Canadian Tire’s objectives when managing capital are:
- Ensuring sufficient liquidity to support its financial obligations and execute its operating and strategic plans;
- Maintaining healthy liquidity reserves and access to capital; and
- Minimizing the after-tax cost of capital while taking into consideration current and future industry, market and economic risks and conditions
The definition of capital varies from company to company, from industry to industry, and for different purposes.
The Company monitors its capital structure through measuring debt-to-earnings ratios and ensures its ability to service debt and meet other fixed obligations by tracking its interest and other coverage ratios, and forecasting cash flows.
The Company manages its capital structure over the long term to optimize the balance among capital efficiency, financial flexibility, and risk mitigation. Management calculates its ratios to approximate the methodology of debt-rating agencies and other market participants on a current and prospective basis. To assess its effectiveness in managing capital, Management monitors these ratios against targeted ranges.
In order to maintain or adjust the capital structure, the Company has the flexibility to adjust the amount of dividends paid to shareholders, repurchase shares pursuant to a normal course issuer bid (“NCIB”) program, repay debt, issue new debt and equity at Canadian Tire Corporation and CT REIT, issue new debt with different characteristics to replace existing debt, engage in additional sale and leaseback transactions of real estate properties, and increase or decrease the amount of sales of co-ownership interests in loans receivable to GCCT.
The Company has a policy in place to manage capital. As part of the overall management of capital, Management and the Audit Committee of the Board of Directors review the Company’s compliance with, and performance against, the policy. In addition, periodic review of the policy is performed to ensure consistency with the risk tolerances.
Financial covenants of the existing debt agreements are reviewed by Management on an ongoing basis to monitor compliance with the agreements. The key financial covenant for Canadian Tire Corporation is a requirement for the retail segment to maintain, at all times, a ratio of total indebtedness to total capitalization equal to or lower than a specified maximum ratio (as defined in the applicable bank credit facility agreements, but which excludes consideration of CTFS Holdings, CT REIT, Franchise Trust, and their respective subsidiaries).
The Company was in compliance with this key covenant as at December 31, 2016 and January 2, 2016. Under the covenant, the Company currently has sufficient flexibility to fund business growth.
CT REIT is required to comply with financial covenants established under its Trust Indenture, Bank Credit Agreement, and the Declaration of Trust and was in compliance with the key covenants as at December 31, 2016 and 2015.
In addition, the Company is required to comply with regulatory requirements for capital associated with the operations of CTB, a federally chartered bank, and other regulatory requirements that have an impact on its business operations and certain financial covenants established under its unsecured revolving credit facility.
Canadian Tire Bank's Regulatory Environment
The Bank manages its capital under guidelines established by the Office of the Superintendent of Financial Institutions of Canada (“OSFI”). OSFI’s regulatory capital guidelines are based on the international Basel Committee on Banking Supervision framework entitled Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems (“Basel III”), which came into effect in Canada on January 1, 2013, and measures capital in relation to credit, market, and operational risks. The Bank has various capital policies and procedures and controls, including an Internal Capital Adequacy Assessment Process (“ICAAP”), which it utilizes to achieve its goals and objectives.
The Bank’s objectives include:
- providing sufficient capital to maintain the confidence of investors and depositors; and
- being an appropriately capitalized institution, as measured internally, defined by regulatory authorities and compared with the Bank’s peers.
OSFI’s regulatory capital guidelines under Basel III allow for two tiers of capital. As at December 31, 2016, the Bank’s fiscal year end, Common Equity Tier 1 (“CET1”) capital includes common shares, retained earnings, and Accumulated Other Comprehensive Income (“AOCI”), less regulatory adjustments including items risk-weighted at 0 percent which are deducted from capital. The Bank currently does not hold any additional Tier 1 or Tier 2 capital instruments. Therefore, the Bank’s CET1 is equal to its Tier 1 and total regulatory capital. Risk-weighted assets (“RWA”) include a credit risk component for all on-balance-sheet assets weighted for the risk inherent in each type of asset, off-balance sheet financial instruments, an operational risk component based on a percentage of average risk-weighted revenues, and a market-risk component for assets held for trade. For the purposes of calculating RWA, securitization transactions are considered off-balance sheet transactions and, therefore, securitization assets are not included in the RWA calculation. Assets are classified as held for trade when they are held with trading intent.
The Leverage Ratio prescribed by OSFI’s Leverage Requirements Guideline provides an overall measure of the adequacy of an institution’s capital and is defined as the all-in Tier 1 capital divided by the leverage ratio exposure. The leverage ratio exposure is the sum of on-balance sheet exposures, derivative exposures, securities financing transaction exposures, and off-balance sheet items.
As at December 31, 2016 and 2015, the Bank complied with all regulatory capital guidelines established by OSFI, its internal targets as determined by its ICAAP, and the financial covenants of its credit facility.