Overdue debt climbing for GTA businesses as pandemic stretches on

Though government subsidies have kept business bankruptcies at bay, the level of delinquent debt carried by Toronto and GTA businesses has been steadily rising since the beginning of the pandemic, foreshadowing a difficult 2022 for many hard-hit firms.

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

Cross isn’t surprised to see delinquent debt rising. The Bank of Canada has already noted a rise in “zombie businesses,” he said, defined as businesses unable to even meet their interest payments.

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

On Tuesday, the Toronto Region Board of Trade published new data from Equifax tracking what are known as “negative occurrences,” such as businesses bouncing checks, being sued, becoming the target of collections agencies, or suffering a judgment against them in court. As with business bankruptcy, the number of businesses with at least one negative occurrence has declined over the pandemic, likely buoyed by government subsidies and loans.

However, Equifax data on delinquent loans shows that businesses are having a harder time paying their debts than before the pandemic, with the average amount past due by more than three months increasing steadily since the onset of COVID-19.

The average and total balance of these outstanding loans has been rising since the beginning of the pandemic, with the average balance per business with outstanding debt growing more than 30 per cent across the Guelph, Hamilton, Oshawa, Toronto, and Kitchener-Cambridge-Waterloo census metropolitan areas. In Toronto, that average balance has risen by almost 50 per cent, 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 taken on significant debt from other sources as well, such as government loans, which aren’t due for another year. A recent estimate by the Canadian Federation for Independent Business put the average debt load per small businesses at $ 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 in-person consumer spending data, show that the Toronto region was on a path to recovery before Omicron took hold.

Data published Tuesday by the board’s recovery tracker shows that up until 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 also saw an increased volume of workers and visitors, but Omicron put a damper on that.

It’s not a surprise that negative occurrences are down, said Burchfield, but she is concerned about the growing amount of delinquent debt held by businesses – especially in Toronto, where costs are higher and many businesses have been impacted by the lack of downtown office workers. Toronto has continued to lag behind other Ontario cities when it comes to recovery from COVID-19.

Delinquent debt does not tell the whole story, however. These businesses likely have even more debt that just isn’t due yet, said Burchfield, including from government programs – and unlike the usual debt taken on by businesses, this isn’t sustainable: “Businesses typically take on debt to grow, not to just keep their doors open. ”

The board of trade is advocating for longer-term thinking when it comes to government support, said Burchfield, including potential debt relief, tax policies, and targeted subsidies.

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

Cross is not surprised to see that business delinquent debt is higher in Toronto.

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

Pierre Cléroux, vice-president of research and chief economist at BDC, said though the Canadian economy has generally recovered in terms of jobs and GDP, certain sectors are having more difficulty, especially those in downtown areas.

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

Clark Lonergan, partner and senior vice-president of financial advisory services at BDO, said it will take more than a few months without restrictions for many businesses to be able to pay back their debt and return to profitability. Whether there will be a significant rise 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 businesses’ trajectories before the pandemic.

After all, the pandemic sped up certain shifts that were already underway, he said, such as the rise in e-commerce.

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

Cross, on the other hand, does not expect worker traffic to go back to pre-pandemic numbers in Toronto’s downtown core. Instead, he thinks there will be a fundamental shift in the business makeup of the district.

“It’s hard to be optimistic about the outlook for a lot of these firms,” ​​he said.

Like many experts and industry representatives, Cross expects a rise in bankruptcies and other forms of business closure in the coming months.

“At some point, when government support programs expire, that (debt) will start to be translated into bankruptcies and exits.”

Ted Mallett, director of economic forecasting at the Conference Board of Canada, noted that the continued low bankruptcy numbers are in part hiding the significant debt many businesses 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 fact that these businesses rely on seasonal highs has made COVID-19 even more challenging for them, he said, and the upcoming summer will be crucial to their survival.

“They’ve got one more shot,” he said. “Hopefully, things 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 is providing advance access to data included in their online Recovery Tracker.