Why the drop in business insolvencies isn’t good news

Businesses are taking a beating during Covid-19, yet insolvencies have dropped in many sectors. The reason for this, however, doesn’t indicate financial resiliency, says a report from TD Economics.

The report analyzed StatsCan data to create a vulnerability index for businesses. The most vulnerable businesses tended to be smaller and in the sectors of arts, entertainment and recreation, as well as accommodation and food services.

However, despite businesses being under strain, the number of those filing for restructuring or bankruptcy hasn’t exhibited a significant uptick.

“In fact, fillings declined precipitously in the early months of the pandemic, and while they have begun to rise in recent months, they paradoxically remain below last year’s levels when the economy was healthy and steadily expanding,” the TD report said.

While many factors are at play, the drop likely reflects “more patient creditors as well as extensive government supports,” the report said.

For example, the report noted that countries such as Sweden and Iceland, which had no stringent lockdowns early on in the pandemic — and less generous government support programs as a result — reported higher business bankruptcy filings year over year.

Also, businesses in the accommodation and food, and construction sectors had particularly high uptakes of the Canada Emergency Business Account (CEBA), which could explain the drop in insolvencies in these sectors.

Further, expanded EI benefits and eligibility for CEBA loans for self-employed workers could have helped to lower insolvencies.

The TD report also noted that some businesses aren’t captured by insolvency data — such as small businesses that simply wind down operations.

Overall, lower insolvency rates offer more reason for concern than optimism, TD said, as they likely capture reliance on borrowed funds, as well as higher business exits.

The pandemic’s true effect on businesses will be evident only when “temporary financial supports recede along with the pandemic,” the report said.

After the crisis ends, new businesses will be required to fill the resulting void.

Finding a silver lining, the report said, “Elevated personal savings and lower commercial rents should help new businesses to start on a solid footing.”

For the full analysis on the health of Canadian businesses, read the report from TD Economics.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.