As a “perfect storm” of economic factors continues to pummel businesses that are no longer insulated by COVID-19 assistance programs, restructuring and insolvency experts say the steady pickup in insolvency activity since the pandemic will likely accelerate over the next year.
“You’ve got this convergence of what I call the economic headwinds, which is high inflation, high interest rates,” says Milly Chow, a partner at Blake, Cassels & Graydon LLP who specializes in financial restructurings and distressed mergers and acquisitions. “You’ve got labour issues, you’ve got consumer debt… and then you have the geopolitical factors. You have this perfect storm.”
Insolvency activity has increased across all sectors over the past two years because “these things aren’t necessarily industry-specific challenges,” Chow says.
Guy Martel, a partner at Stikeman Elliott LLP who specializes in restructuring and insolvency, shares the same sentiments, saying a combination of high interest rates, inflation, increased costs, and increasingly weak consumer demand has mounted considerable pressure on companies.
“I think by the end of this year, early next year, we’re going to see a drastic increase in defaults resulting in insolvency,” Martel says.
The current market is the latest stage in the fallout from the pandemic – a period during which there was an “abnormally low” level of restructuring and insolvency activity, Martel says. From 2020 to 2022, pandemic government assistance programs poured billions of dollars into businesses nationwide to prevent business closures and job losses, aiming to mitigate the pandemic’s impact on the economy.
As those financial supports fell away over the last two years, restructuring and insolvency activity began climbing again. In Martel’s view, the pandemic assistance programs created a temporary “artificial bubble” around companies that may not have been equipped to survive otherwise.
Chow says she’s seen an increase in restructuring and insolvency cases since 2023, but 2024 was notable for being “more about volume than size.” Many insolvencies haven’t necessarily been big or remarkable enough to “make the news,” she says. Still, a notably large number of distressed companies have either formally filed for insolvency or taken steps to resolve matters outside formal insolvency processes.
While Chow maintains that the economic factors challenging companies have been felt across most industries, several stand out partly because their troubles are clearly tied to the pandemic. She says one of the most notable insolvencies of the past year, for example, involved Pride Group, one of Canada’s largest trucking and leasing companies. The company owed lenders $637 million, filing for bankruptcy protection on March 28.
In its bankruptcy filing with the Ontario Superior Court of Justice, the company blamed its downfall partly on the pandemic, when freight service prices, diesel prices, and interest rates were favourable for the trucking and logistics industry. That prompted a boom, and the subsequent supply glut and rise in operating costs left Pride and other logistics companies unable to repay loans.
Chow also points to the surge in online shopping during lockdowns, which later “led to an overcorrection when the pandemic ended, as things kind of normalized.”
Other industries where insolvencies clearly stemmed from the fallout of COVID-19 include commercial real estate and construction. Both saw less demand as many remote work arrangements became permanent, Chow says. In the case of the construction industry, high interest rates and many debt maturities also put pressure on refinancing transactions on large-scale projects.
Chow says cannabis, regional airlines, and media are other industries that have seen many insolvencies recently, but these are less explicitly tied to the pandemic.
Martel agrees that insolvency filings have been increasing over the past two years but are relatively small in scale. He contrasts the current landscape with what it looked like in 2015 when oil and gas companies filed for insolvency en masse, and he says, “It was a very industry-specific situation.
“You don’t have that now. You have companies that are undercapitalized or are not well financed in various sectors that will file.” Examples include “real estate companies that were overleveraged, retailers that bought too much inventory and were not equipped to face a slowdown in their sales,” he says.
In the coming year, however, Martel says he anticipates an uptick in insolvency filings in the retail and manufacturing industries as consumer demand declines – particularly regarding goods “in the column of what I would describe as ‘discretionary spending,’” like luxury products.
Like Martel, Chow says she expects insolvencies to increase “because the economic impact of things like interest rates and inflation – it’s not instantaneous.” Corrections don’t happen overnight; in the meantime, many companies will not be able to withstand these economic challenges before things improve.
Job numbers don’t look great, consumer confidence isn’t high, a significant maturity wall of corporate debt is coming due at the end of 2025, and the mortgages of many of the individuals who bought homes in 2020 will be up for renewal.
“You’ve got those things to look at in the future,” Chow says.
