Canadian CEOs are turning away from spending on expansion, choosing to pile up cash in anticipation of harder timestemmuz can arsiray/Getty Images/iStockphoto
Canadian executives are sitting on cash and bracing themselves for higher financing costs, worried that turmoil in Europe will spill into North America in the months ahead.
The most recent C-Suite survey of senior corporate managers shows executives are relatively optimistic about the economies of Canada and the United States, but the clouds looming overseas are making them leery of unbridled expansion.
Almost half of executives surveyed said their companies are holding on to cash reserves, rather than reinvesting or distributing them. At the same time, 47 per cent of those surveyed expect it to be harder for their firms to raise equity over the coming year, and 34 per cent say it will likely be tougher to issue debt.
The memory of the last recession, and the rapid deterioration in markets that accompanied it, is spooking some executives, said Don Charter, chief executive officer of Corsa Coal Corp. in Toronto.
"We all lived through 2008-2009, when there was a huge credit crunch, and we see it coming back at us in Europe," Mr. Charter said.
While the past couple of years have seen "good liquidity at very good rates" when it comes to borrowing, he said, there are now concerns things could deteriorate if the European situation worsens and infects North America. It has not happened yet and banks are still lending freely, he added, but "it could fall off a cliff quickly."
At the same time, Mr. Charter said, equity markets are "beat up" right now, so it is difficult for companies to consider issuing stock. As a consequence, many firms are sitting on their cash, just in case.
Matt Campbell, CEO of Rocky Mountain Dealerships Inc., a Calgary-based construction and agriculture equipment dealer group, said that for Western-based businesses at least, debt financing is cheap and relatively easy to attain at the moment. His company recently took advantage of low rates to repurchase $38-million in convertible debentures and replace them with lower-interest debt.
But that could change quickly, and it is no surprise that many executives want to hoard cash just in case things turn down, Mr. Campbell said. After the crisis of 2008-2009, "that's just a natural reaction."
Still, the vast majority of executives feel the Canadian economy will expand in the next year, with more than 80 per cent projecting moderate growth – roughly the same proportion as in February.
And optimism about the U.S. economy has improved, with 71 per cent predicting moderate growth, up from two-thirds in February.
The main threats now come from elsewhere. Almost 90 per cent of executives say European political instability has them very or somewhat concerned. A slowing Chinese economy has also raised the concerns of almost 70 per cent of top decision-makers. And, particularly in Western Canada, labour shortages rank high as a problem that could stunt growth.
Scott Edmonds, CEO of Webtech Wireless Inc., a Vancouver company that makes vehicle tracking systems for commercial customers, said the relative strength of the North American economy, coupled with worries overseas, means many companies are focusing their efforts closer to home.
"We are certainly decreasing our focus on international opportunities," Mr. Edmonds said. "The expansionism imperative is stronger when times are good."
The C-Suite survey found that almost two-thirds of executives feel that fear of the unknown is keeping Canadian companies from expanding or selling in offshore markets.
While Webtech is not hoarding cash, Mr. Edmonds said, "we are very focused on profitability and increasing margins and making more from less." With the world's economies so interconnected, Europe's problems will likely have some impact in Canada and companies need to be prepared, he said. "These are big economies in Europe that are in trouble. Something's got to give."
The economic uncertainty does generate some significant advantages for companies on the hunt for acquisitions, said Andrew Snelgrove, chief financial officer of Halifax-based investment company Clarke Inc.
"It could offer some great opportunities right now," he said. "There are obviously things … that are being sold at a discount." And with interest rates so low, it is easier to generate returns above the cost of borrowing, he added.
Like many other companies, Clarke is taking advantage of low rates to cut its borrowing costs. It recently redeemed an issue of convertible debentures, financing the payments at a significantly lower rate.
Overall, Mr. Snelgrove said, worries about Europe will clearly have a ripple effect on Canada, but the economic gains showing up in the United States are more important. "We're more in bed with the U.S. than Europe," he said. "And they've weathered the storm for now and are making some progress."
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AN UNEASINESS ABOUT EXECUTIVE PAY
They are hardly card-carrying members of the Occupy movement, but many Canadian executives are concerned about the possible detrimental effects of high levels of executive pay.
One-third of those who responded to the C-Suite survey said Canadian CEOs are paid more than their performance is worth. And more than half said the disparity between CEO pay and that of the average worker is having a negative impact on society.
"I think in some cases [executive compensation] is probably egregious," said Matt Campbell, CEO of Rocky Mountain Dealerships Inc. in Calgary.
Still, this is not an issue to be dealt with through regulation, said Scott Edmonds, CEO of Webtech Wireless Inc. in Vancouver. The right route is to have shareholders put pressure on companies to bring pay in line – something that is happening more often at Canadian firms, he said.
"Are we at risk of returning to a feudal state? I don't think that is the case, but in Canada the gap will continue to grow because we lag the United States on trends in business," Mr. Edmonds said. "[But] I don't think it calls for interference from government or regulators."