EDC strikes deal with Canadian sureties to add construction bond market capacity

Export Development Canada’s (EDC) announcement last week that it will facilitate up to $1 billion in domestic surety credit in 2009 through an agreement with Canada’s surety industry adds “extra capacity” to the construction bonding market, industry sources say.

Export Development Canada

Export Development Canada’s (EDC) announcement last week that it will facilitate up to $1 billion in domestic surety credit in 2009 through an agreement with Canada’s surety industry adds “extra capacity” to the construction bonding market, industry sources say.

That is good news to the construction industry, but Canadian sureties don’t have a capacity problem, despite rumors to the contrary as the economy heads into a tailspin, says Steven Ness, president of the Surety Association of Canada.

“If someone wants to do a $10 million job, for example, there is lots of surety capacity available.”

In fact, bonds are available even for big projects — $200 million ones, for instance, he adds.

“There are professional surety reinsurance companies (providers of insurance for insurers) out there that will do this.”

The reason for EDC’s move to domestic soil, he says, was to give relief to financial institutions.

“Some of the other sectors of the financial industry are facing much greater challenges than the surety industry is,” Ness said.

Granted, having another surety competitor in the market is “never a bad thing,” he adds.

John Mattioli, senior vice-president, surety, of Aviva Insurance Company of Canada, says EDC can help on “non-typical construction risks” such as service providers, manufacturers and specialty contractors, including those in the field of environmental remediation.

When the construction industry hits tougher times in the next 18 months as current projects wind down and credit terms tighten, the addition of EDC will have a more significant impact, adds Mattioli. Aviva is Canada’s fourth-largest surety firm.

“Although I haven’t seen it yet, I suspect over the coming 24 months the reinsurance community directed at surety will tighten as credit terms continue to tighten so we look forward to EDC helping to fill that gap,” he says.

Mattioli says B.C. and Alberta will likely be affected by tightening credit before Ontario because of the non-speculative nature of the development community in Ontario — specifically Toronto and its highrise condo market.

“Out there (B.C. and Alberta) we’ve seen financing all ready taken off the table for this market because of worries of the overall economy,” Mattioli says.

But Canadian surety firms typically partner with foreign reinsurance companies, which “don’t differentiate a whole lot between provinces,” he adds.

EDC’s domestic powers were enacted into law in March for a 24-month period.

While EDC’s participation will be determined solely by market demand, its ability to facilitate up to $1 billion in new domestic surety credit could support up to $2 billion in contracts for Canadian companies. Surety bonds are usually written in the amount of 50 percent of a contract’s value.

Downsides to the announcement? Could too much capacity dilute underwriting standards?

“I don’t see that happening because surety companies will continue to be diligent because they have to be — particularly during the times we’re going into — or they will pay for their sins,” says Ness.

The EDC agreement was undertaken after changes to EDC’s legislation as a result of the federal budget.

“By providing reinsurance, EDC will complement the existing services of Canada’s surety industry to increase the amount of business they can provide to their customers,” says Pierre Gignac, senior vice-president, Insurance with EDC.

EDC will work through the existing financial services networks that serve the Canadian surety industry, either directly through surety companies or indirectly with brokers. EDC will also undertake its support for the surety industry using current market practices for pricing and documentation.

EDC’s approach to the domestic market will be based upon the same underwriting structure that supports its bonding business model for exports. It will only facilitate new and incremental commitments and it will only consider surety bonds and bank guarantees related to contract performance (including advance and progress payments, performance, labor and material, warranty and supplier payment guarantees).