Cash crunch looms for co rporate Canada

Portions of corporate Canada could experience a liquidity crunch that investors and analysts say will likely result in a wave of companies tapping debt markets and credit facilities during the next months.

In the United States, companies such as Gap Inc., Carnival Corp., Expedia Group Inc., Exxon Mobil Corp. and Walt Disney Co. have already tapped debt markets for more than a combined US$ 20 billion. But Canada’s top companies have yet to enter the debt markets in force, other than Suncor Energy Inc. and TC Energy Corp., each of which raised more than $ 1 billion in debt in April.

Andrew Johns, the lead adviser at Canaccord Genuity’s Cash Management Group, said the federal government’s corporate assistance has helped keep Canadian companies from raising money in the capital markets, but that could quickly change once those programs end.

“We’re not going to see the real pain of COVID-19 until this money runs out and when it does, there’s going to be a real bad situation,” he said. “We’re going to see a lot of companies file for bankruptcy.”

There are 46 companies in Canada that credit ratings agency Moody’s has given a speculative grade — its lowest category. Only 10 of those companies have an SGL-1 liquidity rating, meaning they can pay their bills with internal cash.

Companies such as Cenovus Energy Inc., Air Canada and GFL Environmental Inc. have an SGL- 2 rating and may have to rely on external funding in the next 12 months. The list’s remaining 18 names, including Bombardier Inc., BRP Inc., and Vermilion Energy and some small-cap miners, have either an SGL- 3 or SGL- 4 rating and they are expected to have to implement such funding.

A majority of the companies on the Moody’s list predictably operate in Canada’s oil and gas sector, where some companies were already struggling.

Victor Vallance, DBRS Morning star senior vice- president of natural resources, said no company in the energy sector is able to generate a positive cash flow with West Texas Intermediate prices trading around US$13 per barrel. Prices will have to more than double, he said, for most companies’ liquidity prospects to improve.

“Under US$ 30 per barrel, the industry doesn’t work,” he said. “At that point, they’re definitely drawing on their sources of liquidity.”

The majority of energy companies have already drawn their lines of credit to fund cash- flow deficits, Vallance said. The sector’s leaders can continue to do so, but he’s concerned about the prospects for small caps.

“Delphi Energy Corp. did submit for (court protection on April 14) and there will be more to follow in the coming weeks and months,” he said.

Airlines have also been some of the hardest- hit companies in the past two months, but Air Canada isn’t expected to have the same liquidity issues that energy companies have.

National Bank of Canada analyst Cameron Doerksen said Air Canada entered the crisis with a war chest of $ 7 billion in cash, including a fully withdrawn line of credit. Further support in the way of loans would be available to the company through Export Development Canada, which has already provided Porter Airlines Inc. with $135 million.

Should those two avenues still not provide enough cash, Air Canada has $ 5 billion in unencumbered assets such as airplanes that it can raise debt against.

“They’re going to be one of the survivors: they have the balance sheet and cash position to come out the other side,” Doerksen said. “Obviously, that’s not sustainable indefinitely.”

He said the airliner will burn through a significant portion of its cash in 2020, but it should have enough left over to get through 2021, when he expects travel to normalize.

Although Air Canada should be looking to take advantage of every possible source of external funding, Doerksen doesn’t expect it will conduct a debt or equity offering.

Johns at Canaccord said companies such as Air Canada and the oil producers may struggle in those markets if they are forced to tap them. He described the current market as a “pens down” environment where institutional investors aren’t making deals happen.

Investors, he added, aren’t keen to offer funds unless it’s for an offering that is as attractive as a gold company expanding production.

“There’s no demand,” Johns said. “There no one out there willing to write a ticket for a company like Bombardier. If Air Canada came to the market and tried to do a debt offering, they’d probably have to do it at double-digit rates.”

Johns sees the same issue for real estate investment trusts, which have also been clobbered in the past two months.

H& R REIT, one of the more well- known names in the Canadian sector, has already taken on a $ 425- million unsecured credit facility and an 8.5- year, $ 100- million mortgage to boost liquidity.

Other Canadian REITS are on less solid ground, particularly because of their higher debt ratios, but BMO analyst Jenny Ma said that, generally, the group will have enough liquidity to both operate and pay off their 2020 maturities. Like the energy sector, it’s the small caps that are most in danger, she said.

The longer the current economic shutdown drags on, she said, the higher the risks associated with the sector become.

“It’s hard for anyone to be truly comfortable at this point in time,” Ma said.