16 Dec Corporate Class Warfare (Q2-25)
The divide between corporate giants and the rest of the economy has been widening for years, but what is striking now is how structural and self-reinforcing it has become. In boardrooms and bank workout departments alike, the same imbalance plays out: large, well-capitalized companies dictate the economic terms of their supply chains, and middle-market businesses – often long-standing, technically capable, and integral to the final product or service – are left absorbing volatility they cannot control.
Consider Canada’s largest supermarket chains, home-grown Loblaw and U.S. retail giant Walmart. They emerged from the pandemic with record earnings, fortified balance sheets, and even greater negotiating leverage over their supply chains. Their size allows them to dictate pricing, shelf placement, and promotional calendars to co-packers and smaller food producers. These dominant players can lock in multi-year retail pricing with their customers and pass most cost increases upstream, while simultaneously imposing “vendor programs” that reduce the supplier’s take even further: early-payment discounts, slotting fees, promotional chargebacks, and penalties for missing on-time-in-full delivery targets.
For a smaller producer, these terms are not optional; refusing them risks losing the contract entirely. The result is a self-reinforcing dynamic: the retailer preserves its own gross margins and cash conversion cycle by pushing working capital and volatility onto the supplier. The supplier’s margin erosion reduces its ability to invest in automation, product innovation, or marketing, further cementing its dependence on the buyer. Over time, this dependence makes it even harder to negotiate better terms, ensuring the imbalance perpetuates itself.
It is not simply that the big players negotiate harder. They set the price to the end customer, and then cascade the economics backwards, telling suppliers to make it work. In concentrated markets like Canada’s, where a handful of companies can make or break an industry, these terms are not just aggressive, they are de facto standard.
In the supply agreements and vendor guides that govern these relationships, there is no visible malice, only a quiet but relentless transfer of margin. A co-packer for a national grocery chain will find its gross price whittled away by promotional chargebacks and service-level penalties, even as it is told to hold extra stock to ensure on-time delivery. A precision manufacturer in aerospace will invest in new machining capacity at a customer’s request, only to watch volumes lag and annual “cost-down” clauses eat away at unit prices. An energy services contractor may win a coveted “preferred vendor” slot with a resource major, then discover that it is expected to maintain crews and equipment on call, unpaid, until the next job. The common element is a mismatch of leverage. The customer can diversify or reshore or simply move to the next bidder; the supplier has fewer options and less time.
In good years, these pressures are masked by growth, cheap credit, or both. A thin-margin supplier can refinance or roll over its bank line, paying today’s bills with tomorrow’s sales. But when inflation runs through materials and freight, when interest rates reset upward on floating debt, when borrowing bases shrink because a single large customer now accounts for too much of receivables, the mathematics change. The erosion of a few hundred basis points of margin becomes a liquidity crisis. Debt service that was easily covered at six percent profit margins cannot be met at one percent. The default is not a shock; it is the predictable end state of a system in which the stronger party captures the upside and shifts the downside.
In Canada, the problem is sharper than it is in the U.S. Our corporate landscape is more concentrated, and our banking sector more unified in its approach to risk. When a borrower breaches a covenant, it is not just one lender pulling back; the whole sector tends to tighten in unison. Asset-based lending availability is re-margined with new reserves, cutting liquidity at the worst moment. For middle-market companies that have already stretched their vendors and drawn down their lines to meet customer demands, the withdrawal of bank support can be terminal. They arrive in formal restructuring proceedings – NOIs and CCAAs – later than they should, having exhausted their cash to keep supplying a customer that cannot or will not adjust the terms.
We have seen it play out in every sector we touch. In one case, a Western Canadian industrial supplier saw its largest OEM customer cut prices annually under a long-term agreement, levy new quality penalties, and insist on expensive retooling without guaranteeing volume. Margins went from healthy to barely positive in a year; the senior lender, wary of concentration and foreign receivables, slashed the borrowing base. In another, a national food distributor’s revenue grew in step with a major retailer’s promotions, but cash drained away through deductions and extended terms. The facility that funded its inputs was suddenly reduced because too much of its receivables sat with one debtor. In both cases, the companies were not failing because they had lost their markets or their competence. They were failing because the contractual architecture of their business relationships left them unable to capture enough value to pay their bills.
The most dangerous shocks in this environment are those that give the stronger party cover to hold the line or push harder: tariffs, for example. Large public companies often manage to turn trade disruptions to their advantage, re-engineering supply chains, pushing price increases downstream, and using the disruption to consolidate share. Their smaller suppliers, lacking the same strategic options, see costs rise and orders fluctuate without any compensating change in terms. A ten percent tariff on key inputs can be absorbed, in theory; but, in practice, for a supplier on thin margins with variable-rate debt, it becomes a debt service problem within months.
When the squeeze comes, traditional credit often makes things worse. Loan agreements are designed to protect lenders from loss, not to give borrowers time and flexibility to adapt. Covenants are based on trailing numbers; borrowing bases are sensitive to reserves for slow-moving stock or concentrated receivables; cross-defaults can shut off new money overnight. Customers with their own working-capital targets to hit may stretch payables further or impose new demands on suppliers, knowing the bank, not they, will be left holding the risk. The result is a narrowing corridor in which management can operate, and a rising probability that the situation will tip into formal default.
It is in these corridors that we operate. The businesses we step into are almost always in the grip of this corporate class system – caught between a demanding customer and an inflexible lender, with margins too thin to carry the load. Solving the problem means more than injecting capital. It means renegotiating the terms that caused the problem, diversifying the customer base even at the cost of short-term revenue, and changing operations so that cash is generated by every unit of output, not just booked as throughput. It often means using court-supervised processes not as a threat but as a way to organize competing interests, freeze unhelpful behaviour, and push through changes that would be impossible in bilateral talks.
These are granular, unglamorous fixes: inserting indexation clauses into supply contracts; capping aggregate penalties and chargebacks; securing take-or-pay minimums in exchange for investment; reclaiming early-payment discounts in price; aligning production schedules with actual, profitable demand. They are not negotiated in a single meeting; they are won over months, with credible alternatives in hand and the discipline to walk away from unprofitable volume. They are paired with changes on the floor and in the yard – shorter production runs to reduce rework, stricter WIP control, maintenance to improve uptime, freight planning to end premium shipments.
None of it works without capital that is anchored in the assets and structured to survive the drama that comes with change. Fancy layered financings collapse when a single customer dispute consumes the cash budget. We favour simple, senior positions underwritten to the value of what can be sold or collected, with equity earned through milestones like contract resets or customer diversification. Sometimes we acquire the existing debt to control the process; sometimes we provide super-priority facilities to fund the fix. In every case, the capital is there to buy time for operational and contractual change, not to subsidize structural unprofitability.
The corporate class system is not a passing condition. It will keep reallocating margin to those with brand, channel, and balance-sheet power, and it will keep pushing volatility onto those without it. In Canada’s concentrated markets, the effects are magnified; in a world of higher rates, they are accelerating. For most lenders and investors, this is a reason to pull back from the middle market. For us, it is a signal of where the next complex situations will arise, and a reminder that the defaults, the distress, and the inevitable drama of these relationships are not anomalies, they are features of the system itself. The companies caught in it can survive and even prosper again, but only if someone is willing to change not just their capital structure, but the rules of the game they have been forced to play.