A new KPMG in Canada survey finds that Canadian business leaders are worried that higher borrowing costs could add additional stress to their pandemic recovery plans. Their concerns come on the heels of the Bank of Canada move last week to lift its overnight lending rate 25 basis points, the start of a widely anticipated rate hike cycle.

"While we've seen one worrying challenge after another faced by Canadian companies over the past two years, rising interest rates could rachet up the stress for many, potentially choking off investment and growth," says Paul van Eyk, Partner and National Leader, Restructuring and Turnaround Services, KPMG in Canada. "Our poll findings clearly show that business leaders are warning not to raise rates too much or it's going to hurt them."

The pandemic has forced the majority of companies surveyed, to restructure and reorganize their operations to address supply chain challenges, wage inflation and labour shortages, stopping short of formal restructuring proceedings as 79 per cent of respondents surveyed are afraid of the stigma of being associated with a financially distressed situation.

Key poll findings

  • 55 per cent of business leaders at Canadian medium-sized companies say they would face "material, substantial, or considerable pressure on their business and cash flow" if the prime lending rate were to increase 1 per cent
  • A third (33 per cent) say a 2-per cent-increase above their current borrowing rate would be a tipping point, putting their company "at risk", creating "significant challenges", or derailing "growth or investment plans
  •  Nearly four in five (79 per cent) strongly or somewhat agree that the pandemic forced them to restructure or reorganize their operations, with 30 per cent agreeing strongly
  • 79 per cent also believe there's still a stigma attached to having gone through financial difficulties and a restructuring
Mapping interest rate hike impact

Piling on fresh risks

When the poll was conducted in mid-February amid trucker protests, escalating tensions in Ukraine, and rising inflation, KPMG asked Canadian business leaders to identify their current single most-pressing concern. They ranked pandemic fatigue and the risk of future restrictions as their foremost concern followed closely by tight labour markets, supply chain challenges, and rising energy prices.

Virtually every company had Omicron-related employee absenteeism that impacted their business operations: 43 per cent say they were "greatly impacted" and 48 per cent were "somewhat impacted".

Single most-pressing concerns ​
Percentage of business leaders
1  Pandemic fatigue or continued uncertainty/restrictions
17%
2  Availability of skilled talent 16%
3  Supply Chains 15%
4  Energy Prices 11%
5  Regulatory Uncertainty 9%
5  Societal unrest 9%
6  Inflation 8%
6  The "Great Resignation" / "Great Reshuffle" 8%
7  Geopolitics 7%


Over four in five (81 per cent) companies believe strongly or somewhat they can pass on cost increases to their customers without losing business or market share. Nearly a third (31 per cent) strongly believe they can pass along higher costs.

"Inflation as a risk is surprisingly rated much lower despite its influence on monetary policy because most companies believe they can pass on rising costs to the consumer," says Mr. van Eyk. "But that's a huge question mark. It remains to be seen if companies can continue to pass along all these higher costs and if the demand will continue to hold in the face of rising costs. If they end up having to absorb them, their profit margins will tighten and for many, it could lead to a new set of challenges."

As well, 94 per cent strongly or somewhat agree that high inflation will be around longer than expected and are building it into their operating models. Nearly half (45 per cent) agreed strongly, indicating they are indeed modelling for higher inflation.

Tackling challenges and strengthening company values

"It's more important than ever in today's extremely fluid environment to plan for the best and prepare for the worst," says Mr. van Eyk. "Crises come in all shapes and forms at any time. We've had pandemic-related employee absenteeism, supply chain snarls, lack of skilled labour, rising energy costs and net-zero carbon commitments, and now the start of a rate hike cycle. It's how your team considers all of its options, puts a plan in place and manages through issues that strengthens a company's culture, its core values, and ultimately its growth prospects."

As noted in the survey, Mr. van Eyk points out that only approximately a third of respondents have actually managed through a crisis in which their company's stability was at risk, which is a skill set that is now in high demand for companies and industries facing these challenges.

Other poll findings

  • Only a third (33 per cent) had been through a crisis that put their company's stability at risk (that is, financial, reputational, technological, natural disaster, cybersecurity breach, etc.)
  • Just 27 per cent "learned lessons" from Canada's 2007 asset-backed commercial paper and the 2008-09 global financial crises that "better prepared" them to navigate the pandemic
  • 91 per cent of companies had Omicron-related employee absenteeism that impacted their business operations: 43 per cent say they were "greatly impacted" and 48 per cent were "somewhat impacted"
  • 81 per cent of business leaders believe strongly or somewhat they can pass on cost increases to their customers without losing business or market share with 31 per cent strongly believing they can do so

Busting restructuring myths as turnaround activity gears up

While most believe undergoing a restructuring can help sharpen their focus, too many companies still think that it's only for companies on the brink of collapse, taints their ability to raise new capital, and diminishes investor trust. Worse, fewer than a third (32 per cent) describe their company culture as open enough to discuss their financial challenges with external parties, such as lenders, accountants, or turnaround specialists.

Too often boards and management teams don't reach out early enough to discuss their situation, says Mr. van Eyk. He points out that the options available to turnaround a company do not always have to be formal insolvency proceedings, there are other creative solutions that stakeholders can consider.

"I have seen some of the largest businesses embrace a restructuring culture that has improved their financial metrics and longer-term viability," he says. "Yes, restructurings are difficult and involve tough decision making and uncomfortable discussions, but it is so important for a company and management team to recognize when they need to change their strategy and embrace and foster a turnaround culture before it is too late."

"The sooner business leaders can engage with external specialists who truly understand the tightrope they're walking the faster solutions can be found and problems addressed," says Mr. van Eyk. "In some cases, it might involve trimming costs, in others, it might mean divesting assets or restructuring the organization to the "new normal". We've already seen the pandemic prompt some to shelf acquisition plans and now divestiture plans are being revived.

"What is also very important to understand for a company facing these challenges, there is no 'one-size fits all' approach. A restructuring needs to be tailored to your situation, facts and stakeholder group, and the more time you have to put those puzzle pieces together, the better the result," he adds.

Additional highlights

  • 86 per cent believe a restructuring can help sharpen an organization's business focus (31 per cent strongly agree)
  • Nearly two-thirds (64 per cent) feel that restructurings are only for companies on the brink of collapse
  • 73 per cent agree it's harder to raise capital once you've gone through a restructuring
  • 69 per cent say investors lose confidence or trust in companies that go through a restructuring or reorganization
  • Only 32 per cent of business leaders strongly agree their company is open or transparent enough to talk about its financial challenges to external parties like lenders, accountants, workout, or turnaround specialists (53 per cent somewhat agree)
  • 33 per cent strongly agree that they're looking to exit or sell their business due to higher costs and increased challenges, including managing and protecting their employees during the pandemic
  • 26 per cent strongly expect to see more distressed M&A in their industry, including cross-border deals (50 percent are expecting somewhat more distressed M&A)
  • 81 per cent intend to expand by buying a competitor, supplier, or diversifying into another sector, with 29 per cent agreeing strongly and 52 per cent agreeing somewhat, indicating it's on the table
  • 31 per cent strongly agree they are "gearing up their M&A, or divestiture plans", particularly in the manufacturing sector (40 per cent) and among privately held companies (33 per cent)
  • A quarter (26 per cent) strongly agree that the pandemic disrupted their M&A plans and 23 per cent strongly agree the pandemic disrupted their divestiture plans

Interest rate impacts

The Bank of Canada has made it clear that emergency economic support is no longer necessary, indicating that the cost of borrowing will rise in the coming months to tame inflation. If the prime lending rate were to increase 1 per cent, will this put material, substantial, or considerable pressure on your business and cash flow?

Percentage of medium-sized Canadian companies that say a 1 per cent increase in prime will put material, substantial, or considerable pressure on their business and cash flow:

 

National
(508)

B.C.
(65)

AB
(41)

SK & MB (17)

ON
(248)

PQ
(107)

Atlantic Canada
(30)

Yes 55 71 44 71 52 60 30


Percentage by specific industry sector:


​National
(508)
Consumer and retail
(101)
Manufacturing
(100)

Oil and gas
(105)

Real estate and construction
64)
​Yes
55​ ​62
​27
​46
​47

Percentage by annual gross revenue:


​$50-
$99.99MM (90)
​$100-
$199MM (177)
​$200-
$299MM (64)
​$300-
$499MM (87)
​$500MM+(90)
​Yes
​44
​39
​38
​43
​67

 
Can your company withstand higher interest rates? What increase in rates above your current borrowing rate would put your company at risk, create significant challenges, or derail growth or investment plans?

Percentage of medium-sized Canadian companies that say the following increases above their current borrowing rate would put their company at risk, create significant challenges, or derail growth or investment plans:

Percentage increase above current borrowing rate:

National
(508)

B.C.
(65)

AB
(41)

SK & MB
(17)

ON
(248)

PQ
(107)

Atlantic Canada
(30)

0.50 per cent 4 2
5 0 5 4 3
1 per cent 11 14 5 0 9 13 30
1.50 per cent 30 35 27 35 34 23 17
2 per cent 33
26 32 35 31 39 33
2.5 per cent 11 12 15 18 11 9 7
3 per cent or higher 10 11 17 12 9 11 10


Percentage by specific industry sector:

Percentage increase above current borrowing rate:

National
(508)

Consumer & Retail (101) Mfg. (100)

Oil & Gas
(105)

Real Estate & Const. (64)
0.50 per cent  4 6 2 1 0
1 per cent 11 9 8 15 13
1.50 per cent 30 35 45 26 33
2 per cent 33 33 28 42 31
2.5 per cent 11 13 9 14 16
3 per cent or higher 10 5 8 2 8


Percentage by annual gross revenue:

Percentage increase above current borrowing rate: $50-
$99.99MM (90)
$100-
$199MM (177)
$200-
$299MM (64)
$300-
$499MM (87)
$500MM+ (90)
0.50 per cent 7 3 6 5 2
1 per cent 20 10 6 10 9
1.50 per cent 28 42 38 22 12
2 per cent 28 36 38 26 34
2.5 per cent 10 5 9 22 16
3 per cent or higher 4 4 3 15 27

About the KPMG Medium-Sized Business Restructuring Poll

KPMG surveyed 508 Canadians medium-sized business owners and decision makers between February 3 to 15, 2022 using Schlesinger Group's Methodify online research platform. All respondents are business owners or executive-level decision makers. Eighty per cent of the companies surveyed are privately held and 20 per cent are publicly traded.

A medium-sized business is defined as having annual gross revenue of more than $50 million and less than $1 billion. Thirty per cent of respondents reported annual gross revenue between $200 million and $499 million, 35 per cent between $100 million and $199 million, and 18 per cent over $500 million. By sector, 21 per cent of business leaders surveyed are in the oil and gas industry, 20 per cent are consumer and retail, 20 per cent are in the manufacturing industrial group, 13 per cent are in real estate and construction, and the remainder are in various other industries.

About KPMG in Canada

KPMG LLP, a limited liability partnership, is a full-service Audit, Tax and Advisory firm owned and operated by Canadians. For over 150 years, our professionals have provided consulting, accounting, auditing, and tax services to Canadians, inspiring confidence, empowering change, and driving innovation. Guided by our core values of Integrity, Excellence, Courage, Together, For Better, KPMG employs more than 10,000 people in over 40 locations across Canada, serving private- and public-sector clients. KPMG is consistently ranked one of Canada's top employers and one of the best places to work in the country.

The firm is established under the laws of Ontario and is a member of KPMG's global organization of independent member firms affiliated with KPMG International, a private English company limited by guarantee. Each KPMG firm is a legally distinct and separate entity and describes itself as such. For more information, see home.kpmg/ca.

For media inquiries:

Caroline Van Hasselt
National Communications and Media Relations
KPMG in Canada
(416) 777-3288
cvanhasselt@kpmg.ca