Unprecedented Spike in Retail Insolvencies in Canada Due to COVID-19: Expert

Mario Toneguzzi
Mario Toneguzzi
Mario Toneguzzi, based in Calgary, has more than 40 years experience as a daily newspaper writer, columnist, and editor. He worked for 35 years at the Calgary Herald covering sports, crime, politics, health, faith, city and breaking news, and business. He now works on his own as a freelance writer and consultant in communications and media relations/training.

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The COVID-19 pandemic has left a trail of devastation for many companies who have struggled just to stay alive amid the vicious economic downturn.

RETAIL AND CANNABIS HARDEST HIT WITH INSOLVENCY FILINGS DUE TO COVID-19

But an expert in insolvency said the overall number of businesses filing for insolvency, bankruptcy, and creditor protection so far this year hasn’t changed much from a year ago, except for two industries — retail and cannabis.

Henry Louis, Founder and Editor of the Insolvency Insider publication, said people would think that insolvency filings would be up across the board due to the challenges COVID has created for so many companies in Canada.

“But if you look at the statistics it’s actually pretty flat in comparison to last year,” he said. “They’re at very similar levels to last year. Everybody talks about the big storm that is coming and I think it’s coming but we’re not there yet for sure.

“The one thing we have seen less of, believe it or not, is receiverships. Receiverships are when banks initiate enforcement proceedings. Specifically if a company defaults and the lender basically wants to realize on their security they appoint a receiver to basically go in and realize on all the assets and pay back the bank. For the most part, that activity is on hold. The banks are being a lot more gracious with their borrowers. They’re giving them extensions, they’re forbearing. And from what we’re seeing and what we’re hearing a lot of these forbearances are basically to sometime in the fall when these forbearance agreements are being kind of extended to.

“Everybody kind of senses at some point the banks are going to begin enforcement proceedings. It just hasn’t happened yet.”

But currently there are some exceptions to the fact that filings are flat right now.

“Retail filings are definitely higher than we’ve seen historically. There’s been a lot of retail insolvencies that have been quite well covered – Reitmans, Laura, Aldo, Moore’s clothing just got protection last week. Without question the pandemic is creating a huge blow for these retailers. They’re carrying huge overhead at these physical locations and when sales dry up many of them just can’t hang on,” said Louis.

“I don’t think it’s fair to put all the blame on the pandemic. Many of these retailers were already struggling prior to COVID. I think the pandemic has just tipped them over the edge especially the ones that were maybe not as well capitalized as others.

“Retail filings are definitely up. I don’t think we’ve seen the end of that. There’s a lot more coming down the pipeline.”

The other industry Louis has definitely noticed more filings is the cannabis industry.

“It’s not a COVID-related issue. These filings are more just a shake out from the growing pains of a new industry,” he said. “It’s a brand new industry and everybody made assumptions as they were ramping up in terms of what the market demand would look like and how to prepare for this new industry. And a lot of those assumptions haven’t yet materialized.

“The demand is just not what everyone expected yet. There’s almost too much supply right now for the current demand and the investors’ appetite to put more capital has just completely dried up. Everybody kind of realized they overshot the mark and now nobody’s putting more money into it. As a result, any of these producers that were under capitalized – and were spending a lot of money to ramp up – now because sales haven’t materialized as they expected they can’t raise any more money and therefore they need to file for creditor protection.”

Insolvency Insider was founded in 2014. The publication provides the news for the restructuring community such as bankruptcy trustees, insolvency lawyers and everyone involved in the industry. It reports on all the new insolvency filings across Canada and important court decisions out of insolvency proceedings.

“We basically keep all the professionals in the loop on what’s happening in the industry,” said Louis.

The news recently has had many stories of retailers, and many well-known retailers, filing for creditor protection. There are two mechanisms for that. One is through the Companies’ Creditors Arrangement Act. There is also the Bankruptcy and Insolvency Act where companies can file a Notice of Intention to file a proposal.

“They basically do the same thing. They give you a timeout from your creditors. All enforcement proceedings are stayed or stopped. So nobody can take action against you and it gives you time to formulate a plan for how you plan to address your debts,” explained Louis.

He said every industry will be affected in some way because of the economic fallout from COVID. Retail and restaurant are obvious industries to be impacted initially.

REAL ESTATE INDUSTRY WILL POTENTIALLY FACE ISSUES IN NEAR FUTURE

The one industry that might have some issues in the near future is real estate, explained Louis.

“Every industry has some angle of real estate in it. Most businesses have a physical presence and as businesses struggle landlords are going to get sucked into all these insolvency proceedings and they’re going to take a hit,” he said.

“And I think the second area of concern with real estate is the fact that the pandemic has really made people second guess how important their physical locations really are . . . Now more people are working from home and people feel maybe it is a viable option. These companies don’t need to be in the middle of downtown paying expensive leases for all their employees. I think there might be some real fundamental changes with tenants which will have an impact.”

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