Canadian Companies Have Limited Exposure to SVB Crisis

The crisis at Silicon Valley Bank (SVB) in early March appears to have abated, but questions remain about how badly exposed space startups are to potentially unstable financial institutions, including Canadian space firms. As regulators, depositors, and other interested parties pick up the pieces, it’s worthwhile to look both at how this happened, how it affects the space sector, and how Canada’s space companies were impacted. The good news, however, is that Canadian space companies seem to have been minimally affected, and the crisis may be unlikely to repeat owing to changes in macroeconomic conditions. Silicon Valley’s Bank SVB was a well established part of California's technology and startup scene. As a bank with strong connections to startups, established tech companies and California's wealthy venture capitalist investor class, one more culturally and organizationally aligned with the technology sector than traditional East Coast banking and investment companies. It was seen as the best place for these firms to put their money. As tech sector investment grew, the flow of money into SVB grew in turn. But it meant that SVB had a serious problem: while banks usually use depositor’s money to issue loans, SVB’s client base of startups and tech companies focused more on issuing equity when they needed to raise funds. SVB’s client base didn’t need loans, so SVB had to take a different approach to storing their wealth. SVB invested the money in what was seen at the time as a secure and low-risk investment: long-term government bonds like US Treasury Bills. These bonds had almost no prospect of default, and though the general low-interest-rate environment meant that their returns were also low, interest rates had been low ever since the Great Financial Crisis, and inflation had remained low as well. They were seen as a safe and unremarkable store of value. Crisis of Inflation and Interest SVB’s crisis happened because all that changed. Owing to a variety of economic factors that are still being debated today, inflation across the globe started growing in late 2021 and accelerating in 2022, leading to central banks (like the US Federal Reserve) raising interest rates at unprecedented speed to combat it. As SVB’s bonds were long-term low-interest bonds, their short-term sales value was pushed down by the combination of high inflation and high interest rates. The bonds were still safe from default. But if SVB had reason to sell them, they would be facing the prospect of selling them at a significant discount. Unfortunately, their clientele was also affected by those interest rates. The explosive growth in startups had been fueled by those same low interest rates, as money was inexpensive to borrow and investors needed to find investments that yielded better returns. While startups often fail, venture capitalists (and others) were willing to deal with failures if they could use that cheap money to find the next Amazon, Facebook, or SpaceX. So, as long as interest rates remained low, startups would be flush with cash—cash they deposited to SVB. As interest rates grew, all that changed. Investor interest in finding the next "unicorn" startup fell, and SVB’s depositors needed to pull their money out to keep the lights on and make payroll during the coming lean times. SVB needed to liquidate their long-term bonds to cover the demand, but due to those exploding those same interest rates, the bonds' short term value was far lower. While normal banks were insulated by their reliance on loans with rising interest rates, SVB had few loans in the first place. And while deposits up to $250,000 are insured by the Federal Deposit Insurance Corporation (FDIC), the vast majority of startups and others had far more money than deposited at SVB. If the bank failed, they could lose everything. In early March of 2023, this caused a bank run. VCs, concerned about the bank’s solvency, triggered that run by pulling their money out en masse. Within days the bank was in receivership by the FDIC, and companies across the entire American technology sector lost access to money they needed to simply make payroll. Fearing contagion to the rest of the bank sector, the Biden Administration said that they would ensure that depositors would regain access to their money, and made good on that promise on March 13th. Depositors regained access to their money. But the damage was not totally contained, with both First Republic in the United States and Credit Suisse in Switzerland facing serious challenges. Credit Suisse eventually failed, and was bought out by UBS. (Another bank, Signature Bank, had been shut down shortly before SVB. In that case, however, it was principally due to their exposure to cryptocurrencies, which have been suffering from a series of devastating crashes and bankruptcies.) Space Sector Exposure The space ecosystem, at least in the United States, also faced serious challenges. Just like other technology companies and startups, many space-focused companies had close and ongoing relationships with SVB, leading to tremendous concern during the period between the bank's failure and the restoration of depositors' funds. As many of the companies involved are private firms, finding out which companies were affected is difficult. Debra Werner at SpaceNews discovered that public filings from Rocket Lab and Astra Space revealed that both companies had balances at SVB, though only 7.9% and 15% (respectively) of their overall cash and other assets. She also said that “BlackSky, Planet, Redwire and Space Perspective also received investment or borrowed money from Silicon Valley Bank,” though they had repaid the loans when they’d gone public through Special Purpose Acquisition Company mergers. Other companies’ situations were more grave. Werner quoted an unnamed “space sector entrepreneur” as saying that “it’s a very serious situation…our balance is suddenly only $450.” The entrepreneur said “I don’t know when or how I will really regain access or how any of the [Know Your Client] regulatory processes will be coordinated, which is critical for international aerospace work.” UK-based venture capital firm Seraphim Space’s CEO Mark Boggett was quoted in another SpaceNews story, by Jason Rainbow, as saying “we’d been panicking all weekend”. Boggett said that “a third of Seraphim’s portfolio companies had funds locked in SVB accounts”. Boggett added, however, that the situation was resolved; that “nobody is going to lose any money…everyone has got access to their bank accounts.” In an email conversation with SpaceQ, Boggett elaborated. He said that, in hindsight, it was “a super busy week which improved each day as the SVB storm clouds faded,” that their “portfolio was in good shape,” and that “measures [are] being put into place to reduce any similar risks in the future.” He added that despite the issues, they are still “confident about the outlook for investment,” pointing to climate change, defence, and sovereign wealth funds as drivers of space-focused investment going forward. SkyWatch’s Director of Marketing, Kelly Winter, also said that they “have a working relationship with SVB” but that “our access to capital has not been impacted by their closing.” In turn, the Federal Reserve is signalling that their latest 25-point rate hike may be their last, partially due to the unexpectedly severe effect that their interest hikes appear to be having on the banking sector. Impact on Canadian Startups SVB had international operations, and they were also affected by the crisis. In the United Kingdom, home to Seraphim, regulators stepped in to assist HSBC in buying SVB UK in “record time.” Even HSBC was surprised by the situation, with CEO Ian Stuart saying “[i]f somebody had said to me [that] we would be acquiring another bank within two or three days, I wouldn’t have believed it.” In Canada, regulators also moved quickly to defuse the situation, as the Superintendent of Financial Institutions (SFI) took permanent control of the assets of SVB’s Canadian branch. SFI Superintendent Peter Routledge said that he “took this action to affect an orderly transition of the Canadian branch of Silicon Valley Bank to the FDIC bridge bank”, and that he was “ satisfied that this approach, developed with officials in the United States, is in the best interest of the branch's creditors.” Canadian startups still felt the impact of the bankruptcy. The CBC’s Jenna Benchetrit quoted one startup CEO saying that he was “sitting there hitting refresh throughout the afternoon to see if the money has hit your other bank accounts”. Chris Albinson, Communitech CEO, said that many of the companies Communitech works with “couldn't pay their employees immediately after SVB's collapse, with the majority of their financing coming from south of the border.” An exec went on to say their company’s “ability to make payroll, to keep the lights on, are really highly intertwined with both the financings and the banking system in the U.S.” Benchetrit said that “the Canadian branch of SVB had about $864 million worth of business loans on its books.” Another CBC story by Arrthy Thayaparan said that at least one B.C.-based startup was scrambling to withdraw its funds, with the CEO saying “we can see our money, but it's on the other side of the glass. We can't get it out.” Limited Impact on Canadian Space Companies According to conversations between SpaceQ and key members of the Canadian space community, however, Canada’s space technology companies seem to be comparatively insulated. Sarah McLean, Vice President of Communications and Corporate Affairs at Maritime Launch Services (MLS), said that things were moving along normally. She said that “we are not seeing the impact ourselves, or with our clients and partners in the industry.” When asked whether they thought that Canadian space firms had only limited exposure to the SVB situation, she said that it “captured the sentiment from Maritime Launch on this issue.” Marek Lorenc, leader of the Aird & Berlis law firm’s space team, had a similar reaction. In an email conversation with SpaceQ, Lorenc said that “fortunately, none of our space clients bank with SVB.” Lorenc was concerned about potential contagion, but said as of the 21st that “as far as my own clients are concerned, it’s business as usual.” Lorenc explained that SVB was only permitted to lend in Canada, not take deposits, so only companies “with material US operations that necessitated holding an account at SVB US” would be affected in almost all cases. Lorenc said that he was “aware of one space tech [company] that held some capital in SVB US”—though he didn’t say which company—but that “given the outcome they too should be largely unaffected.” Attempts to reach out to other Canadian space startups and companies about the situation went mostly unanswered, though a spokesperson for one Canadian company simply said that they had “nothing to add to the discussion.” But between the client lists of Aird & Berlis and the prominence of MLS, as well as the limitations on SVB in Canada, it suggests limited impact on the Canadian scene, and limited risk of contagion spreading in ways that will materially affect Canadian space companies. It appears that the steady hiking of interest rates may be coming to a close in Canada, just as in the United States, which may also help Canadian space firms. Bloomberg’s Randy Thanthong-Knight said that year-over-year growth in the Canadian consumer price index had slowed, from 5.9% in January to 5.4% in February, “making it the largest deceleration in headline inflation since April 2020.” Another indicator, the average of the trim and medium core rates, had fallen to 3.5% from 3.7%, suggesting that Canadian inflation is “steadily coming off the boil,” even though the Bank of Canada had paused its inflation tightening. Thanthong-Knight quoted Bank of Montreal chief economist Douglas Porter as saying “there’s really no reason for the bank to hike further…the bank’s pause looks prudent.” That should reassure space companies in both Canada and elsewhere that the SVB crisis will not be repeated.