CCI estimates low risk for the majority of Canadian companies.
With Canadian regulators taking temporary control of Silicon Valley Bank (SVB) Canada, the immediate question is what happens to companies that have existing lines of credit with the bank.
The Canadian Office of the Superintendent of Financial Institutions (OSFI) announced on March 12 it was taking temporary control of the assets of the Canadian branch of SVB following the collapse of the financial institution last week.
As well, the regulator said it intends to seek permanent control of SVB Canada’s assets, and will request a winding-up order from the Attorney General of Canada.
SVB only provides venture debt locally as it does not have a banking license in Canada. As such, it pulls its Canadian venture debt lending capital from deposits made outside of the country. It is unclear at this time how companies with loans from SVB Canada will be affected by the US closure and the local regulator takeover.
However, the Council of Canadian Innovators (CCI) is estimating that the risk for companies with existing lines of credit will be low.
In an email shared with BetaKit and sent to the Department of Finance, CCI vice-chair John Ruffolo noted “the jury is out with what happens to existing credit lines,” but speculated SVB’s Canadian book of business will be bought, which would presumably cover the lines of credit.
This falls in line with what happened in Britain where the government helped broker a deal that saw HSBC acquire the assets of SVB UK for a symbolic £1.
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“Assuming the buyer has excess deposits, which should be the case, one would presume the buyer would carry on,” wrote Ruffolo. “SVB has very good adjudication processes and the quality of their loan book is good. The result is low risk.”
Similarly, Ruffolo called the risk related to untapped credit on SVB credit lines low given the existence of a strong venture debt market in Canada. “The market in Canada was increasingly dominated by the banks with CIBC, RBC, and BMO leading the way,” he said. “While some folks are frustrated, there are choices available in Canada that were not there say 10 years ago.”
Ruffolo characterized SVB’s business as good, but opined it made a “massive miscalculation” in its portfolio allocation in light of increasing interest rates. Ruffolo’s comments refer to an investment decision that SVB management made amid the tech boom that killed its liquidity and resulted in an unrealized $15 billion USD loss. “The CEO still has not explained how they failed miserably in their treasury risk management,” Ruffolo said. “This needs to be the job of US regulators.”
In advice to the Minister and Department of Finance, Ruffolo maintained that the Minister needs to issue a statement that the situation is being closely studied, and are working on understanding the impact to the Canadian ecosystem. “You can state with good assurance that the vast majority of the Canadian tech ecosytem has little to no exposure with SVB,” Ruffolo wrote.
As CBC News reported, SVB Canada has some $864 million worth of business loans on its books.
The OSFI took its action to preserve the value of the assets held at SVB’s Canadian Branch in light of the decision by US regulators to shut down Silicon Valley Bank.
OSFI noted that it had closely monitored SVB’s Canadian branch following the onset of the bank’s difficulties.
As Canada’s banking regulator announced that it would protect creditors from the fallout of the collapse of SVB, the Deputy Prime Minister and Finance Minister, Chrystia Freeland, reassured investors that Canada’s banking system remained safe.
“We are in close contact with the OSFI,” Freeland tweeted. “Which took action earlier this evening. Canada’s well-regulated banking system is sound and resilient.”
Beyond companies with SVB Canada lines of credit, SVB’s collapse is set to impact startups that have their US banking with SVB, or ostensibly Canadian companies that are legally domiciled in the US for tax purposes and use SVB.
One Canadian venture capitalist (VC) BetaKit spoke with noted that numerous Canadian startups used SVB for their US bank accounts. “They were much more reasonable on rates and faster to help them than Canadian banks in the USA,” the VC said.
CCI estimated that the US collapse of SVB will also have a low impact on the majority of Canadian companies.
Speaking with BetaKit, CCI president Benjamin Bergen said that based on conversations he’s had with Canadian startups, the majority seem to fall under the $250,000 limit that FDIC is covering as part of its takeover of SVB in the US.
In a survey of more than 60 companies, CCI shared preliminary data that indicates the majority of Canadian companies are not impacted by SVB’s collapse overall.
Around 10 percent of those surveyed claimed to be severely impacted, meaning they are over the $250,000 threshold or cannot access unused lines of credit, and are worried about making payroll and other operation costs.
Around eight percent of those surveyed reported being somewhat impacted, meaning they have less than $250,000 with SVB in the US, or the lines of credit they may have are not essential to make payroll or for operating expenses.
One anonymous respondent who noted the bank’s situation negatively impacted their company said, “We paid SVB a significant USD “Good Faith Deposit” towards a multi-million-dollar venture debt facility and have a fully executed term sheet with the bank.”
Another respondent expressed concern that the biggest impact on them would likely be related to fundraising. “Both our US and Canadian prospects for VC capital have been affected directly or indirectly though their portfolio companies,” the respondent noted.
One innovation bank leader BetaKit previously spoke with on background last week noted that SVB’s downfall was likely to create a “credit crunch” here.
With FDIC taking over control, the regulator now holds the insured deposits from SVB. The FDIC’s standard insurance to protect bank customers’ deposits covers up to $250,000 per depositor, per bank.
After receiving a recommendation from FDIC and the Federal Reserve, US Treasury Secretary Janet Yellen approved actions on March 13 to enable the FDIC to complete its resolutions of Silicon Valley Bank in a manner that fully protects all depositors, both insured and uninsured. This is also the case for Signature Bank, which was closed by the US regluator two days after the collapse of the SVB.
These actions are meant to reduce stress across the financial system, support financial stability and minimize any impact on businesses, households, taxpayers, and the broader economy.
The SVB gained its license to operate in Canada in 2019, opening a Toronto headquarters at that time.
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