2025 Canadian loan trends

General backdrop and economic outlook

The state of the Canadian business cycle at the present moment can be generally characterized as a story of both resilience and challenges.

On the one hand, most businesses have adapted to the post-COVID-19 era and all of the associated "new normals". Corporate borrowers, by and large, understand their businesses in terms of new consumer behaviours, normalized supply chains, stability in revenues and expenses, and accommodative monetary policy.

On the other hand, the flurry of tariffs being threatened and imposed by the Trump administration is injecting a massive degree of uncertainty (see “U.S. imposes tariffs on Canada; Canada retaliates”). While Canadian companies that sell goods targeted by the tariffs into the U.S. are most affected, the downstream effects on parts, supply chains, and the Canadian economy at large are significant. Second-order unknowns include the extent of retaliatory tariffs, escalating counter-measures, and the potential policy response of the Canadian government to alleviate the impact of a trade war with Canada’s largest trading partner through monetary and/or fiscal policies as it did in the early COVID-19 period.

As a developing secular phenomenon, the impact of artificial intelligence on businesses and global economies is becoming increasingly relevant. Companies that can harness the power of AI and intelligent robotics will stand to benefit tremendously from competitive advantages, greater efficiencies, and lower costs while others that do not are left behind. Conversely, governments will have to grapple with significant job disruption and displacement as increasingly more tasks are performed by agentic AI and intelligent robots, all of which are a massive deflationary force that may require a recasting of what GDP per capita means¹.

Looking ahead, forecasts suggest modest economic growth of around 1.5% for 2025, with expectations of continued below-potential expansion. Lower interest rates are anticipated to support consumption and investment, though uncertainties persist, particularly with trade policies.

Tariffs and trade wars

The Bank of Canada (BoC) warns that new U.S. tariffs and potential retaliatory measures could dampen future economic performance. In some cases, Canadian companies with a cross-border footprint are even considering options to redomicile to the U.S. Corporate borrowers may find it advisable to proactively assess their financial positions, engage with lenders early, and explore diversified financing strategies to manage these evolving challenges effectively.

Following the Trump tariff announcement on so-called Liberation Day, equity markets sold off sharply, yet the 10-year U.S. Treasury yield rose — an atypical divergence from the usual flight-to-quality response. The move reflected rising inflation expectations, diminished prospects for rate cuts, and fears of renewed supply-side shocks, all of which drove bond prices lower despite broader market risk aversion.

Canadian borrowers and lenders are actively addressing the uncertainties introduced by recent U.S. tariffs and trade tensions, particularly their impact on loan agreements. Two contractual provisions have become focal points in this context: force majeure clauses (as a defensive shield) and material adverse effect (MAE) clauses (as an offensive sword).

Force majeure clauses

Force majeure clauses are designed to relieve counterparties from contractual obligations when unforeseen events beyond their control result in their performance becoming impossible, significantly hindered or impractical. In a typical formulation, these events often include so-called "acts of God" (such as earthquakes, floods, or other natural disasters), labour strikes, riots, armed conflicts or wars, acts of terrorism, and, in some cases, acts of State or government.

In the lending context, force majeure clauses are most prevalent in project financing, P3, and infrastructure deals. Notably, force majeure is a standardized termination event under the ISDA Master Agreement for derivatives arrangements.

Importantly, the notion of a force majeure event excusing contractual performance does not exist as a feature of Canadian common law; it is purely a contractual construct. As such, the courts will examine the specific language of the force majeure clause rather than deferring to implicit legal principles.

However, the applicability of these clauses to tariffs is complex and largely depends on the specific language of the contract. Canadian courts typically interpret force majeure clauses narrowly, often requiring that the event be explicitly listed or fall within a defined category of qualifying events. For instance, in Porter Airlines Inc. v. Nieuport Aviation Infrastructure Partners GP, 2022 CarswellOnt 16072 (Ont. S.C.J.), the Ontario Superior Court of Justice ruled that increased costs due to the COVID-19 pandemic did not constitute a force majeure event excusing payment obligations.

Material adverse effect clauses

MAE clauses typically allow lenders to withhold funding, declare a default, or renegotiate terms if a significant, unknown event substantially affects or threatens the borrower’s financial condition in a persisting manner. From a lender’s perspective, the animating principle before extending financing is ascertaining the creditworthiness of its borrower (such as projected revenue streams and debt service capacity). If those assumptions are invalidated due to an exogenous event that materially and adversely impairs the borrowing credit, the question becomes which party bears the risk of that event. Including an MAE clause in a loan agreement, where triggered in a default scenario, would allow a lender to accelerate its loan and immediately pursue enforcement remedies before further deterioration of the borrower’s business and any related collateral. The inclusion of an MAE-based event of default is often a point of negotiation and is more likely to be included in higher-risk, sub-investment grade credits. Where one is included, parties should pay attention to whether the MAE clause is forward-looking or not and the words used to convey the attendant probabilities of the event having an adverse impact on the borrower’s business (for example, "could" occur versus "would" occur), as indicated in a typical definition below:

"Material Adverse Effect" means any such matter, event, or circumstance that, individually or in the aggregate [could/would], in the opinion of the Lender, [acting reasonably], be expected to have a material adverse effect on: (a) the business, assets, properties, liabilities (actual or contingent), operations[,/or] condition (financial or otherwise) [or prospects] of the Borrower, individually, or the Borrower and its Subsidiaries and the Guarantors taken as a whole; (b) the ability of any Loan Party to perform any of its material [payment] obligations under this Agreement or any other Loan Document to which it is a party; or…

The ability to invoke an MAE clause on the grounds of tariffs will depend on the clause’s wording and the extent of the financial impact. For example, if tariffs substantially impair a borrower’s ability to meet debt obligations, a lender might consider that to be an MAE. However, Canadian courts have historically set a high threshold for what constitutes an MAE, often requiring a long-term, significant impact on the borrower’s earnings or overall financial health. In Canada, there is a dearth of case law interpreting MAE clauses in financing transactions or otherwise. As such, Canadian courts will typically resort to the definitions of materiality in analogous contexts, such as accounting practice and securities law, to determine whether a particular event or development is sufficiently material to meet the MAE standard³.

To mitigate risks, borrowers that are potentially implicated by tariffs should consider proactively engaging with lenders to discuss their potential impact on financial performance. This may involve negotiating waivers, adjusting financial covenants, or restructuring debt to accommodate the increased costs associated with tariffs. Lenders, in turn, are encouraged to assess the specific circumstances of each borrower, considering the direct and indirect effects of tariffs on their operations before deciding to enforce MAE clauses. In Canada especially, a lender electing to accelerate the loan and enforce remedies against its borrower based on an MAE-default could be considered draconian and may carry reputational risks for the lender.

In summary, the evolving landscape of international trade underscores the importance of precise contractual language and proactive communication between Canadian borrowers and lenders. By carefully reviewing and potentially revising force majeure and MAE clauses, and maintaining open dialogues, both parties can better navigate the uncertainties posed by U.S. tariffs and trade disputes. As a general rule, it is nearly always better to broach the issues pre-emptively by way of a consent or amendment rather than a waiver after a default has occurred.

Riding the interest rate roller coaster

It is fair to say that Canadian consumers and businesses alike have become accustomed to, if not reliant on, relatively cheap financing in the debt markets. In the wake of the 2008 Great Financial Crisis, the BofC cut its benchmark policy rate to near-zero to support credit markets and stimulate the economy. The so-called "zero interest rate policy" (or ZIRP) persisted as a nearly worldwide phenomenon for most of the next decade, with interest rates even going negative in Japan and the Eurozone (negative interest rates act essentially as a tax on savings, thereby incentivizing the deployment of capital in the form of loans or otherwise).

While the BofC’s policy rate gradually began drifting higher in the latter half of that time span, it peaked at 1.75% in 2018, which is still remarkably low from a historical context.

When the COVID-19 pandemic fully manifested in early 2020, the BofC once again slashed the benchmark rate to spur borrowing and liquidity, fueling cheap credit and a surge in home prices and corporate borrowing. Borrowers who were able to lock in long-term, fixed-rate debt during this second ZIRP period—whether through capital markets, fixed-rate mortgages, or by securing interest rate swaps in the private lending markets—benefited significantly by securing medium- to long-term cheap financing. These businesses enjoyed a major competitive advantage relative to their unhedged peers who had to contend with the subsequent whipsaw in interest rate policy.

As part of its COVID-19 response measures, the Canadian government injected a massive amount of liquidity into the economy—in the range of $360 billion—through a combination of fiscal measures (for example, CERB and wage subsidies), quantitative easing, and financial asset purchases. A predictable response to the "helicopter money" approach to stimulus was soaring inflation, exacerbated by persistent supply chain issues and high energy prices, which peaked at a CPI of 8% in June 2022.  In response, the BofC initiated the most aggressive interest rate hiking cycle in Canadian history, raising the benchmark overnight by a factor of 20 times from 0.25% to 5.0% by mid-2023. This jarring reversal in policy resulted in a significant cost to borrowers with floating rate interest costs and for savers/investors holding fixed-rate bonds on their balance sheet locked in at low yields.

After signs that inflation was moderating and growth was slowing, the BoC began cutting rates in late 2024, bringing the overnight rate down to 2.75% by March 2025 after seven consecutive interest rate cuts, with a bias toward supporting economic growth without reigniting inflation. While recent rate reductions may ease some pressure, firms must nevertheless navigate the complexities of refinancing at rates that, while lower than recent peaks, remain higher than the historically low rates acquired during the low-interest period of the early COVID-19 pandemic.

Private credit

Private credit has grown tremendously over recent years, with global volumes forecasted by many financial firms to grow to as much as $3 trillion by 2028. This growth in the private credit market has been largely in the U.S., fueled by several factors, including regulatory changes, that have resulted in banks scaling back their lending activities. The private credit market in Canada has experienced growth but remains relatively underdeveloped compared to the U.S. This disparity is largely attributed to:

• The dominance of Canada’s "Big Six" banks, which control a large percentage of the lending market.
• The fact that the factors contributing to the growth in the U.S. have not been present in Canada.

While we have seen an increase in Canadian private credit funds, many funds choose to deploy their capital south of the border and in other regions to achieve their desired returns.

Looking ahead to the remainder of 2025, it will be interesting to see whether the current trade conflict will drive any of the Big Six banks to pull back from lending to certain sectors, thereby creating opportunity for private credit as an alternative source of capital. We may also see an increase in stress on maintenance covenants in existing credit facilities with Canadian banks, which could also open the door to private credit lenders who generally are able to offer more flexible terms and may be able to support complex capital situations. Lastly, if we find ourselves in a recessionary environment, distressed companies may turn to private credit for liquidity and support. Often, private credit is noted for its ability to structure around unusual economic impacts and fill in gaps when other suppliers of capital pull back. Whether or not this becomes the case in Canada remains to be seen.

Sustainability-linked loans

Sustainability-linked loans (SLLs) have become an integral component of Canada’s sustainable finance landscape⁴. These instruments have gained traction among Canadian corporations and financial institutions aiming to align financing strategies with sustainability objectives. According to many Canadian financial institutions, the Canadian sustainable finance market is poised for growth in 2025. However, the recent executive orders by the U.S. government aimed at dismantling diversity, equity, and inclusion (DEI) programs may have implications and present complex challenges for Canadian companies with cross-border operations that have a sustainability-linked loan with a DEI component.

Canadian companies with U.S. operations and an SLL that includes DEI components may encounter regulatory probing if U.S. regulatory changes scrutinize DEI metrics in an SLL. This could potentially lead to a need for borrowers and lenders to reassess and potentially modify their DEI metrics within the SLL agreement. Canadian companies with SLLs and U.S. operations may want to conduct a review of the key performance indicators (KPI) and specific performance targets within their SLL to ensure compliance with both Canadian and U.S. regulations as they evolve. Borrowers could consider an amendment to adjust or remove any DEI-related KPI in light of the potentially evolving landscape in the U.S. In doing so, they should also consider the disclosure previously made regarding the nature of the SLL and its alignment and integration with its ESG plan to avoid any greenwashing concerns. For Canadian companies with cross-border operations, the sustainability focus in any new SLL will likely trend towards environmental rather than social due to the current U.S. environment. We anticipate that we may also see an increased number of amendments to SLLs in 2025 to modify the KPIs to remove or revise the DEI metric or to otherwise ensure the DEI metric is jurisdictionally limited in scope or to segregate the SLL into a separate tranche held by lenders that are not subject to the U.S. restrictions.

CDOR transition

At the risk of further traumatizing those who were subjected to the transitioning of nearly the entire Canadian loan market (or some approximately $20 trillion worth of CDOR-based loans and derivatives products) over to a CORRA benchmark interest rate, the good news is this saga is now almost fully in the rear-view.

With that said, one lingering facet of the CDOR era relates to whether or not to include a credit spread adjustment (representing the market consensus delta between the risk-free rate and the interbank funding rate) in addition to the deal margin (representing a particular borrower’s idiosyncratic risk premium). Without reanimating too many skeletons, the issue can be succinctly summarized as follows:

• In the old regime, CDOR represented the unsecured, interbank borrowing rate between Canada’s largest financial institutions for various fixed terms (for example, 30 days and 90 days). As such, inherent in the CDOR rate was both a credit premium for the banks as well as a time-value-of money premium for the fixed periods.
• In contrast, the new and improved rate of CORRA represents a "risk-free" rate because it is derived from the overnight lending cost of secured, Canadian treasury-backed securities. As such, CORRA has neither a credit premium nor a time-value-of money premium, meaning that the CORRA rate is nearly always lower than the CDOR rate in nominal terms.
• When global loan and derivatives markets began the move from credit-sensitive rates (like CDOR and LIBOR) to risk-free rates (like CORRA and SOFR), the question arose as to how existing loan agreements would "convert" the former to the latter. To use an analogy, credit risk was previously measured in inches and is now being measured in centimeters, so a conversion factor is needed. The answer was to use credit spread adjustments, which were necessarily anchored to a world where credit risk was priced off of a CDOR credit baseline. (See CDOR transition accelerated to November 1 for new-money loans and material amendments to existing loans for more information on credit spread adjustments.)

However, with CDOR increasingly receding into the background, we are seeing many, if not most, loan agreements eschewing credit spread adjustments; instead, lenders are increasingly thinking in CORRA terms insofar as pricing credit risk based on the risk-free rate. This shift in practice was foreseen and encouraged by CARR, the organization convened by the BoC to guide the transition process, stating in July 2024 that "CARR expects the market to transition to CORRA plus an all-in spread, without the need for a specific spread adjustment"⁵. We expect this trend to continue, and those relying on older CDOR-based precedents are encouraged to follow the market tide by removing references to credit spread adjustments and pricing loan deals solely on CORRA.

Bitcoin-backed lending

In a matter of months, Bitcoin has experienced a makeover in public perception. Not so long ago it was widely viewed as an unregulated refuge for illicit trade and money laundering, but now it is being heralded as digital gold and pristine collateral for new loans, and has been designated as a strategic reserve asset by the U.S. government (this Bitcoin and Blockchain Cheat Sheet provides background information on this transition). Bitcoin-backed lending offers a novel avenue for accessing liquidity and potentially new revenue streams for institutional lenders.

Bitcoin-backed lending has emerged as an innovative financing method, enabling individuals and businesses to access liquidity without liquidating their Bitcoin holdings. This approach allows borrowers to use their Bitcoin as collateral to secure loans, providing immediate funds while retaining potential future appreciation of their assets. Bitcoin-backed lending is poised for explosive growth, with the global market expected to grow at a compound annual growth rate of 26.4% from the present through 2030 to a market value of US$45 billion⁶. Operating in over 120 countries, the leading Bitcoin-backed company in Canada, Ledn, processed US$114 million in retail-backed loans in January 2025 alone⁷  and over US$6.5 billion in digital asset loans since its inception in 2018.

A Bitcoin-backed loan works as follows. First, borrowers pledge a specified amount of Bitcoin as collateral. The loan-to-value ratio determines the loan amount relative to the collateral’s value. Next, the loan funds are disbursed by the lender, typically in fiat currency or stablecoins, within as little as 24 hours. Borrowers repay the loan over an agreed term. Upon full repayment, the collateralized Bitcoin is returned.

The advantages of Bitcoin-backed loans include the following:

• Liquidity retention: access funds without selling Bitcoin, preserving potential long-term gains.
• Tax efficiency: avoid triggering taxable events associated with asset sales.
• No credit checks: loans are secured by collateral, often eliminating the need for traditional credit assessments and greatly expediting the time to process loan applications.
• Proof of reserves: unlike loans in traditional finance, the Bitcoin blockchain is an open, permissionless, and decentralized network that enables anyone to verify asset balances, including borrowers who have pledged Bitcoin as collateral. As such, exchanges offering Bitcoin-backed loans can and do submit to regular proof-of-reserves attestations with a certified public accountant⁸.

Market participants should be mindful that, as an emerging investible asset class, Bitcoin’s price remains fairly volatile. That said, the amplitude of that volatility has been attenuating in recent years, with Bitcoin’s volatility now being comparable to the Magnificent Seven stocks⁹. Price fluctuations can affect collateral value, potentially leading to margin calls or liquidation.

However, the legal framework in Canada for securing loans with crypto-assets remains underdeveloped. Current legislation does not specifically address the use of crypto-assets as collateral, leading to uncertainties in secured transactions. The evolving nature of cryptocurrency regulations necessitates careful navigation to ensure compliance. As the regulatory environment evolves, clear guidelines will be essential to foster the growth of Bitcoin-backed lending in Canada, ensuring both innovation and consumer protection. Participants should remain cognizant of the associated risks and regulatory considerations to navigate this landscape effectively.