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B.C. still awaiting predicted wave of insolvencies

Government support has helped delay filings normally expected in an economic downturn
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COVID-19 has yet to spark a surge in formal insolvency filings, in part because of government support programs | Chung Chow

The first wave of COVID-19 brought closures and chaos. The second wave brings uneasiness and uncertainty as B.C.’s health crisis continues to grow.

Despite the disruption, neither wave caused the steep rise in insolvencies experts say will eventually come.

“We haven’t seen the surge in insolvencies that I think everyone was expecting. I think a lot of the stress and distress you’re seeing in the market has been with companies that were already not viable going into this crisis,” said Michelle Grant, a Vancouver-based partner with PwC’s deals practice and a licensed insolvency trustee. “The government subsidies have been doing a good job in propping up a lot of those companies.”

Grant was one of four panellists discussing insolvency at the Association for Corporate Growth British Columbia’s recent middle-market growth series event. Comments from the participants highlighted some of the unusual characteristics of the COVID-19-induced downturn – notably, an absence of COVID-19-induced distressed transactions.

“There’s usually a surge when you have a downturn. There’s a wave of insolvencies, there’s a wave of liquidations, and we didn’t see that this time around,” said John Sandrelli, a partner in Dentons’ restructuring, insolvency and bankruptcy group, and managing partner of the firm’s Vancouver office.

General uncertainty about the COVID-19 crisis dampened enthusiasm for distressed assets during the pandemic’s early days. Federal support programs, such as the Canada Emergency Wage Subsidy, and the willingness of financial institutions and funds to work with clients have also contributed to delaying what may be inevitable for many businesses.

“You can only kick the can down the line for so long,” said Huey Lee, a partner with KPMG and the firm’s B.C. restructuring and turnaround leader.

According to Gabriel de Alba, managing director and partner of the Catalyst Capital Group Inc., a distressed cycle’s peak is typically 18 months after the beginning of a recession.

“We are still just at the beginning of the recession,” de Alba said.

In looking at companies that are rated by S&P Global Ratings (NYSE:SPGI) and Moody’s (NYSE:MCO), Catalyst Group has seen 400 downgrades for every upgrade.

“That is the true dynamic of what’s happening to the balance sheets,” he said. “If it was not for the government funding … the liquidity would have already basically been erased. Ultimately, that is additional leverage.”

When governments begin to pull back some of their support, Sandrelli expects to see a significant wave of distressed transactions. Avoiding that will require a wind-down strategy from Ottawa, Grant said.

“The government’s going to have to be very thoughtful about how they start ratcheting back these programs,” she said. “Otherwise, it will just be a tsunami of companies that will be forced to seek protection from creditors because a lot of them are being propped up by this.”

“As long as there’s still uncertainty and instability, we’re just in this kind of holding pattern right now.”

Despite the uncertainty caused by COVID-19, exacerbated by uncertainty around the U.S. presidential election, traditional mergers and acquisitions activity has continued to take place. One of the bigger challenges has been properly valuing companies that may have had strong fundamentals prior to the pandemic but have been shaken by COVID-19.

De Alba believes that in 2021 companies will lay out trajectories for their creditors and lenders, rather than compare 2021 to 2019.

More restructurings and distressed transactions are also expected in the year ahead.

The most recent Office of the Superintendent of Bankruptcy Canada statistics show that business insolvencies for the year ended August 31, 2020, were nearly 19% lower than filings for the year ended August 31, 2019.

Similarly, insolvencies have decreased every month since March. Filings increased in January and February. •