The forecast may be gloomy, but Canadian companies are facing the looming economic slowdown with healthy war chests built on a strong post-pandemic rebound and high commodity prices, says TD Economics.
“While corporate debt levels have increased by 18% since the end of 2019, the associated risk is less than meets the eye,” it said.
Corporate profits relative to GDP are at a historic high, and firms have generally banked their recent earnings windfalls, “causing cash to now account for 42% of total debt — well above the 30% average over the prior two decades,” the report said.
Additionally, it noted that many companies have locked in much of their debt at fixed rates, shoring up their ability to meet their debt obligations.
While this improvement in corporate balance sheets has occurred in most sectors, TD noted that industries such as real estate, manufacturing, construction and energy account for a higher proportion of corporate debt.
Together they represent 55% of debt, compared with 34% of GDP, the report said, leaving some of these sectors more vulnerable to tougher economic and financial conditions.
“While oil and gas, and manufacturing have a solid financial foundation, real estate and construction could be vulnerable given their interest rate sensitivity,” the report noted.
At the same time, sectors still feeling the effects of the pandemic — such as the arts, food and accommodation — may be more at risk to an economic slump, it suggested.
“A slowdown that cuts their earning potential would be coming at a very inopportune time,” the report said.
Overall, the report finds that most sectors “have built up a significant financial buffer. This better foundation will be imperative as firms attempt to navigate the upcoming economic slowdown. “