StatCan COVID-19: Data to Insights for a Better Canada The impact of the pandemic on the solvency of corporations, third quarter 2020

The COVID-19 pandemic has posed significant challenges to the Canadian economy and the financial position of enterprises. The second quarter of 2020 saw the steepest decline in real gross domestic product (-11.3%) since quarterly data were first collected in 1961. Over the same period, enterprises reported lower net income before taxes (-8.6%) and operating revenues (-13.1%), according to the Quarterly Survey of Financial Statements (QSFS).

This article examines the changes in the number of companies that filed under the Bankruptcy and Insolvency Act and the Corporations’ Creditors Arrangement Act from 2006 to the third quarter of 2020. The analysis highlights the number of firms filing for creditor protection, as well as the financial position of these firms before the onset of the pandemic.

The Bankruptcy and Insolvency Act (BIA) regulates the law on bankruptcy and insolvency in Canada. It governs bankruptcies, consumer and commercial proposals and receiverships in Canada. The Office of the Superintendent of Bankruptcy is responsible for ensuring that bankruptcies are administered in a fair and orderly manner.

Corporations filing under the BIA are not necessarily declaring bankruptcy. They can file a proposal under the Act, which can lead to restructurating their debt if an agreement is reached with its creditors. When no agreement can be reached between a corporation and its creditors, a bankruptcy procedure is undertaken. A bankruptcy under the BIA is designed to provide financial relief to corporations with overwhelming debt burdens, halting the legal actions of creditors.^{Note 1}

The Bankruptcy and Insolvency Act is not the only law that regulates bankruptcies in Canada. There is also the Companies’ Creditors Arrangement Act (CCAA), which allows financially troubled corporations to restructure their affairs. The CCAA is restricted to larger corporations, as they must owe creditors in excess of $5 million to be eligible under the Act.

The scope of this article looks at insolvency fillings under both Acts; the BIA and CCAA. For the purpose of this study, there is no distinction made between a corporation filing for bankruptcy or a proposal; they are both treated as insolvencies.

Historically, insolvency filings increase during economic downturns

The financial crisis of 2008^{Note 2} had an immediate impact on the number of fillings made under the BIA in Canada. BIA fillings rose 11.3% from the third quarter of 2008 to 721 in the fourth quarter and reached a record high of 816 in the first quarter of 2009.

The 2014 oil crash also had a major economic impact on the Canadian economy. Oil prices (Western Canadian Select) fell from $US83 in July 2014 to $US37 in February 2015, which seriously affected businesses in the oil and gas extraction and support activities industry. This was reflected in the number of BIA fillings, which increased by one-quarter (+25.2%) from the third quarter to reach 779 in the fourth quarter of 2014.

The numbers of CCAA filings (large companies) also increased over this period.^{Note 3} Filings over doubled from 5 in the third quarter of 2014 to 11 in the second quarter of 2015, when 3 corporations in the oil and gas extraction  and support activities industry filed for insolvency.

Data table for Chart 1



Data table for Chart 1
Table summary
This table displays the results of Data table for Chart 1 BIA and CCAA, calculated using number of insolvency fillings units of measure (appearing as column headers).

	BIA	CCAA
	number of insolvency fillings
2006Q1	672	Note ..: not available for a specific reference period
2006Q2	592	Note ..: not available for a specific reference period
2006Q3	547	Note ..: not available for a specific reference period
2006Q4	633	Note ..: not available for a specific reference period
2007Q1	621	Note ..: not available for a specific reference period
2007Q2	637	Note ..: not available for a specific reference period
2007Q3	560	Note ..: not available for a specific reference period
2007Q4	609	Note ..: not available for a specific reference period
2008Q1	697	Note ..: not available for a specific reference period
2008Q2	682	Note ..: not available for a specific reference period
2008Q3	648	Note ..: not available for a specific reference period
2008Q4	721	Note ..: not available for a specific reference period
2009Q1	816	Note ..: not available for a specific reference period
2009Q2	767	Note ..: not available for a specific reference period
2009Q3	658	Note ..: not available for a specific reference period
2009Q4	716	14
2010Q1	684	15
2010Q2	712	8
2010Q3	516	3
2010Q4	598	6
2011Q1	626	6
2011Q2	657	7
2011Q3	522	7
2011Q4	666	12
2012Q1	634	15
2012Q2	595	9
2012Q3	576	6
2012Q4	595	5
2013Q1	681	6
2013Q2	658	6
2013Q3	592	7
2013Q4	687	14
2014Q1	652	3
2014Q2	722	5
2014Q3	622	5
2014Q4	779	6
2015Q1	718	10
2015Q2	683	11
2015Q3	613	3
2015Q4	676	4
2016Q1	705	6
2016Q2	713	13
2016Q3	591	7
2016Q4	647	8
2017Q1	654	3
2017Q2	642	5
2017Q3	523	2
2017Q4	640	12
2018Q1	642	2
2018Q2	586	4
2018Q3	570	5
2018Q4	630	4
2019Q1	651	11
2019Q2	671	2
2019Q3	550	6
2019Q4	600	14
2020Q1	618	10
2020Q2	474	21
2020Q3	474	9
Source: Office of the Superintendent of Bankruptcy of Canada, author’s calculations.

BIA insolvency filings decline since the beginning of the pandemic, while CCAA filings increase

The number of BIA filings fell by almost one-quarter (-23.3%) from the first quarter of 2020 to 474 in the the second quarter (Chart 1) and was down by 29.4% compared with the same quarter a year earlier. In the third quarter of 2020, the number of fillings was unchanged at 474 and 13.8% lower year over year.

This decline in insolvencies during the COVID-19 crisis could partially be explained by the government programs^{Note 4} to support businesses and help them stay afloat during this difficult period. This could suggests that  corporations are waiting to see if more government aid is coming, before filing for insolvency. Low borrowing cost for businesses^{Note 5} could also partially explain this drop in insolvency filings.

Insolvency filings were down in most industries (Chart 2) in the second quarter, led by the construction industry (-32.1% or -45). The construction industry had the largest number (14.1%) of loan approvals among industries in April and May through the Canada Emergency Business Account (CEBA)^{Note 6}, according to the Survey of the Canada Emergency Business Account.

Conversely, CCAA’s insolvency filings doubled from 10 in the first quarter to 21 in the second quarter. This was an historic high for the number of CCAA’s fillings. The increase was led by corporations in the manufacturing (+3) and the oil and gas extraction and support activities industry (+2). There were 9 filings in the third quarter.

Data table for Chart 2



Data table for Chart 2
Table summary
This table displays the results of Data table for Chart 2 Accomodations and Food Services, Construction, Retail Trade, Manufacturing, Professional, Scientific, and Technical Services, Transportation and Warehousing, Wholesale trade and Administrative and Support, Waste Management and Remediation Services, calculated using number of insolvency fillings units of measure (appearing as column headers).

	Accomodations and Food Services	Construction	Retail Trade	Manufacturing	Professional, Scientific, and Technical Services	Transportation and Warehousing	Wholesale trade	Administrative and Support, Waste Management and Remediation Services
	number of insolvency fillings
2020Q3	73	38	63	38	27	21	28	36
2020Q2	83	40	69	33	41	12	27	14
2020Q1	90	85	83	50	49	43	28	28
Source: Office of the Superintendent of Bankruptcy of Canada, author’s calculations.

Corporations filing for insolvency under the BIA were below their industry’s average in terms of financial position before the pandemic hit

This section focuses on industries where the majority of corporations filed for insolvency up to the third quarter of 2020.  It will focus on two measures, namely the quick ratio and debt-to-equity ratio. These ratios shed light on a corporation’s liquidity situation. They are a class of financial indicators that reflect a corporation’s ability to meet their debt obligations.

The quick ratio measures a corporation’s ability to meet its short-term obligations with its most liquid assets (current assets excluding inventories). The higher the ratio, the better the corporation’s liquidity position.

$$QuickRatio=\frac{CurrentAssets–Inventories}{CurrentLiabilities}$$

The debt-to-equity ratio measures how much equity and debt a company is using to finance its assets. It is used as a proxy for the extent to which shareholder’s equity can fulfill obligations to creditors in the event of a loss of business. A low debt-to-equity ratio indicates a lower amount of financing by debt via lenders, versus funding through equity. A higher ratio indicates the company is getting more of its financing by borrowing money, which subjects the company to potential risk if debt levels are too high.

$$Debt-to-EquityRatio=\frac{Borrowings+LoansandAccountswithAffiliates}{TotalEquity}$$

Although these ratios are helpful to understand the financial position of a corporation, they cannot provide a complete picture of a company’s solvency. Rather than being exhaustive, this analysis aims at providing an indication of the financial health of these corporations a year or less before filing for insolvency, in the context of the pandemic.

Table 1 shows the average quick and debt-to-equity ratios for corporations that filled under the BIA during the first three quarters of 2020. The metrics are computed using the financial statements from 2019.^{Note 7} They are compared with the quick ratio and debt-to-equity ratio published in the QSFS.^{Note 8}  

To make appropriate comparisons, it is necessary to compare the financial metrics of a corporation with those in the same industry. Each industry has its own sets of specificities and constraints, which impact its financial metrics and financial composition.^{Note 9}

The quick ratio for corporations filing under the BIA was below their industry averages during the first three quarters of 2020. These corporations had less cash and other liquid assets (such as marketable securities and stocks) to cover their current liabilities compared with their respective industry averages. The BIA firms, therefore, indicated a potential solvency risk in the period leading up to the onset of the pandemic.

For instance, in the second quarter, the quick ratio for corporations filing under the BIA in the wholesale industry was 0.45 compared with the industry-wide average of 1.13, according to the QSFS. In other words, for every $1 of current liability, the corporations that filed for insolvency had $0.45 of liquid assets, compared with the wholesale industry average of $1.13.

A negative debt-to-equity ratio stems from the negative equity position of a corporation, which implies that the corporation has more liabilities than assets. A negative equity position is generally not common, but in the context of a corporation filing for insolvency, it is understandable to observe this phenomena. Therefore, in the context of this analysis, a negative debt-to-equity ratio can be regarded as a high debt-to-equity ratio.

Table 1 shows the debt-to-equity ratios of corporations that filed for insolvency were significantly higher than their industry’s average, which suggests they relied more heavily on debt financing and were less able to absorb a negative shock to the economy. These corporations were therefore more susceptible of becoming insolvent.



Overall, both the quick and debt-to-equity ratios from the selected industries show that corporations filing for insolvency mostly underperformed compared with their industry averages. This suggests that these firms faced some challenges in both short-term liquidity and financial leverage that lead them to file under the BIA, in spite of the COVID-19 crisis.

Corporations filing for insolvency are likely to increase in the coming quarters

These results also suggests that corporations that filed for bankruptcy in 2020 were already in a precarious financial situation before the COVID-19 crisis hit. Even with the help of government programs, these corporations decided to file for insolvency.

However, the fact that the number of corporation filings has decreased since the onset of the pandemic could indicate that businesses are waiting to see if more government aid will be forthcoming, and wether they will be able to manage their debt levels, before filing for insolvency.

According to the Canadian Survey on Business Conditions, 43.9% of businesses reported that they were unable to take on more debt in the third quarter of 2020. This suggests that there might be more insolvency filings in coming quarters as the financial position of businesses deteriotates.

Statistics Canada will keep tracking corporations’ insolvency fillings in the coming quarters, as the impact of the COVID-19 crisis continues to disrupt the normal activities of Canadian corporations.