Economic experts warn that focus on bridging assistance risks expanding corporate debt
Over the past few months, Canadian companies have rushed into bond markets at breakneck pace, causing the debt-to-equity ratio of Canadian private non-financial corporations to balloon to 212% in the first quarter.
That number could spell trouble ahead for the country’s economic recovery, particularly given the federal government’s emphasis on helping companies ride out the coronavirus crisis though loans rather than handouts.
According to a report by Reuters, Ottawa’s record financial support of $300 billion, equivalent to 15% of GDP, includes $85 billion of deferred tax payments and $81 billion of loans to small and medium-sized businesses. Those loans will have to be serviced and repaid eventually, which poses a dilemma for many corporations.
“Many firms with already high debt loads from prior to the spread of COVID-19 may not seek assistance structured as debt if their debt service costs are already too high,” RBC economist Colin Guldimann told the news outlet. “That means those firms may fail rather than bridging the gap with a loan that will ultimately lead them to close.”
Through the Canada Emergency Business Account, Canadian small businesses may get an emergency loan, with 25% of the amount being forgiven under certain conditions. In comparison, loans extended to American small businesses under the U.S. Paycheck Protection Program may turn into grants under certain conditions.
Ottawa has also decreased the budgeted amount for the Canada Emergency Wage Subsidy (CEWS) program, which was enacted as a measure to curb coronavirus-induced job losses.
The Canadian Federation of Independent Business (CFIB) has continually highlighted a desperate need for additional support among many of Canadian entrepreneurs. In one survey, it found that businesses think raising the 25% forgivable portion of CEBA should be the highest priority in improving federal relief imports.
Credit programs have also been introduced for medium-sized businesses, though the debt is fully repayable with interest charged at market rates. While market pricing could reduce government costs as well as economic distortions – businesses taking on debt they don’t need, for example – the ensuing overhang of debt servicing could be a drag on economic growth.
Serge Dupont, a senior adviser at law firm Bennett Jones, noted that some firms will emerge from the crisis with more debt, which will make it difficult for them to borrow to invest.
“That debt, it has to be repaid and it’s going to have to be repaid at a time when the economy is still not firing on all cylinders,” Dupont told Reuters.
