Overdue debt climbing for GTA companies as pandemic stretches on

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Although government subsidies have kept corporate bankruptcies at bay, Toronto and GTA corporate delinquency levels have risen steadily since the pandemic began, heralding a difficult 2022 for many hard-hit businesses.

“This is clearly a sign that companies are under financial stress,” said Philip Cross, senior economist at the Macdonald-Laurier Institute.

Cross isn’t surprised to see overdue debt rising. The Bank of Canada has already noticed a rise in “zombie companies,” defined as companies that are unable even to make their interest payments.

“They’re being kept afloat by government loans… But eventually they’re going to phase out,” he said.

On Tuesday, the Toronto Region Board of Trade released new data from Equifax tracking so-called “negative events” such as how companies that bounce checks are sued, targeted by collection agencies, or face judgment against them in court. As with corporate bankruptcies, the number of companies with at least one adverse event has declined during the pandemic, likely helped by government subsidies and loans.

However, Equifax data on delinquent loans shows that businesses are finding it harder to pay their debt than before the pandemic, with the average amount overdue more than three months steadily increasing since the outbreak of COVID-19.

The average and total balance of those outstanding loans has risen since the pandemic began, with the average balance per company with outstanding debt growing more than 30 percent in Guelph, Hamilton, Oshawa, Toronto and Kitchener-Cambridge-Waterloo, according to the census metro areas. In Toronto, that average balance has increased nearly 50 percent, from $22,871 in January 2020 to $33,598 in November 2021.

But that’s just debt that’s three or months past its due date. Businesses have also taken on significant debt from other sources, such as government loans that have another year to go. A recent estimate by the Canadian Federation for Independent Business put the average debt burden per small business at $170,000.

Marcy Burchfield, vice president of the Economic Blueprint Institute, an initiative created by the Toronto Region Board of Trade, said new data on worker and visitor traffic combined with personal data on consumer spending showed the Toronto region was on the right track to recover before Omicron took root.

Data released Tuesday by the board’s Recovery Tracker shows that through early December, personal consumer spending was close to pre-pandemic numbers in most parts of Toronto except metropolitan area. The city also saw an increase in the flow of workers and visitors, but Omicron put a damper on that.

It’s no surprise that negative incidents have decreased, Burchfield said, but she’s concerned about the growing amount of delinquent debt being held by businesses — particularly in Toronto, where costs are higher and many businesses are suffering from a shortage of office workers in Toronto downtown are affected. Toronto has continued to lag behind other Ontario cities in its recovery from COVID-19.

Past due debt doesn’t tell the whole story, however. Those companies likely have more debt that’s not yet due, Burchfield said, including from government programs — and unlike the usual debt that companies take on, this is unsustainable: “Companies take on debt to grow, don’t to grow just keep their doors open.”

The chamber of commerce advocates longer-term thinking when it comes to government support, Burchfield said, including possible debt forgiveness, tax policies and targeted subsidies.

However, she is hopeful about Monday’s easing of restrictions in Ontario: “I think the timing is right.”

Cross isn’t surprised to see that Toronto corporations’ delinquent debts are higher.

“We know that a lot of the businesses that get into trouble are going to be these small firms in the downtown core that serve other businesses, or even the customers that work in these big towers,” he said.

Pierre Cléroux, vice president for research and chief economist at BDC, said while Canada’s economy has generally recovered in terms of jobs and GDP, certain sectors are struggling more, particularly those in inner cities.

“It’s really a two-speed recovery,” Cléroux said, adding that these sectors will likely continue to need targeted support in the coming months.

Clark Lonergan, partner and senior vice president of financial advisory services at BDO, said it will be more than a couple of months with no restrictions before many companies can pay down debt and return to profitability. Whether there is a significant spike in closures or bankruptcies will depend largely on how quickly government support dries up, he said.

Lonergan said the next form of government support, in whatever form, should be more selective, focusing on specific sectors, but also taking into account how companies were performing before the pandemic.

Finally, the pandemic has accelerated certain changes already underway, such as the rise of e-commerce.

However, Cléroux is optimistic that despite the shift towards remote and hybrid work, businesses in downtown Toronto will see a slow but steady return of their customers.

Cross, on the other hand, doesn’t expect worker traffic in downtown Toronto to return to pre-pandemic numbers. Instead, he believes the district’s business structure will fundamentally change.

“It’s hard to be optimistic about the prospects for many of these companies,” he said.

Like many experts and industry representatives, Cross expects bankruptcies and other forms of business closures to increase in the coming months.

“Eventually, when government aid programs expire, that (guilt) will turn into bankruptcies and exits.”

Ted Mallett, director of economic forecasts at the Conference Board of Canada, noted that the persistently low bankruptcy numbers partly hide the significant debt that many companies have taken on during the pandemic.

The concentration of companies in hard-hit sectors like groceries and entertainment likely explains why Toronto’s debt levels are higher, Mallett said.

The fact that these companies rely on seasonal highs has made COVID-19 even harder for them, he said, and the upcoming summer will be critical to their survival.

“You still have a chance,” he said. “Hopefully it will be much better.”

This is the second article in a series looking at Toronto’s economic recovery from the pandemic lockdown. The series is produced in partnership with the Toronto Board of Trade, which offers early access to data contained in its online recovery tracker.

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