After the third wave of COVID-19 and as the economy reopens, we should see the market continue on an upward trajectory. According to the Bank of Canada (Boc) recently released Monetary Policy Report, the Canadian economy is expected to grow approximately 6% in 2021 and more modestly, at 4.5% and 3.5% in 2022 and 2023, respectively. Inflation is expected to remain at 3% or above for the remainder of 2021 due to temporary factors as a result of the pandemic, but it’s expected to ease to 2% in 2022.
On July 14, 2021, the BoC held its target overnight rate at 0.25%, where it’s been since the start of the pandemic in Canada. The BoC adjusted its quantitative easing bond buying program which is reduced to a target of $2 billion per week. The BoC noted that global GDP growth is expected to reach 7% in 2021 as the economy recovers strongly with continued progress on vaccinations.
Given the momentum from more businesses reopening and restrictions easing, Q3 2021 is expected to exhibit stronger performance primarily due to vaccine rollouts, increased consumer confidence, with expected increases in spending on services such as transportation, recreation, and food and accommodation.
The bank lending market continues to be robust and hyper competitive for new lending arrangements. The alternative lending space presents an opportunity for businesses to access providers and continues to support existing customer needs while liquidity/capital continues to be strong and pricing remains relatively inexpensive.
Capital providers, both banks and non-banks, are well capitalized and aggressively looking at placing capital. In certain cases, credit criteria have loosened, as is evident by leverage profiles and as lenders move away from disciplined lending to single- and two-covenant structures.
Private debt remains strong. However, due to the competitive bank market, some providers are seeking capital outside traditional lenders.
Default rates declined to 1.3% and yields are declining given the competitive market. High-yield secondary spreads are declining to what we typically see in senior debt levels. With the abundance of liquidity in the markets, it’s not surprising leverage multiples are being pushed up as compared to pre-COVID-19 levels, with large corporate at 5.3x and middle market at 6.0x.