Corporate debt in Canada is reaching worrisome levels, according to a new report by Toronto-Dominion Bank (TD).
Corporate debt outside the financial sector in Canada reached a record 118.7% of gross domestic product (GDP) at the end of the second quarter of 2019, TD economists wrote in a new report on the issue. Corporate debt in Canada is now the third highest among G-20 countries after China and France.
The report, which relies on data from the Bank of International Settlements for its findings, found that servicing that debt, including interest and principal payments, amounts to 56.6% of income — close to the record levels seen in 2017 and well above the average for the 2010-19 period, which was around 50%.
While cash levels have risen considerably over the past few years to help cushion that borrowing, debt has grown at an even quicker pace. TD said real estate, manufacturing, and the oil and gas sectors account for about 45% of total non-financial corporate debt. When adjusting for the level of cash holdings, debt levels in these industries remain elevated and are well above their respective averages over the current economic cycle.
With a limited market for non-investment grade issues in Canada, firms are increasingly turning to the U.S. dollar market which now makes up about 60% of the issues, compared with 40% in 2007, TD said, citing Bank of Canada figures. As well, the value of U.S. leverage loans held by Canadian firms increased more than two-fold to $175 billion U.S.
