Pandemic’s impact on consumer behaviour may outlast the virus: Insolvency lawyer
Canada is currently experiencing the calm before the storm, with the COVID-19 economic impact soon to unleash a downpour of insolvencies and restructurings in the latter half of 2020, says Robert Thornton, a Toronto-based restructuring and insolvency lawyer and founder of Thornton Grout Finnigan LLP.
“We are standing on the precipice of an unprecedented time where there is going to be, I think, an enormous number of restructuring cases that are going to affect just about every area of the economy, not just in Canada, but in the world,” says Thornton.
With the shutdown of economies across the world, “the consequences are likely to be broader than we can even foresee,” he says.
Thornton will be speaking at Canadian Lawyer’s upcoming webinar COVID-19: Bankruptcy and Insolvency Considerations - Examining Your Options, on June 3 at 11 am.
While now, uncertainty is keeping individuals and businesses from making decisions and insolvency hasn’t risen yet, the present lull will be followed in a steep rise in both personal insolvency and corporate restructuring and insolvency, in the third and fourth quarter of 2020, says Thornton.
The pandemic has “fundamentally altered” the economy, both with how we work and how we spend money, says Thornton. There are the obvious losers — retail, tourism and the event industries — but Thornton adds the uncertainty among consumers means it is too soon to say whether the pandemic’s effect on consumer behaviour will become the new normal, he says.
“There will be longer term consequences as well. For example, when was the last time you heard of somebody buying a car? When was the last time you heard of somebody starting a renovation project?” he says. “There's a lot of demand that has gone missing and a lot of capital that hasn't flowed.”
“It will take some time for the consequences of this to truly work their way out. And I think of it not in quarters but in years,” he says. “I think we'll be restructuring a lot of companies because of this shift in the way we live, work and spend money.”
Even before the COVID-19 pandemic, Canada was experiencing a rise in insolvency. In January, Law Times reported personal insolvencies were at the highest level in a decade. October 2019 saw 13,000 bankruptcies and proposals filed — a 13 per cent increase on October 2018 and the highest since September 2009.
The trend was matched on the corporate level. The mining, oil & gas extraction and the information and cultural industries led other industries with a 40 per cent increase in business insolvency filings, during the 12 months leading up to September 2019. This difficulty for Canadian business and consumers is following nearly two decades of consistent yearly declines in business insolvencies, Canadian Association of Insolvency and Restructuring Professionals board member David Lewis told Law Times.
Two factors leading Canadian consumers to higher levels of insolvency are credit card and student debt. Another CAIRP board member Andre Bolduc told the CBC that pre-COVID, Canadians were carrying “near record levels of debt.”
In the widespread economic downturn, there is space for those with capital to make lemonade, says Thornton. An example is the recent moves made by Brookfield Asset Management. The investment firm has announced a plan to invest US$5 billion in struggling retail tenants, which, prior to COVID already faced an existential threat from e-commerce and have now been further depressed by stay-at-home orders and mandatory business closures.
“I think they're being smart about the opportunity that this pandemic presents and they're taking advantage of that,” says Thornton. “I think that there are opportunities out there and it will be very interesting to see which firms capitalize on that.
“I know that there are some private equity funds that are looking to deploy capital and have announced to me and others in our business that they're looking for opportunities. This will be an interesting time ahead. If you have lots of cash, I think there will be companies in distress that will need that capital.”