As borrowing costs rise, Canadian companies look to delay expansion plans

3:46 pm Tuesday, July 19th, 2022

By Divya Rajagopal

TORONTO (Reuters) – Some Canadian businesses are reconsidering their expansion plans after the central bank’s surprise full percentage point interest rate hike last week, and instead are sharpening their focus on protecting profits, analysts say.

The shock of sharp and sudden rise in borrowing costs comes as the Canadian companies are already battling tight labor markets and uncertain demand outlook.

The impact of the rising cost could be felt most by small and medium enterprises that employ over 80 percent of the labor force, according to Statistics Canada.

“I’m not worried about whether Ford or General Electric can borrow money because they have money, but I’m worried about small and medium sized manufacturers who now will see an additional cost,” said Dennis Darby, President of Canadian Manufacturers and Exporters.

Record low interest rates during the pandemic encouraged companies to load up on cheap debt, with non-mortgage borrowings of non-financial corporations in Canada rising 10% to C$817 billion ($639 billion) in the first quarter of 2022 from a year ago, according to Statistics Canada. Real estate, construction and the oil and gas industry have emerged as the most leveraged sectors.

James White, Vice President of Wellmaster, an Ontario-based manufacturer of industrial pipes for the oil and gas industry, has put on hold plans to invest in a sustainable equipment plant as part of the company’s transition to a greener economy.

“We just have to wait it out,” White said.

Economists and industry groups say other small and medium organizations are re-evaluating business plans in the wake of the sharp rise in interest rates.

James Orlando, senior economist at TD Bank, said that corporations are seeing these higher interest rates, and determining how much new expansions or a new capital investment will cost. And they may have to reassess if that’s going to be profitable for them.

“Corporate bond yields and bank borrowing rates for businesses are all going up right now. That changes the arithmetic on whether or not a new project or a new investment will be profitable,” Orlando said.

($1 = 1.3032 Canadian dollars)

(Reporting by Divya Rajagopal; Editing by Aurora Ellis)