The number of corporate failures fell sharply in Canada as the COVID-19 crisis took hold, but insolvencies are expected to jump as multibillion-dollar government support programs lapse in the coming months.
In recent weeks, retailers such as Aldo Group Inc. and Reitmans Canada Ltd., as well as oil producer Delphi Energy Corp., filed for protection from creditors after running out of options to deal with the plunge in revenues amid the pandemic. Some businesses had been struggling before the coronavirus contagion, and the crisis proved to be the final straw.
But more broadly, new government numbers show that corporate bankruptcy and court-protected restructuring proposals actually fell in April, compared with both the previous month and the year-earlier figure. It was the second straight monthly drop.
“The overall message is we are in a period when everybody is trying to get through the short term, and we’re seeing that with government and lenders supporting businesses,” said Sharon Hamilton, a partner in Ernst & Young LLP’s restructuring practice. “Unfortunately I don’t think that can go on forever, so I think we will see a lot of insolvencies later in the year.”
In April, 164 businesses made insolvency filings, according to Industry Canada. That was down 35 per cent from March, and down by more than half from April, 2019. This was despite heavy financial pressure on businesses across the Canadian economy as companies dealt with the effects of mass restrictions on movement to try to minimize infections.
Since then, Ottawa has announced several financial support packages for business with the aim of staving off bankruptcy until the economy recovers. They include the Canada Emergency Wage Subsidy, which gives eligible employers funds to cover 75 per cent of salary costs up to a maximum benefit of $847 a week per employee. There are also a series of programs to provide rent support as well as credit to large and small businesses whose traditional lenders may have stopped extending loans.
Joseph Reynaud, a partner in the Montreal office of Stikeman Elliott LLP who does restructuring work across the country, says banks have also been relatively patient with struggling businesses.
“Lenders are saying, ‘You know you’re in default, but I won’t exercise my rights for the time being,’” Mr. Reynaud said. “As a result of the pandemic, there’s been a general state of forbearance on the economy during the months of March, April and May. I just don’t know how long it will last for.”
Steven Graff, co-leader of the financial services group at the law firm Aird & Berlis LLP in Toronto, agrees that lenders have sought to “demonstrate a real level of tolerance,” but warns that can’t continue indefinitely.
“All these things come to roost and there’s no freebies. So at some point there’s going to be a reckoning,” Mr. Graff said, noting that banks will only defer payments or extend amortization periods for so long. “Time is not on the borrower’s side for much longer.”
Cannabis companies, oil and gas producers and service providers as well as retailers were all in a difficult position before COVID-19 and have accounted for the bulk of early insolvency filings.
In the oil patch, companies had dealt with weak commodity prices and shrinking access to capital for about half a decade before March, when the destruction of fuel demand and a price war between Saudi Arabia and Russia combined to crush oil prices. Some insolvency cases have been before the courts for well over a year.
Now, lenders have been reluctant to push energy companies into receivership in a market that currently has few buyers for assets. Another factor is the Supreme Court’s 2019 Redwater decision, which mandated that any money left over in an insolvency must first go to environmental cleanup obligations.
Restructuring lawyers have yet to see a deluge of filings in other areas yet but have been consulting widely with many companies about their options. Some businesses that could be at risk include those related to aviation and autos.
Hospitality and tourism are also at high risk of business failure as customers stay away from large groups in enclosed spaces or patrons must be kept two metres apart to adhere to physical-distancing guidelines, Ms. Hamilton said.
Construction and real estate may also suffer. “With all of the decline in GDP that we’re seeing this year, that may have a spillover effect into real estate and affect real estate prices," she said. "But I do think every business has to look at the way they operate ... there’s going to be challenges and adjustments for everyone,” she said.
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