Economy has 'defied logic' so far
Canada’s debt market saw slow overall growth in the final quarter of 2023 as lender caution and economic uncertainty continued – and alternative lenders and private credit presented a “bright light” for businesses during that period, according to a new study.
BDO Canada’s quarterly debt market report showed that loan issuance increased by 5% in 2023 compared with the previous year, a slowdown from growth of 9% in 2022, with alternative lenders and private debt funds fuelling 40% of Q4’s $1.43 trillion loaned.
That trend emerged as many pension fund giants began expanding into private credit amid a growing lack of risk appetite among major Canadian banks.
While growth slowed at the end of the year, the Canadian economy has continued to “defy logic” by avoiding a technical recession, BDO Canada’s partner, leader capital advisory Shilpa Mishra (pictured top) told Canadian Mortgage Professional.
“We’ve seen the implementation of some of the steepest interest rate hikes in decades. This has led to housing cost increases, elevated consumer prices – I could go on and on,” Mishra said. “But despite all this, what we’re seeing for the businesses that we work with [is] their revenue continues to grow.”
Still, there remain areas of uncertainty weighing against the overall outlook – not least the question of when interest rates will actually begin to decline.
Mishra said a timeline for rate cuts will depend heavily on whether inflation clearly sets a course toward the Bank of Canada’s 2% target in 2024, with a majority of businesses set to face obstacles related to cost in the coming months – meaning prices could rise “more frequently and larger” than usual.
Peter Quinn, Director at Multi-Prêts Hypothèques, predicts a mild decline in interest rates for the Canadian commercial mortgage market, but warns against expecting significant drops. https://t.co/fIBRldJ0el#mortgageindustry #economicoutlook #interestrates #commercialmarket
— Canadian Mortgage Professional Magazine (@CMPmagazine) March 15, 2024
Businesses weathering storm – but challenges remain
Another noteworthy trend highlighted in the report: higher input and borrowing costs saw a majority of businesses experience a reduction in both net income and EBITDA [earnings before interest, taxes, depreciation, and amortization], a development market observers will be closely watching in the coming months.
“We’re waiting to see how businesses – small, medium enterprise, upper-mid-market – fare in terms of keeping compliance with covenants,” she said. “We have seen the banks support their clients through challenging times in ’23 and ’24.
“But we’ll really see what happens in ’24 because [last year] we saw the banks work with borrowers to extend amortization periods, to reduce payment shock, adjusting reporting and covenant requirements for clients. As we see these tighter EBITDAs come in and banks doing their year-end review, we’re looking to see [the impact].”
Approach taken by banks has been the right one, says report
While banks’ lending appetite has further weakened in light of recent economic uncertainty, Mishra said that approach has been an unsurprising – and prudent – one in the current climate.
“It’s really this caution by the banks that has led to the stability of the Canadian economy as we’ve avoided some of the disasters that have occurred south of the border, like Silicon Valley Bank,” she said.
“As the banks released their results for the first quarter of 2024, commercial lending grew at a very gradual pace. But as I said, banks are working with clients.”
BDO’s report indicated that despite rising loan loss provisions and lending pressure among the top Canadian lenders, those funds set aside for potential turbulence down the line should peak in 2024 – although tighter credit conditions will prevail throughout the year.
Merger and acquisition (M&A) activity also slowed again in 2023, dipping by 35% for the full year thanks to tighter capital conditions and continuing uncertainty, the company said.
That said, “there continues to be a backlog of businesses in Canada that need to transition due to the intergenerational transfer of wealth,” it noted. “Additionally, many business owners have been holding off going to market over the past year [which has] resulted in pent-up activity in the deal-making space.”
A rebound is expected to take place when economic uncertainty subsides and rates start to fall, the report added, with a quicker pace anticipated “particularly in technology, healthcare, food and beverage, and all industries sensitive to the economic slowdown.”
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