The financial distress of companies accelerated in 2023. Worse, the sharp increase in bankruptcies measured last year is expected to continue this year, in line with the full impact of monetary tightening that will be felt on economic activity. So, record bankruptcies on the radar… which must however be put into perspective.
First, statistics taken from data from the Office of the Superintendent of Bankruptcy (OSB). Last year, the number of business insolvencies in Canada jumped 41.4% from the previous year, recording its largest increase in 36 years of statistics kept by the OSB. This involves more than 4,800 companies, the highest annual volume in 13 years. “Corporate insolvency filings in the fourth quarter of 2023 increased by 34.7% compared to the previous quarter and more than doubled (51.6%) compared to 2022 in the same quarter,” he said. added the Canadian Association of Insolvency and Restructuring Professionals (CAIRP).
Note: bankruptcies accounted for 77% of insolvency cases in the business segment. The opposite occurred among consumers, with proposals to creditors taking up 78% of files. According to André Bolduc, Licensed Insolvency Trustee and Chair of the CAIRP Board of Directors, debt accumulated by Canadian businesses during pandemic lockdowns, including Canadian Emergency Business Account (CEBA) loans ), weighs heavily on many of them. And in some cases, it compromises their viability or forces them to turn to debt restructuring options.
However, everything must be put in perspective that the federal government estimates that more than 80% of businesses have repaid their loans under the CEBA, writes The Canadian Press.
A widespread phenomenon
The phenomenon is fully verified within the G7, where business bankruptcies were on average up 23% last year and 47% since 2021. The analysis firm Oxford Economics notes that the level of bankruptcies is higher higher than what its forecast model had estimated, particularly for Canada and the United Kingdom. In the latter two economies, corporate balance sheets would have contained a greater proportion of floating rate debt. Where fixed-rate borrowing was more prevalent, such as in the United States, the level of bankruptcies in 2023 is below or near that of 2019.
But everything must be put in the context of an abnormally low level of bankruptcy in 2020-2021, a pivotal period of the pandemic during which companies benefited from direct aid from governments, from a policy of deferral of payments applied by financial institutions and a low interest rate environment. Overall, over the 2020-2023 period, the volume of bankruptcies remains well below projected levels for France, Italy, Germany and the United States, in particular. “The rate of business closures, although high, is not high on a historical basis for many of these economies,” Oxford points out.
In addition, many bankruptcy cases involve small businesses with few or no employees, and are concentrated in a handful of sectors such as commerce, construction and restaurants. Which, in some ways, can be “reassuring” from a more macroeconomic perspective of the labor market and financial stability, notes the analysis firm.
The reality of zombie companies
According to the analysis firm, the recent rebound within the G7 places the average insolvencies at 13% below the level modeled for 2023. This suggests that 2024 should be another year of strong growth in bankruptcies, at pace with the full impact of monetary tightening on economic activity, which seems to be confirmed by the first data this year. At least for Canada. “For the United Kingdom and Canada, bankruptcies are already at their modeled level,” specifies Oxford, while we observe a large gap – 20 to 30% – for Germany, Italy, France and the United States.
These figures hide the obvious: the proliferation of zombie companies during the period of low interest rates pushed up bankruptcy statistics.
“Generally, the share of financially vulnerable companies in advanced economies has increased during the post-pandemic period. » Some studies indicate that the share of zombie firms in around twenty economies would explain around a quarter of the variation in the level of bankruptcies in 2023. “A high number of these moribund companies, artificially kept alive in a context of low bankruptcy rate “interest, will not be able to survive in an environment of high rates or a return to a certain normality,” writes Oxford.
For Canada, recent studies show that this share could potentially be the highest in the world. In an International Monetary Fund census, Canada ranked sixth in the world for the period 2000-2021 in the percentage of zombie companies in its economy. We are talking about a weight of 12% over the period considered.