The trade war with the United States is causing anxiety among Canada’s business leaders, with many companies already reducing their investment plans this year.
A recent poll by market research firm Léger found that 87% of Canadian business leaders are worried the economy will slip into recession this year, and 86% fear inflation will rise significantly in the coming months.
Amid the uncertainty, Reap Capital managing partner Mary Gagliardi said she’s seeing more interest in refinancing based on firms looking to prepare for harder times to come. Green Street News caught up with Gagliardi, whose firm brokers approximately $1bn per year in commercial debt, and has about $2.5bn in the pipeline, to discuss how businesses are adapting in an uncertain environment.
What trends are you seeing?
We’re uncertain about values, uncertain about what banks are going to do, uncertain about the effects of the tariffs and uncertain economically. That uncertainty cuts across everything we’re seeing right now, and it’s a tough environment to operate in.
I think the market tends to retrench a bit during uncertain times. Uncertainty often leads to refinancing because people want to hoard a bit of cash if they can to weather any coming storm.
In a recession, at least you know what you’re dealing with. With uncertainty, it’s day-to-day. Are we in a recession or not? What impact are the tariffs having? Right now, the biggest challenge is operating in the unknown. In business, uncertainty is the worst word because you don’t actually know what’s coming next.
“This current climate is the most unique economic situation I’ve seen in 35 years”
Have you seen this before during any financial crises?
I’ve been doing this since 1991, when I entered banking during a financial crisis. There was a degree of uncertainty back in 2007, 2008. I happened to be working for [Business Development Bank of Canada] at the time. I was sitting in our London, Ont., office, wondering what was going to happen with the automotive sector, with Windsor being one of my markets.
But this current climate is the most unique economic situation I’ve seen in 35 years. I’ve never seen this level of uncertainty, or this degree of political chaos affecting business confidence. This is a unique economic climate.
What portfolio strategies are there from a finance perspective?
When you’re not sure of what’s to come, you want to get your hands on cash. That helps to weather storms.
When I talk about a portfolio review, sometimes it’s about refinancing to take out capital. Other times it’s to reduce carry costs or improve cashflow.
There are three key things to consider in a refinance or portfolio review: Can I pull cash? Can I save on costs? Can I improve cashflow? If we can achieve one or more of those goals and stabilize the portfolio, it puts you in a position to ride out uncertainty or even capitalize on opportunities.
In a market like this, those who can raise cash may find themselves in a buying position.
How is this uncertainty affecting values?
We are starting to see [capitalization] rates getting pushed up. We’re seeing some downward pressure on values, and certainly land has been a very challenging asset.
“In a market like this, those who can raise cash may find themselves in a buying position”
We’re also seeing increased government involvement in financing. For example, more projects are relying on Canada Mortgage and Housing Corp. insurance, especially in the multi-unit space. It’s becoming difficult to secure conventional financing.
Across the board, we are finding that due diligence and timelines are taking much longer. Getting a deal done now often takes significantly more time, whether it’s because of delays in decision-making due to uncertainty or more extensive documentation requirements from lenders.
Even with CMHC, the bar has moved. A year ago, you could get into the queue more easily. Now, they want to see full appraisals and environmental reports just to get started.
How do you find solutions in today’s conservative lending environment?
One way is to look beyond the individual asset and consider the client’s overall holdings. We take a global view of the portfolio and then look at how to restructure, whether that’s re-amortizing, cross-collateralizing or providing cross-guarantees.
It often requires more creativity in structuring the debt. We start by understanding the full picture, then look at how we can shift terms. Sometimes it’s worth paying a break fee to get out of a short-term deal in order to re-amortize and improve cashflow.
Because of the uncertainty we’re anticipating that, come fall – after all this tariff activity settles into the economy – there will be an impact on values. Cap rate expectations may increase, which would reduce values.
So now is still a good window to act, before we see those changes materialize. It’s a good time to get your portfolio in order before what I expect could be a fall slowdown.
