Canadian pandemic stimulus programs are now ending: Is (economic) gravity about to reassert itself?

As with so many other things since March 2020, the landscape for Canadian insolvency professionals remains far from normal. Despite an initial flurry of activity as practitioners prepared clients for what was seen as an inevitable tsunami of business failures, not only did the wave not arrive, but insolvency activity levels in general remain at historic lows. Commercial filings fell over 24 percent in 2020 and hit the lowest levels seen since tracking began in 1987. They have fallen even further since: filings under the Companies' Creditors Arrangement Act—the statute of choice for most large corporate proceedings—fell by an astounding 73 percent for the year ended September 30, 2021 when compared against the equivalent period in 2020. Although this trend was less marked for smaller businesses, bankruptcy and proposal filings—the most common type of insolvency proceeding available to such companies—still fell by 18 percent during this same timeframe.

Unsurprisingly, it's a complicated picture as to why this is. Businesses have faced numerous challenges during this period, including supply chain difficulties, multiple extended lockdowns and greatly increased debt levels. Increasing inflation may also prove a challenge. However, these factors have so far generally been no match for interest rates at the "zero lower bound" and the willingness of Western governments to provide unprecedented levels of direct stimulus.

In Canada, however, nearly all of the direct stimulus programs for businesses are now winding up. Below, we explore what debtors, creditors and insolvency practitioners can expect going forward.

Crucial supports

Since the beginning of the pandemic, Canadian governments at all levels have offered a wide array of stimulus supports. The most significant for businesses though have been offered federally and have included the following:

• Canada Emergency Wage Subsidy (CEWS): provided employers with a substantial subsidy (initially 75 percent for up to CAD$58,700) on employees' wages where certain revenue declines were experienced. Under this program, approximately CAD$98.6 billion has been spent to date on 457,000 approved employers.


• Canada Emergency Business Account (CEBA): Provided loans of up to CAD$60,000 to small businesses, and that would have the balance forgiven if 66 percent is repaid by December 31, 2022. To date, CAD$49.2 billion has been approved under the program for 898,000 applicants.


• Large Employer Emergency Financing Facility: Provided bridge financing for large employers with minimum annual revenues of CAD$300 million at loan amounts of CAD$60 million or more.


• Canada Emergency Rent Subsidy (CERS): Provided a subsidy to qualifying business for commercial rent and mortgage expenses in a monthly amount of up to CAD$75,000 per location (for four locations total). Approximately CAD$7.4 billion has been spent to date on 218,000 approved applicants under the program


• Highly Affected Sectors Credit Availability Program: Provided heavily-impacted businesses (primarily tourism, hospitality and restaurants) with guaranteed, low-interest loans of between CAD$25,000 to CAD$1 million to cover operational cash flow needs. Approximately CAD$2.4 billion has been provided to date.


• EDC Loan Guarantee for Small and Medium-Sized Enterprises: Via Export Development Canada, this guaranteed 80 percent of new operating credit and cash flow term loans in amounts of up to CAD$6.25 million.


• BDC Co-Lending Program for Small and Medium-Sized Enterprises: Via Business Development Canada, this provided co-lend term loans of up to CAD$12.5 million to small and medium sized-enterprises for operational cash flow requirements.


• BDC Mid-Market Financing Program: Via Business Development Canada, provided junior loans of between CAD$12.5 and CAD$60 million to medium sized businesses.


• EDC Mid-Market Guarantee and Financing Program: Via Export Development Canada, this brought liquidity to companies with revenues between CAD$50 and CAD$300 million. Separately also provided guarantees of up to 75 percent of new operating and cash flow loans between CAD$16.75 and CAD$80 million.

The impact of these programs has been immense. As mentioned to above, insolvency filings have fallen across the board during the pandemic. But perhaps the best illustration of their impact is that filings fell substantially even for particularly hard hit sectors like hospitality, tourism and restaurants. Although this is surely clouded by instances where businesses have ceased operating but didn't formally file for bankruptcy, it also makes sense. For many of the businesses that were most acutely affected by the pandemic, wages and rent were their biggest operating line items, and so programs like CERS and CEWS went a long way in assisting them.

Programs winding up

Each of the above-noted stimulus programs has now closed out however—with the substantial majority of them shuttering to further applicants on December 31, 2021. The exceptions to this rule are the CERS and CEWS programs, which the Federal government has proposed to extend through to May 2022.

In both cases however, they would be subject to major changes that will narrow and dampen their impact. First, the programs would be available only to tourism, hospitality and certain other hard hit businesses that meet large (up to 50 percent) revenue loss thresholds; and second, their subsidy rates would be cut in half from March 2022 onwards. At CAD$7.4 billion, the total estimated cost of these additional measures also represents a small fraction of what has been spent under prior programs.

Uncertainty ahead

What the ending of these programs means going forward for insolvency activity levels remains unclear. As of the time of writing, many economic indicators remain very positive, and over 80 percent of eligible Canadians have received two doses of a vaccine.

On the other hand, serious challenges remain. This includes the threat of inflation but also the fact that many business have taken on substantial amounts of debt just to survive to this point, much of which will be repayable in the relatively near term. Loans under the CEBA, for instance, one of the largest stimulus programs at CAD$49 billion, will come due at the end of 2022.

Finally, there is now the threat of the Omicron variant, which has thrown a wrench into everyone's best-laid plans. If it impacts economic activity as forcefully as early signs suggest (as at the date of writing, in late December 2021, it's already causing lockdowns and curfews in Quebec, Canada's second most-populous province), it may well prompt a renewal of these now shuttered programs.

Either way, many businesses and their lenders would do well to monitor the situation and their cash very carefully. Any renewed stimulus is likely to be more limited in scope than previously offered, and as mentioned, other challenges remain. Although many companies have done very well to weather the storm so far, the next few months are likely to be crucial as many of the hardest hit businesses see if they can stand on their own two feet. Given how important many of these supports appear to have been for some of the hardest-hit sectors, it may well be that this is finally when economic "gravity" reasserts itself and insolvency activity levels start to tick up again.