Is corporate Canada too cautious?

The country is not seeing any big deals because the Canadian market is too small and, partly, the conservative culture of the asset managers is to blame, according to Andrew Baranowsky, senior director, corporate finance and financial risk management, Bombardier Inc.

“To this date, a billion dollar trade has not been done in this country,” he said. The Canadian banks, he added, failed to capitalize on the government stimulus during the global crisis. “Rather than institute the multiplier effect, and generate loans and economic activity, they sat on [assets], evidencing that they’re not ready to deploy because they have a conservative credit culture.”

Eric Castonguay, managing director, PricewaterhouseCoopers Corporate Finance dissented from that assessment, though, saying Canadian bank prudence served companies well during the crisis.

“I do think what we saw during the credit crisis really was kind of a flight to a relationship,” said Castonguay. “So companies with existing bank relationships tended to get capital. Canadian banks, cautious by nature, were cautious in deployment of capital and kept a fair bit of dry powder.”

Paul Stinis, senior vice-president and treasurer, BCE Inc, says the truth lies somewhere between Baranowsky’s and Castonguay’s views.

“There’s no question it’s a much more conservative market in Canada than it is in the U.S., and in some ways that’s an impediment to growth,” he said. “But Canadian companies in general tend to have a lot sounder balance sheets; Canadian companies are by and large sitting on a lot of cash, and debt levels overall are almost down to pre-credit crisis levels.”

However, it’s this cautious and conservative approach that some experts say is responsible for corporate Canada recovering more slowly than corporate U.S., despite having gone through a much shallower recession.

Castonguay offered a two-part explanation. “Because the U.S. was so much harder hit than Canada, the actions that companies in the United States had to undertake had to be a lot more severe, a lot more drastic, a lot more ruthless in terms of cost cutting,” he said.

The amount of stimulus introduced into the U.S. economy, either fiscal or monetary, was what boosted top line growth, Castonguay added. “I think the combination of those two has probably contributed to faster growth in profits in the U.S.”

One can’t overlook the long-term impact of quantitative easing on a country’s economy and budget deficits, said Castonguay pointing out that “while the U.S. earnings have recovered, Canada has been typically a lot more stable.”

A fair bit of credit was given to financial regulation of the Canadian capital markets. “I believe an invisible hand should happen, and if people go off the deep end they should fail; that’s how regulation works,” said Baranowsky.

Stinis agreed that Canada, and indeed the world, needs more effective regulation and increased transparency. But Ali Suleman, vice-president and treasurer, Hydro One, insisted regulation can’t prevent another crisis and that Canada is regulated enough.

“There is a reasonably good balance of regulation; if you try to regulate any further, you’re going to increase costs,” he said.

New rules would perhaps make the capital market a better place, improve accessibility and provide greater transparency, says Stinis, but he argued that on the flip side “the heavy administration and the cost of that is just going to be a bit of a trade off.”