Public equity markets will be key to business recovery, says IIAC

Association urges improved access to capital as remedy to Canadian small-business woes

Public equity markets will be key to business recovery, says IIAC

Getting better access to public equity capital should be the first step to help Canadian small businesses hit by the coronavirus, according to the Investment Industry Association of Canada (IIAC).

In a recently penned commentary, IIAC President Ian C.W. Russell sounded the alarm on the deteriorating balance sheets of Canada’s small and medium enterprises (SMEs), which have long relied on loans, lines of credit, and even credit cards for financing.

“Much of the corporate debt build-up occurred in the years following the global financial crisis, chiefly because a low interest rate environment made it easy for companies to borrow,” he said, adding that institutional investors’ aggressive focus on ETFs – and by extension, large-cap stocks — have also made it hard for SMEs to go public and access equity capital.

Citing figures from the Bank of International Settlements (BIS), he noted that private non-financial corporate debt at the end of 2019 represented a 115% share of GDP. That has been exacerbated by the crisis, as indicated by Bank of Canada (BOC) data showing a 54% annualized rise in business loans in the country during March.

Non-bank credit also plays a large role, Russell added, noting that the amount of bonds outstanding from Canadian non-financial corporate issuers has doubled since the 2007-2008 financial crisis. As firms across sectors including manufacturing, mining, and oil saw their creditworthiness decline in Canada, an increasing number began to issue non-investment-grade corporate bonds outside the country. “The share of bonds issued in U.S. dollars by Canadian firms [before the COVID-19 crisis] was around 60%,” he said.

Many firms faced with tremendous debt or weak credit ratings have also tapped the U.S. leveraged loan market, leading to some $175 billion in outstanding leveraged loans to Canadian non-financial firms, as reported by the Bank of Canada.

The vulnerabilities of such businesses were exposed in March as the coronavirus fallout caused a massive widening of credit spreads, causing both the high-yield and leveraged-loan markets to seize up. While Canadian policymakers have acted quickly to support Canadian individuals and businesses with an array of fiscal and monetary measures, Russell warned that “Canadian businesses will emerge from the COVID-19 crisis with even more debt, making any economic recovery much harder.”

With the debt space becoming increasingly difficult for business owners to sustainably access, he argued, the equity markets will play a critical role. And while private sources of equity capital are important, he argued that they are too small to satisfy Canadian business owners’ needs.

“As  the  first  order  of  business,  the  federal  and  provincial governments and securities regulators should focus on solutions to help small business obtain better access to public equity markets,” Russell said, urging changes such as simplified and streamlined offering and disclosure requirements for listed companies, as well as regulatory relief for small registered dealers intermediating small companies and the investing public.


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