, at least until BDC Capital publishes official guidelines. In the meantime, those that are interested in applying are encouraged to reach out to their lead investor or the BDC directly.
The Bridge Financing Program will inject $150 million of additional capital into the VC ecosystem by matching a "financing round" in an "eligible company" that includes a "qualified investor" through the use of a convertible note investment by BDC. Each of these requirements is addressed below. According to the BDC, "the program is ideal for high potential companies who have investor syndicates that are willing to support them."
Size of financing round
The size of the financing round into which BDC will invest must be at least $250,000. BDC Capital will match the value of the financing round on a dollar-for-dollar basis, up to $3 million. It appears that even if the contemplated financing round is a priced equity round (likely preferred shares), BDC's investment will still take the form of a convertible note.
To be an eligible company, the company must have previously raised at least $500,000 in funding. In addition, BDC Capital's initial press release stated that the applicant must be specifically impacted by COVID-19, but no further details were provided during the CVCA presentation. It is possible that this will be an easy test to meet but it is not yet clear whether BDC Capital will require applicants to specifically show revenue decline or staff layoffs (or some other specific impact) as a direct result of the COVID-19 pandemic.
A qualified investor is defined as a fund that: 1) has at least $10 million under management; 2) includes third party limited partners; and 3) has at least 3 portfolio companies. This was the more formal definition provided during the CVCA presentation, but it was also suggested that any well-known institutional investor will qualify. For the full definition of a qualified investor, interested companies should look to forthcoming program details to be published by BDC Capital.
Convertible note terms
The convertible note will be made on market standard terms that are reasonable to both the investors and the applicant company. The maturity period will be 3 years with an interest rate equal to the BDC Floating Rate + 4%. The note will convert at BDC Capital's sole discretion upon a qualified financing (the threshold of which was not specified but will likely vary depending on the company's size and maturity) or liquidity event at a 20% discount (with no valuation cap). The note will be secured and will rank senior to any company shares or other indebtedness. Importantly, if the syndicate of investors in a convertible note round are investing on more investor-friendly terms, BDC Capital will likely invest on those terms.
The convertible note is a particularly useful instrument in this extraordinary context because it avoids protracted negotiations on valuation and does not contain many deal points that need to be negotiated. By using the convertible note, BDC Capital can deploy funds quickly and efficiently to the companies that need them.
BDC Capital's matching investment will still be subject to satisfactory due diligence. It is reasonable to expect that BDC Capital will rely to some degree on the diligence done by the syndicate, although this may vary from case to case. BDC Capital's investment will also be subject to approval by a BDC investment committee.
The Bridge Financing Program is designed specifically to assist startups that are impacted by COVID-19 and whose investors believe in its long term potential if it can survive the recession that will result from the COVID-19 pandemic.
For all other startups, BDC Capital remains available to help by remaining an active investor in the market through its existing programs, namely its Fund Investments and Co-Investment programs. Together, these programs are already $250 million in size.
Originally Published 21 April, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.