Overdue debt rises for GTA businesses as pandemic drags on

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Although government subsidies have prevented business bankruptcies, the level of overdue debt for Toronto and GTA businesses has steadily increased since the start of the pandemic, foreshadowing a difficult 2022 for many businesses. hard hit.

“It’s a clear sign that companies are in financial trouble,” said Philip Cross, senior economist at the Macdonald-Laurier Institute.

Cross is not surprised to see outstanding debts increasing. The Bank of Canada has already noted an increase in “zombie companies”, he said, defined as companies unable to even pay their interest.

“They’re kept afloat by government loans… But at some point they’re going to expire,” he said.

On Tuesday, the Toronto Region Board of Trade released new data from Equifax on so-called “negative events,” such as businesses that bounce checks, get sued, become targets of recovery or undergo a judgment against them in court. As with business bankruptcies, the number of businesses with at least one negative event has declined during the pandemic, likely due to government grants and loans.

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

The average and total balance of these outstanding loans has been increasing since the start of the pandemic, with the average balance per business with outstanding debt increasing by more than 30% in the Guelph, Hamilton, Oshawa, Toronto and Kitchener-Cambridge- Waterloo. census metropolitan areas. In Toronto, this average balance increased by nearly 50%, from $22,871 in January 2020 to $33,598 in November 2021.

But this is only a debt whose due date is overdue by three months or more. Companies have also taken on significant debt from other sources, such as government loans, which are not due for a year. According to a recent estimate by the Canadian Federation of Independent Business, the average small business debt is $170,000.

Marcy Burchfield, vice-president of the Economic Blueprint Institute, an initiative launched by the Toronto Region Board of Trade, said new data on worker and visitor traffic, combined with consumer spending data in person show that the Toronto area was well on its way to recovery before Omicron took over.

Data released Tuesday by the council’s recovery tracker shows that through early December, in-person consumer spending was close to pre-pandemic numbers in most of Toronto, with the exception of the metropolitan center. The city has also seen an increased volume of workers and visitors, but Omicron has put a damper on that.

It’s no surprise that negative events are down, Burchfield said, but she’s concerned about the growing number of delinquent debt held by businesses — especially in Toronto, where costs are higher and many businesses have been affected by the lack of office workers downtown. Toronto continued to lag behind other Ontario cities in COVID-19 recovery.

However, overdue debt does not tell the whole story. These companies likely have even more debt that just isn’t due yet, Burchfield said, including government programs — and unlike typical corporate debt, it’s not sustainable: “Companies generally indebted to grow, not just to keep their doors open.

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

However, she remains hopeful about the easing of restrictions on Monday in Ontario: “I think the time has come.

Cross isn’t surprised that corporate overdue debt is higher in Toronto.

“We know a lot of the struggling businesses will be these small downtown businesses that service other businesses, or even the customers that are going to work in these tall towers,” he said.

Pierre Cléroux, vice-president of research and chief economist at BDC, said that while the Canadian economy has generally recovered in terms of jobs and GDP, certain sectors are having more difficulty, particularly those in the centers -cities.

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

Clark Lonergan, partner and senior vice president of financial advisory services at BDO, said it will take more than a few unrestricted months for many businesses to be able to pay down debt and return to profitability. Whether there is a significant increase in closures or bankruptcies largely depends on how quickly government support dries up, he said.

Lonergan said the next form of government support, whatever form it takes, should be more selective, looking at specific sectors but also taking into account companies’ pre-pandemic trajectories.

After all, the pandemic accelerated some changes that were already underway, he said, such as the rise of e-commerce.

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

Cross, on the other hand, does not expect worker traffic to return to pre-pandemic numbers in downtown Toronto. Instead, he believes there will be a fundamental shift in the makeup of district affairs.

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

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

“At some point, when the government support programs expire, this (debt) will start showing up in bankruptcies and exits.”

Ted Mallett, director of economic forecasting at the Conference Board of Canada, noted that the persistently low number of bankruptcies partly hides the large debt that many companies have taken on during the pandemic.

The concentration of businesses in hard-hit sectors like food and entertainment likely explains why debt in Toronto is higher, Mallett said.

The reliance of these businesses on seasonal peaks has made COVID-19 even more difficult for them, he said, and the coming summer will be crucial for their survival.

“They still have a chance,” he said. “Hopefully things will go a lot better.”

This is the second article in a series on Toronto’s economic recovery from the pandemic lockdown. The series is produced in partnership with the Toronto Board of Trade, which provides early access to the data included in their Recovery Tracking.

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