COVER

The spreading blight of bankrupcty

Thomas Hopkins June 7 1982
COVER

The spreading blight of bankrupcty

Thomas Hopkins June 7 1982

The spreading blight of bankrupcty

COVER

Thomas Hopkins

In Toronto's fashionable Yorkville district, few people hide success. Mercedes coupes vie with Jaguars for space on the narrow streets while style-conscious shoppers

browse in pricey shops. But failure is more discreet. Last week a tasteful grey-and-white window sign was the only evidence that, after four profitable years in operation, a small craft gallery named Dexterity had become one of Canada’s latest victims of the recession. Business was strong until the end of 1981, explains Jim Wies, one of the three partners. Then, this spring, sales dropped dramatically. “It’s like somebody turned off the tap,” says Wies. Without savings to draw on, the owners decided to close shop voluntarily at great cost to themselves. All three will now have to look for work—and senior partner Ross McGill estimates their total personal loss to be $100,000.

Although Dexterity’s passing will go largely unnoticed, its story is being repeated with alarming frequency across the country. Signs shout EVERYTHING MUST GO! from storefronts, and plaintive newspaper notices read THANKS FOR 25 GOOD YEARS. Owing to a lethal combination of high interest rates, meagre sales and—in some cases— shortsighted management that led to a

drunken sailor’s attitude toward debt, Canada is in the middle of an epidemic of business failures.

So far, the new wave of bankruptcy has mainly affected the nation’s 700,000 small businesses—those with assets of less than $2 million. But their closings have formed a ground swell that now threatens to engulf corporate giants. In the United States major corporations

As the wave of failures buildsthere are mounting fears that it will soon engulf one or more of the corporate giants

have already fallen (box page 38), and Canadian business circles are rife with rumors that the phenomenon is rapidly spreading north. Many large Canadian companies are now over their heads in debt following last year’s acquisition binge, and at least one is on the critical list—Dome Petroleum Ltd. of Calgary. At the same time, other companies, such as Turbo Resources—also of Calgary—are inching perilously close to it.

So great is the atmosphere of morbid anticipation that the management of

such companies as real estate giant Nu-j West Group Ltd. and toney Toronto furniture retailer the Art Shoppe recently« felt moved to publicly deny persistent rumors that they were about to be closed.

But while attention is focused on the fate of the major companies, the blight of bankruptcy among their mediumand small-sized brethren is already placing a severe strain on the country’s economy. The figures are stunning. In

1981 commercial bankruptcies in Canada increased 22 per cent from 1980— 8,055 compared to 6,595—and the pace is accelerating. In the first quarter of

1982 they were up 37 per cent from the same period last year, with the crucial industrial heartland of Ontario and Quebec suffering most. The federal bankruptcy figures are all the more chilling because they do not include the major portion of business failures. Receiverships, in which failing businesses are placed in the hands of a trustee, or simple “walk-aways,” in which an owner voluntarily closes a disabled enterprise, are generally thought to total three to four times the number of bankruptcies. (No reliable statistics are kept on these two categories, but some estimates put the real rate of failures last year at 21,000 while other estimates project that the 1982 body count will be as high as 30,000.)

The fiscal danse macabre is performed daily across the country in a ^frighteningly familiar pattern. In the case of a small retailer, the bank usually first becomes aware of a firm’s troubles as bad cheques and credit inquiries mount. Then, as the pattern unfolds, the owner is called in, and, depending on his situation, attempts are made to generate cash through fire sales or perhaps a loan from a relative. If the prognosis is bleak, the bank or lending institution, as the major secured creditor, will issue a writ for the firm’s assets. When a larger firm is involved, the banks may call in a receiver to assume the company’s assets and liquidate them, restructure the firm or sell it. Alternatively, the owner of a faltering operation may act first. Often he simply closes down with or without a declaration of bankruptcy. In some cases the owner is able to convince his creditors to forestall bankruptcy by accepting less than what is owed them in exchange for allowing him to continue in business. When a company does fail, however, it sets off a malignant ripple effect that leaves generally unprotected employees with little more than vacation pay and an average of 30 small, unsecured suppliers with unpaid bills. Nor do owners walk away unscathed. While most personal bankruptcies are caused by mishandled consumer debt or unemployment, as many as 10 per cent result directly from the loss of personal assets that have been sunk into a failed business.

No region of the country is immune from the malaise. In Atlantic Canada business bankruptcies soared by 83 per

cent last year to an all-time high of 812. Reflecting a nationwide pattern, many of the stricken firms were retailers. In one grim week last fall Scovil’s Department Store, Kennedy’s Shoes and Jack’s Men’s Clothing, all established concerns in downtown Saint John, N.B., announced they were going out of business.

The vital fisheries industry, too, is caught in a downturn. Former Nova Scotia fisheries minister Edmund Morris estimates that the industry’s big four—National Sea Products, H.B. Nickerson and Sons Ltd., the Lake

Group Ltd. and Fishery Products Ltd.— lost a combined total of $100 million in the past two years. The widely predicted bankruptcy of any one of them could have disastrous effects on the 85,000 Atlantic Canadians who depend on the $1billion-a-year industry. The depressed state of the industry was underlined last week when National Sea Products of Halifax announced it was taking over the international marketing operations of its 50-per-cent shareholder, Nickerson. And that may only be the first step of a further merger.

Even Newfoundland’s Crosbie family financial empire has not been spared. Newfoundland Engineering and Construction Co., the keystone company in a group that once spanned two dozen companies ranging from real estate to newspapers, was forced into receivership in late November. Another Crosbie concern, Chimo Shipping Ltd., went into bankruptcy last August, and Domac Enterprises folded before that. In Sydney, N.S., an incredible 115 companies have declared bankruptcy in the past 12 months. Says William MacDonald, manager of the local Board of Trade: “I’ve never seen anything like it, not even in the Depression . . . . It’s the worst it’s ever been.”

The brunt of the business-failure onslaught, however, has been borne by Ontario and Quebec. Ontario accounted for 36 per cent of the nation’s bankruptcies in 1981, largely because the nation’s manufacturing sector is concentrated in that province. Indeed, of 883 business failures in Ontario in the first three months of this year, most have been in manufacturing. And with output in that

sector forecast to drop by seven per cent in 1982, the situation is likely to worsen. Scores of retailers have also failed in Ontario. One of the most dramatic recent cases came in May, when tour giants Skylark Holidays Ltd. and Sunflight Vacations Ltd. were placed in receivership. Said a stunned Graham Atkins of the Ontario Travel Industry Conference: “Never in our wildest dreams did we expect the two largest travel companies to go out in the same day.”

But the greatest number of bankruptcies last year occurred in Quebec— which has a higher proportion of smalland medium-sized businesses than any other province. It accounted for a stunning 41 per cent of the Canada-wide toll. Recent failures include two Montreal real estate companies as well as Consumer Carpet Warehouse and the 77store Jean Junction Ltd. But no one is hurting more among Quebec busi-

nessmen than restaurateurs. (Until recently there was one restaurant for every 500 people in the province—compared to Ontario’s ratio of one per 1,000 people.) Last year 329 restaurants closed their doors in Quebec, and the outlook for this year is even worse. The province’s restaurant association estimates that 30 per cent of Quebec’s 12,000 dining establishments are on the verge of bankruptcy. One of the more high-profile owners to succumb this year was Benito Gusmaroli, who ran three Montreal restaurants including the well-known Café Martin on fashionable Crescent Street. After 31 years in the business, 50-year-old Gusmaroli filed for bankruptcy in March and he is now looking for a job. Lamented Gusmaroli: “Am I going to have to take a train to Toronto to get a job as a waiter?”

Even Canada’s strongest economic region, the West, has fallen victim to

the recession. While the Conference Board of Canada predicts growth in Alberta of 3.8 per cent, 1981 bankruptcies numbered 619, up from 445 in 1980. During the first quarter of 1982 they jumped again by 15 per cent. In recent months four Edmonton-area mortgage brokers have failed, and the Alberta Oil Patch is buzzing with stories of companies trimmed to the bare bones. “Those of us who haven’t already gone down are keeping barely one week ahead of the receiver,” says Douglas Wenzel. Wenzel’s Cycle Machine Shop Services Ltd. went into receivership in March.

Premier Peter Lougheed recently announced that his government would forgo $5.4 billion in royalties in the next five years as part of a package to revive the oil industry. But it will not be enough for 10 of the 35 members of Canadian Oilfields Heavy Haulers’ Association. They have already collapsed. In a recent survey by the Canadian Fed-

eration of Independent Business (CFIB), 32 per cent of the 1,000 Alberta businesses surveyed said they will be bankrupt or in receivership this year if conditions do not improve.

Declining economic growth rates are afflicting Saskatchewan, Manitoba and British Columbia, and, already, business failure rates are moving in lockstep. In Saskatchewan 167 businesses closed last year; in Manitoba, 244. For its part, British Columbia was even worse off, with a total of 1,480 bankruptcies. And in all three

provinces the rates have accelerated so far this year.

As in other provinces, many of those failures have come in the retail, residential construction and manufacturing sectors. In Manitoba, for instance, recent fatalities include Winnipegbased Victoria Squire, a 25-year-old manufacturer of leather goods. In a tearful meeting last April, founder Jimmy Gobuty, 71, informed 326 employees that the company was going into receivership. Another was Schreyer Equipment Ltd. of Winnipeg—once one of the 10 largest MasseyFerguson dealerships in Canada— which went into voluntary receivership last December.

But some of the West’s major problems lie in sectors that are in crisis right across the country. Farmers are in trouble in every province, and bankruptcy rates are increasing. In the first four months of this year there were 14 collapses in Manitoba and 12 in Alberta. That has created fears that the crisis in Central Canada is spreading westward. Already Ontario and Quebec have been setting record rates. While Quebec’s 1982 farm bankruptcies totalled 61 by

the end of April, Ontario had edged into the lead with 63, continuing a pattern set last year when it accounted for 140 of the farm bankruptcies in Canada. The seriousness of the farmers’ problems was underlined recently when agricultural leaders from across the country converged in Ottawa to ask the government for low-interest loans and better marketing systems to help them out of their difficulties.

Those are not the only

problem areas. A slump in the forestry industry, too, is nationwide. Still reeling from a three-month strike last year, B.C.’s lumber companies are also plagued by the stagnant state of the North American housing industry. Similar gloomy outlooks prevail across Central Canada and in the Atlantic provinces. In the Maritimes, where the industry employs 14,000, falling demand cut last year’s sales by 25 per cent, and many retail lumber companies have closed.

Mining is still another victim of the acute downturn, as a result of falling prices for metals. And while no mining companies have failed during the current recession, the sector’s problems may have strong spin-off effects this year in the Yukon and Northwest Territories—where both regions’ economies are heavily reliant on it. Meanwhile, layoffs at the Yukon’s three major mines and a slowdown in exploration activity in the Northwest Territories threaten to throw service industries into bankruptcy.

into bankruptcy.

Clearly the recession itself—which promises to drag on at least until year’s end—is one major factor underlying the

current wave of bankruptcies. Exporters face shrinking markets, and construction, manufacturing and retail companies face low consumer demand in the domestic market. But many of Canada’s businessmen place the blame on a more immediate problem which, they say, j*makes their efforts to Scope with the downturn onearly futile. They see |themselves as cannon |fodder for Ottawa’s late^blooming war on inflaf:tion. “There’s no ques-

tion that the major cause [of the new wave of bankruptcies] is high interest rates,” says John Bulloch, president of the 65,000-member CFIB. Many companies borrowed heavily from banks that were eager to lend in the late 1970s. They expected continuing high demand for their products and continuing high inflation, which would allow them to pay debts in inflated dollars. Now those companies, often the best and most aggressive, ohave been caught painfully short by the “downturn.

Even such individual entrepreneurs as Vancouver’s real estate and sports magnate Nelson Skalbania (box page 40), who rode high on the speculative froth two years ago, are frantically struggling to survive. “When we were in a buoyant economy, companies could make mistakes and get away with it. Now there’s no room for error,” says Graham Gibson of Winnipeg receivers MacGillivray & Co. Some, such as Edmonton’s Dali Bhandari, are paying a painful price. Bhandari borrowed heavily in the late 1970s to assemble development land outside Edmonton. By 1980 carrying costs had ballooned and real estate demand in the West had crashed. In March the banks foreclosed. Two weeks ago they took Bhandari’s $220,000 Edmonton house, and today he is on welfare. Says the 53-year-old civil engineer: “If the interest rates had stayed at 12 per cent, by the end of the year I could have been a millionaire.” Most businessmen sympathize with the federal government’s call for belttightening but they charge that for the government it is only rhetoric. Says Bill Stewart, manager of Winnipeg’s Western Sound, a stereo store that is attempting to re-establish itself after going broke in 1980: “The galling thing is that I see no evidence at all that the [federal] government is willing to lead the way by example.” Moreover, the Nov. 12 federal budget is universally condemned as antibusiness and antiinvestment. “A disaster... a clumsy tax grab,” grumbles Bulloch.

Aggravating the distress of businesses large and small is the vicious circle created by a misfiring economy. High interest rates lead to bankruptcies, which cause unemployment, and that leads to falling demand and more bankruptcies. At the same time, businessmen complain that the banks, eager to lend almost any amount in good times, are too quick to call in their

money in the bad times. On the other hand, bank champions are quick to come to the defence of the Big Five. Says Melvin Zwaig of Thorne Riddell: “I have yet to see a foreclosure that was either frivolous or malicious.”

There is also concern that the banks, in their eagerness to distribute money, paid insufficient attention to the quality of the projects they were backing and then lacked the expertise to follow up on investments when they started to go wrong. For their part, the banks counter that lending, especially for large projects, had to be borne by them because capital markets were not responding to new stock and bond issues. One result was the recent acquisition of Hudson’s Bay Oil and Gas by Dome Petroleum, which left a squeezed Dome owing four Canadian banks $3 billion, or almost 45 per cent of their total capital. But if the banks were figuratively shovelling loans off the back of the wagon two years ago, the deluge of generosity has clearly stopped. New loans, except to customers with triple-A credit ratings, are almost nonexistent, and current customers are being urged to retrench—to lower their debt exposure by up to one-half by liquidation.

One major institution increasing its liquidity is the National Bank of Montreal. Its problems do not stem from a lending binge. They are thé result of overlapping services left by the merger that brought it into being in 1979. Nevertheless, its woes underline the deepening fragility of the banking system. Last week the bank reported a drop in second-quarter profits and took the dramatic step of withholding commonshare dividends.

All the news is bad for Canada’s bankrupt small businessmen. For them, the human cost of business failure is immediate and often terrible. The social stigma of bankruptcy persists. Worse, many small businesses are financed by demand loans from the banks, loans that are not available unless secured by the personal assets of the owner. As a result, business bankruptcy often means personal disaster. “Bankruptcy is very much a stressful, emotional and psychological decision, not just financial,” says David Connop, a Vancouver bankruptcy trustee. “To a large extent these people have lost control of their lives.”

Insolvency experts sympathize with owners but they say that many hasten their troubles through bad management. John Bulloch, for one, does not accept that argument. “It’s not a question of good or bad management,” he contends. “There is simply not enough business to go around.” Bankruptcy experts agree that high interest rates are an unpleasant reality but argue that they are simply a cost of doing business.

They charge that businesses are too often built around the strong sales or technical strengths of the owner. Says Kitchener management consultant Graham Cunningham: “Many people have been running their firms the same way year after year. They did well yesterday. Now they’re not. They didn’t change anything so they ask, ‘What the hell happened?’ They end up blaming high interest rates, which is nonsense.”

Worse, once the downturn starts, firms often do not know how to reverse it. Says Walter Carson, director of public affairs for the 5,000-

member Canadian Organization of

Business: “Most

small businesses are not set up to know when they are losing money. They don’t realize the terminal signals, such as a spurt in accounts receivable.” When they do wake up, he says, they do not know where to get help. The advice of Canada’s insolvency experts to companies awash in red ink is brutally simple: adapt or die. Confused businessmen are hanging on week by week.

Business in the 1980s has changed fundamentally from business in the past. The survivors will be the businesses that move quickly to cut costs, discontinue unprofitable lines and, above all, reduce debt. “If something

goes wrong, the only thing that can really hurt you is debt,” counsels Cunningham.“If you don’t owe the bank anything and you have a downturn, who’s going to call your loan?”

But despite short-term corrective measures, the medium-term economic future for Canadian business looks grim. Calvert Knudsen, chairman of B.C.’s MacMillan Bloedel Ltd., summed up the icy reality when he told a recent meeting that the West Coast forestry giant was being “managed for survival.”

Nor will business find any comfort in the statistical indicators. Corporate profits for the first quarter of 1982 dropped by 50 per cent.

Unemployment reached a postwar high of 9.6 per cent. And unlike the United States, where inflation is edging down to four per cent, Canada’s rate appears to be nailed above the double-digit line.

Meanwhile some experts worry that the federal government’s current interest rate squeeze is now beginning to cut into the well-toned muscle of the economy. They are concerned that even wellmanaged companies are becoming socalled “walking bankruptcies”—enterprises technically in default on their loans but carried by their lenders. Says Thorne Riddell’s Melvin Zwaig: “Under normal circumstances, bankruptcy is a levelling-off process. I feel we are now

beyond the levelling-off process.”

Not surprisingly, given the bleak outlook and increased calls for government action to stimulate the economy, the resolve of the federal government to maintain its tough monetarist course appears to be wavering. Despite claims by Prime Minister Pierre Trudeau that inflation is still the main enemy, a shift in policy seems likely this summer (page |13). Still, one of the country's only growth industries is to be found |among the executors of |bankruptcy. Says Ian ^Strang, vice-president of |Clarkson Company Ltd. Sand president of the Ca-

nadian Insolvency Asso-

ciation: “I don’t think

there is one insolvency firm that has ever been busier. It’s not all that different from the 1930s.”

But the picture is not unrelentingly bleak. There can be reprieves. Canadian Admiral Corp. Ltd. went into receivership last November. In March, Inglis bought the company, rehiring 700 of the 2,000 workers who had been laid off. Admiral is not alone. In November, 1980, Ontario’s Alton-Lewis Ltd., a chain of six ladies’ wear stores, went bankrupt. Last January the daughter of the original owner bought the name and resurrected four of the stores. Besides, as John Bulloch points out, in normal conditions seven of 10 new firms close down within their first five years. And of those that fail and start again, the majority are successful the second time around. “Sometimes a bankruptcy can be worth a Harvard MBA,” says Ron Twohig, federal administrator of bankruptcy for the Atlantic region. “A person learns the hard way how you can go wrong in business and he learns not to make the same mistakes again.” Theoretically the survivors of the hard times will emerge blinking from their bunkers to find an economy that is leaner and more rationalized.

Still, as the small business deathwatch continues and more firms close down across the country, the impression is growing that the casualty count in Canada’s war with inflation is becoming unacceptably high.

With Stephen Kimber in Halifax, Anne Beirne in Montreal, Ian Austen and Carol Bruman in Toronto, John Hay in Ottawa, Peter Carlyle-Gordye in Winnipeg, Gordon Leyye in Calgary, Diane Luckow in Vancouver, Leslie Cole in Whitehorse and Anna Prodanou in Yellowknife.