Ontario business bankruptcies up 39 per cent

There has been a 39 per cent increase in the number of corporate bankruptcies in Ontario, according to the latest numbers from the Office of the Superintendent of Bankruptcy Canada. 

The numbers show 64 businesses filed for bankruptcy in November 2018, up from 46 in the same month the previous year. 

Consumer debt proposals — a formal agreement with creditors to settle debts under special terms — also increased from 24 in November 2017 to 35 in November 2018. 

Insolvency numbers are an imperfect measure of the economy, experts told CBC Kitchener-Waterloo, but they do show a snapshot of how businesses surviving on thin margins are affected by changes in national and provincial policy.

"In a lot of cases there are businesses that are closed down that aren't bankrupt. So it's difficult to look at those bankruptcy numbers and make a really strong determination on the economy based on the bankruptcy filings alone," said Art Sinclair, from the Greater Kitchener Waterloo Chamber of Commerce. 

Businesses failing stress test

Madhu Kalimipalli, professor of finance at Wilfrid Laurier University's Lazaridis School of Businesss and Economics, agreed with Sinclair but said nevertheless, the numbers point toward a possible trend. 

"The higher cost of borrowing could be part of the story here, for these marginal firms," said Kalimipalli. 

"A lot of these businesses ... are the ones who had a tough time servicing their bank loans, typically," he said. "There's a lot of stress-testing happening post-Doug [Ford], and also post-Bank of Canada rules now, about mortgage loans and so on."

The Bank of Canada kept the interest rate steady on Wednesday, at 1.75 per cent, but had increased the key rate five times since the summer of 2017 — which means higher borrowing costs for corporations.  

Kalimipalli told The Morning Edition host Craig Norris on Wednesday other factors that could have contributed to the bankruptcy numbers include the real estate slowdown in the GTA, "which is like the bellwether market for the rest of Ontario," and the new NAFTA agreement between Canada, the United States and Mexico (CUSMA) — which still has yet to be signed.

"The NAFTA uncertainty took a big toll on the corporate invest sentiment, and hence corporate investment," said Kalimipalli. 

The higher minimum wage would have also had a negative effect, he said. 

Spillover to suppliers, customers — even competitors

Spillover effect may also have contributed to the increase in bankruptcy filings, said Kalimipalli's colleague Jin Wang, an associate professor at the Lazaridis School of Business. 

It's a well-documented economic phenomenon, said Wang: if one company goes bankrupt, it normally also affects related companies — suppliers, customers and even competitors. 

"There might be some economy-wide shock to all companies similar," said Wang, but impact could also spread to seemingly unrelated companies. 

"Those firms usually use certain assets as collateral when they borrow money. So when they go bankrupt that sends a signal to the market that the value of the collateral is actually not as high as people thought,"

Wang said this affects other companies using similar assets as collateral.

CUSMA approval should bring confidence

Since the Office of the Superintendent of Bankruptcy Canada doesn't break the numbers down into sector for its provincial data sets, Wang said it's not clear how much spillover happened, but it may have created a positive feedback loop in some industries. 

Once CUSMA, the new NAFTA agreement, is approved by U.S. Congress in March that should provide more certainty for business and may mean the bankruptcies are a short-lived trend, said Kalimipalli.

But provincial policies and attempts to reduce the deficit could turn the "blip" into a longer term trend, he said.  

"The Conservative government is trying pull back investments, we see that happening across the board."

Reduced government spending means companies that rely on government contracts will have less work and could go out of business, Kalimipalli said, and a switch to privatization takes time. 

"It will take at least two to three years to see that happen," he said. 

On Wednesday the Bank of Canada also downgraded its expectations for the economy this year. The bank is now forecasting just 1.7 per cent growth, whereas three months ago, it was expecting 2.1 per cent growth.