As economic uncertainty grips Canadian businesses in the wake of U.S. President Donald Trump’s tariff policies, veteran investor Arif Bhalwani sees a compelling silver lining for those willing to navigate the challenging landscape of distressed investments. The current market volatility, exacerbated by cross-border trade tensions and compounded by years of economic stagnation in Canada, has created what Bhalwani considers an opportune moment for investors to enter the distressed debt space with potentially significant returns—provided they understand the complexities involved.
Rising Business Insolvencies Signal Market Opportunity
Recent data from the Office of the Superintendent of Bankruptcy paints a concerning picture for Canadian businesses but an intriguing one for distressed debt investors. Business insolvencies across Canada increased by 7.6 percent in January 2025 compared to the previous year, representing a dramatic 42.5 percent increase from 2019 levels. These figures reflect the mounting pressure on Canadian companies struggling to adapt to the economic realities created by Trump’s tariff policies and their ripple effects throughout the North American supply chain.
This upward trend in business distress comes after years of relatively stable, if stagnant, economic conditions in Canada. The sudden jolt from U.S. trade policy changes has pushed many businesses that were previously managing to stay afloat into precarious financial positions, creating what Bhalwani describes as a “reckoning” in borrowing spreads.
“We’re coming off a decade of cheap money. There’s been a lot of weak businesses that survived just because capital was flowing freely, and that era is pretty much over,” Bhalwani explains. “When capital starts pulling back, companies that once had options suddenly don’t. That’s when you can step in as a private lender and structure deals that protect your downside, giving you a shot at some real returns.”
Not for the Faint-Hearted: The Realities of Distressed Investing
While the opportunity in distressed investments may be attractive, Bhalwani emphasizes that this strategy requires a particular mindset and specific expertise that differs substantially from traditional investment approaches. Investors considering this space should be prepared for a hands-on, often complex process that bears little resemblance to passive income strategies.
“For high-net-worth investors, they should be paying attention to the strategy, but it’s not a plug and play strategy – you need to be okay with illiquidity, you need to be okay with longer holding periods,” Bhalwani cautions. “The reality is not everything is clean or pretty, so you’ve got to have patience. This isn’t a passive income strategy. You’re not clipping a coupon and forgetting about it, it’s not like buying a bond or a fixed income instrument.”
The process of restructuring distressed companies frequently involves legal complications, negotiations with multiple stakeholders, and fundamental operational changes to the underlying business. Investors must be prepared for potential litigation, extended holding periods, and the inherent illiquidity that comes with private debt investments. These factors make distressed investing unsuitable for those seeking quick returns or unwilling to engage with the messier aspects of corporate restructuring.
Trump’s Tariff Policy: Creating Volatility and Opportunity
The catalyst for much of the current market turbulence in Canada stems directly from the unpredictable nature of U.S. trade policy under the Trump administration. This volatility affects businesses across virtually all sectors of the Canadian economy, though some industries face particularly acute challenges.
Manufacturing-related businesses have proven especially vulnerable to these trade tensions, with their operations often directly impacted by tariffs and supply chain disruptions. However, Bhalwani notes that the uncertainty extends far beyond traditional manufacturing, affecting a broad swath of Canadian industries dependent on stable trade relations with the United States.
“One tweet or one policy change can pretty much wipe out the margins of a business or cut access to a market. And for a highly leveraged business, that kind of shock can be really fatal,” he observes. This vulnerability creates opportunities for distressed debt investors who can provide capital and restructuring expertise to otherwise viable businesses caught in temporary but severe downturns.
The Restructuring Approach: Beyond Simple Financing
What distinguishes sophisticated distressed debt investing from simply providing emergency capital is the comprehensive approach to restructuring. For Bhalwani and other experienced practitioners in this space, the strategy involves much more than financial engineering—it requires fundamental operational changes to restore business viability.
“What we’re doing is solving for complexity. We’re not just providing capital, we’re helping businesses shed their liabilities, trying to get out of bad contracts and restructure around what actually worked,” he explains. This often means making difficult decisions about which aspects of a business to preserve and which to eliminate, focusing resources on the most viable operations while cutting underperforming divisions or obligations.
The initial phase of restructuring typically involves a thorough assessment of existing contracts and liabilities, identifying those that drain resources without contributing adequately to profitability. Exiting unfavorable agreements, renegotiating terms with suppliers and customers, and streamlining operations form the foundation of successful turnarounds. Only after addressing these fundamental issues does recapitalization make sense as a long-term solution.
Medium-Sized Businesses: The Sweet Spot for Distressed Opportunities
While economic uncertainty affects businesses of all sizes, Bhalwani identifies medium-sized companies as particularly well-suited for distressed investment strategies. These businesses—typically with annual revenues between $10 million and $500 million—often lack both the financial resilience of larger corporations and the flexibility of smaller enterprises, making them especially vulnerable to economic shocks.
“I think spreads are going to remain high in certain segments of the market where we operate, which is that small and medium sized business market where companies will have anywhere from revenues of 10 million to 500 million,” Bhalwani notes. “Because capital is just getting more and more scarce in this country, those spreads are going to be wide for a long time, irrespective of where the base rate is.”
This market segment also tends to receive less attention from traditional lending institutions and larger private equity firms, creating a potential opportunity gap for specialized distressed investors. The complexity of these situations often deters conventional capital providers, particularly when combined with the current economic uncertainty, allowing distressed debt specialists to negotiate more favorable terms.
The Monetary Policy Context: High Rates for the Foreseeable Future
The Bank of Canada’s recent decision to maintain its policy rate at 2.75 percent reflects the challenging economic balancing act facing monetary authorities. With Trump’s tariffs potentially fueling inflation on imported goods while simultaneously threatening economic growth, central bankers find themselves with limited room to maneuver.
Bhalwani interprets the Bank of Canada’s cautious stance as an indication that higher interest rates will persist for the foreseeable future. This rate environment, combined with increased risk premiums for business lending, means that companies accustomed to easy access to cheap capital must now adapt to a fundamentally different financial landscape.
Even in scenarios where baseline interest rates eventually moderate, Bhalwani anticipates that borrowing spreads—the premium charged above base rates to account for business risk—will remain elevated for medium-sized Canadian companies. “Because capital is just getting more and more scarce in this country, those spreads are going to be wide for a long time, irrespective of where the base rate is,” he predicts.
The Investment Opportunity: Patience and Expertise Required
For investors considering entering the distressed debt space in this environment, Bhalwani emphasizes that success requires specialized expertise, patience, and a tolerance for complexity. Unlike more passive investment strategies, distressed investing demands active involvement in restructuring processes and the ability to navigate sometimes contentious negotiations with various stakeholders.
The potential returns, however, can be compelling for those equipped to handle these challenges. By entering distressed situations at advantageous valuations and successfully implementing operational improvements, investors can potentially achieve returns significantly above those available in more traditional fixed-income investments.
The current economic climate in Canada, characterized by the dual challenges of persistent stagnation and new trade uncertainties, has created what Bhalwani sees as a particularly favorable environment for this investment approach. The sudden shock of Trump’s tariff policies has accelerated financial distress among previously stable businesses, creating opportunities for investors prepared to provide both capital and restructuring expertise.
Conclusion: A Specialized Strategy for Uncertain Times
As Canadian businesses continue to navigate the turbulent economic waters created by U.S. trade policy and broader market challenges, the distressed investment landscape offers both significant opportunities and considerable complexities. For investors with the appropriate expertise, risk tolerance, and patience, this environment may present attractive entry points into businesses with fundamental value obscured by temporary financial distress.
However, as Bhalwani repeatedly emphasizes, success in this space requires much more than simply providing capital. It demands a comprehensive approach to restructuring, willingness to engage with complex and sometimes messy situations, and the patience to see turnaround strategies through to completion. For those able to meet these requirements, the current market turbulence may indeed offer compelling investment possibilities amid the broader economic uncertainty.
Acknowledgment: This article was written with the help of AI, which also assisted in research, drafting, editing, and formatting this current version.
