What does SVB’s Collapse Mean for the Cannabis Industry?
"The risk of failure and deposit losses here is that the next, least well-capitalized bank faces a run and fails and the dominoes continue to fall," Bill Ackman, Billionaire Investor, Hedge Fund Manag
Agree or disagree, when Bill Ackman talks you better listen.
Silicon Valley Bank, the 19th largest bank in the US with $200B in assets and 40K customers, went bust last Friday. California-based SVB was a big lender to American start-ups.
Beyond short term volatility, there will be ramifications for the California cannabis industry not to mention the broader sector.
SVB’s key vulnerabilities (unrealized losses in their bond portfolios, rising interest rates, falling deposits and narrow sector exposure) were not unique to them. All banks face this bond problem and some of those banks who service cannabis firms may be over-exposed to our sector.
SVB’s failure was already felt in the California wine industry. Thousands of wineries were completely locked out of their accounts on Friday. On Sunday, regulators promised to backstop depositors enabling access to funds today though equity and bondholders will be all but wiped out.
A key question is whether SVB’s failure is an unfortunate one off or a harbinger of further troubles at other financial institutions. True, most cannabis firms are not directly impacted since they work with smaller non-California banks, alternative lenders and credit unions. However, it’s the 2nd & 3rd order impacts of the SVB collapse that is worrisome.
Here’s why:
> There is a decent chance markets will see big declines over the short term, further driving down MSO & LP share prices.
> The crisis could send a chill to the market, making equity capital even more scarce and seeing deposits flee small banks to larger, safer ones.
> Banks or other lenders who don’t limit exposure by industry will now put limits by sector, potentially reducing available credit and/or increasing the cost of that credit.
> SVB could trigger a 2008-like run on the California banking system – and beyond. People are watching warily for other cracks to emerge as the Fed's policy tightening continues.
The situation is fluid. There will be no government bailout; a Sunday auction of SVB assets was inconclusive.
Cannabis leaders can’t afford to tarry. They should start by checking the status of their deposits (if any) and whether their funders have SVB exposure.
Furthermore, leaders should diversify their banking & payments business to another institution, set up a cash reserve, and review their near-term spending plans. Finally, they must ensure your Chief Risk Officer and Board are monitoring this situation closely and communicating to all stakeholders.
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