A surge in commercial bankruptcies is gaining speed in Canada and the U.S., a sign that tightening credit and rate hikes are starting to weigh on big business. 

After binging on cheap credit through the first two years of the pandemic, the corporate sector is facing an increasingly challenging borrowing environment. 

Corporate borrowers are dealing with interest rates at their highest levels in a generation. And U.S. banks have recently stiffened lending standards at a pace consistent with past recessions. Canada’s big banks announced this week that they set aside billions of dollars in their fiscal third quarter to cover risky loans. 

“Reality is setting in,” said Brian Madden, chief investment officer of First Avenue Investment Counsel in Toronto. “The free money stopped flying around and we’re getting back to a more normal environment where bad businesses fail.” 

In the year up to the end of July, more than 400 U.S. corporations filed for bankruptcy – more than the total for all of 2022, S&P Global Market Intelligence reported earlier this month. 

In Canada, the number of business insolvencies rose by 37 per cent in the second quarter compared with the prior year, according to the Office of the Superintendent of Bankruptcy. 

Few would be shocked if a sustained wave of corporate bankruptcies were to follow. Higher-for-longer interest rates have the potential to push many weak borrowers with high debt burdens over the edge. Just how well many of them have withstood the pressure this long is arguably the bigger surprise. 

The immunity of corporations to high interest rates has been one of the economic curiosities of the moment. 

When central banks jacked policy rates to levels not seen in more than 20 years, one may have reasonably expected the corporate sector to suffer mightily. That didn’t happen. Instead, earnings went up, business failures stayed low and credit issues were minimal. 

That resilience has helped keep stock markets afloat over the last year-and-a-half. The S&P 500 index is actually up since the U.S. Federal Reserve began hiking rates in March, 2022. The S&P/TSX Composite Index, meanwhile, is down by a negligible 4 per cent since the Bank of Canada started its tightening campaign.

Source: The Globe and Mail