How did the Canadian debt market perform in 2024's first quarter?

Continuing caution prevailed – but green shoots are evident, suggests report

How did the Canadian debt market perform in 2024's first quarter?

Slow overall growth in Canada’s debt market persisted throughout the first quarter of the year, marked by a continuing crunch in the availability of capital and persistent caution in commercial and corporate lending among Canadian financial institutions.

That’s according to BDO Canada’s latest debt market report, which showed loan issuance ticked upwards by 6% year over year in Q1 to $1.5 trillion, driven mainly by growth in the real estate and financial services sectors.

Shilpa Mishra (pictured top), partner and leader, capital advisory for BDO M&A Capital Markets, told Canadian Mortgage Professional that despite lenders’ conservative outlook, those institutions had also continued to step up for clients amidst a still-turbulent landscape.

“What I can’t emphasize enough – and I’ve said this before – is that we’re continuing to see the Canadian banks supporting clients with extended amortization schedules to lower payment shocks,” she said. “They’re adjusting reporting and other covenant requirements.

“So yes, there is caution from the Canadian financial institutions – but there’s also support. Debt continues to be expensive, and interest rates continue to be high… but there’s still the resilience from Canadian businesses, [although] their margins are being crunched.”

How have Canada’s leading financial institutions been faring?

The latest financial results revealed by Canada’s top six banks unsurprisingly showed provisions for credit losses rising once again as leading financial institutions stashed away more funds for potentially souring loans.

On the mergers and acquisitions front, Royal Bank of Canada (RBC) saw its blockbuster deal for HSBC pass relatively smoothly, although Bank of Montreal (BMO) took a small hit from integration costs and items related to its Bank of the West acquisition in the US.

Anti-money laundering (AML) procedures and safeguards have also emerged as a huge discussion point in recent weeks amid the much-publicized woes of TD Bank, which has faced a high-profile investigation in the US over alleged use of the bank by criminals to wash money.

Mishra sounded a positive note on steps taken by the bank and its competitors since that crisis emerged.

“All of the banks are putting through proper controls. It’s being managed, and all the banks stress that they’re really investing in that infrastructure – as did TD,” she said. “And TD’s CEO acknowledged that there had been some challenges but it’s now time to put the past behind, look forward and ensure those controls are in place.”

Continued spending by the federal government on infrastructure projects and affordable housing, meanwhile, will prove a “bright light” for debt capital markets, according to Mishra, with provincial and municipal authorities likely to need some further support from banks and alt-debt funds in addition to what’s being provided from a grant perspective.

“What’s really interesting for our clients here in the mid market, in the upper mid market and for enterprise – it’s going to help Canadian builders, developers and business owners who’ve been involved in the housing market,” Mishra said, “because as builds slow… many of those businesses, especially those that foresaw the slowdown in the sector coming, have been able to pivot.

“They’re taking advantage of building, developing the construction opportunities that are coming from this interest spend. And that’s why I see it as a bright light – not just for the debt capital markets, but overall for the economy.”

How can businesses position themselves to withstand economic turbulence?

A glimmer of optimism on the economic front arrived last week (June 5) with the Bank of Canada’s announcement that it was cutting its benchmark rate for the first time in over four years – and Mishra said businesses with the right infrastructure and systems in place are well positioned to weather out what could be the tail end of Canada’s economic turbulence.

That means keeping their eyes on the prize – namely, their bottom line – and maintaining strong net income, she said, as well as ensuring they’re updating their businesses, putting technological innovation in place, managing costs, and pivoting to the changing economy to boost and maintain profitability.

“If they have that profitability, they’ll meet bank covenants, they’ll get through the turbulence of the next year, and they’ll come out on the other side,” she said.

“Getting through the next year is about managing the bottom line, making sure everybody’s in line with bank covenants, having those communications with their financial institutions who are ready and willing to help – and getting through to 2025, which will be a brighter time as we get there.”

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