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Streetwise As BMO takes on role in cannabis financing, other banks rethink risk

Employees inspect and sort marijuana buds for packaging at the Canopy Growth Corp. facility in Smith Falls, Ont., on Dec. 19, 2017.

Chris Roussakis/Bloomberg

In August, 2015, a firm then known as Tweed Inc. had its accounts at Royal Bank of Canada terminated for doing business in Canada's legal medical-marijuana sector.

Tweed changed its name Canopy Growth Corp., captured the market's attention and is now the pot industry's giant, with a $7-billion market capitalization. And the big banks are back in the picture, after Bank of Montreal co-led a $200-million stock sale for the company.

The financing is, in some ways, a watershed moment that will put pressure on other major banks to find ways to cash in on the burgeoning marijuana sector.

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But it does not necessarily mean Canada's largest lenders will open their arms wide to weed producers just yet.

The sector, largely shunned by the Big Six, has been supported in recent years by credit unions on the commercial banking side and independent broker-dealers in capital markets. The large domestic banks have done little more than tip-toe around the edges, weighing the promise and peril of an industry that would once have seemed untouchable but is pushing into the mainstream.

These days, the cannabis sector is getting harder for the banks to ignore: Canada is mere months away from legalizing the drug for recreational use. BMO's leadership on Canopy's bought deal sends a signal that banks are warming up to medical-marijuana companies and could encourage competitors to follow suit. But there are still no clear policies within most banks about what counts as acceptable risk where cannabis is concerned, and companies looking to expand still have trouble getting loans from conventional banking sources.

Canopy appears to have earned bankers' trust. It is the largest public pot company by market value; it was the first to go public and the first to score a major backer in alcohol giant Constellation Brands Inc., which announced a deal last fall to buy a 9.9 per cent stake in Canopy.

Wednesday's stock sale attracted more than $600-million in demand and is fully sold, with an estimated 80 per cent of shares going to institutional investors. Nearly six million shares were sold in the deal for $34.60 apiece, and Canopy's shares traded well above that price on Thursday, closing at $36.96.

The syndicate underwriting the deal, which collected a 4-per-cent fee, included BMO and co-lead underwriter GMP Capital Inc., as well as Canaccord Genuity Group Inc., Eight Capital Corp., PI Financial Corp. and Beacon Securities Ltd., according to a source with knowledge of the deal. GMP took 40 per cent of the shares and BMO 25 per cent, while 20 per cent went to Canaccord, the source said.

Bruce Linton, chief executive officer at Canopy, said that it's only a matter of time before other cannabis companies get the support of the country's big banks, as long as they are not violating federal law south of the border. In the United States, marijuana is legal in certain states but illegal under federal law.

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"I'm not going to be the last, I'm the first," he said. "What the bank needed what was an entry point. And I think the most certain, successful and safe entry point is Canopy. And that's why we're No. 1 with them. But we certainly won't be the last."

For the most part, Canada's six biggest banks still approach the cannabis sector with extreme caution, gauging companies' suitability case by case. They also have yet to assemble teams of analysts and specialists to cover the industry, and may look to poach talent from smaller competitors.

Risk managers at banks are wary of damaging their reputations by backing marijuana producers and distributors; they are also cautious of the volatility in the industry, where share prices have been prone to sudden swings. Banks that are incorporated in the United States – Royal Bank of Canada, Toronto-Dominion Bank, BMO and Canadian Imperial Bank of Commerce – are also fearful that American regulators could crack down on regulated financial services firms providing support to the industry.

"BMO coming in is absolutely a game-changer and everybody was in shock," said one senior banker at a competitor bank.

RBC "currently does not provide banking services to companies engaged in the production and distribution of marijuana," a spokesperson said. And the bank continues to send letters severing ties with some clients from the cannabis industry. But RBC says it is reviewing its stance. "We recognize that the legislative landscape is evolving and we are undergoing a review of our policies," spokesperson AJ Goodman said in an e-mail.

As legalization nears, a CIBC spokesperson said the bank is also "reviewing the legislation and determining next steps." Bank of Nova Scotia said in a statement that it "will revisit our risk assessment and make risk policy adjustments if warranted," as the laws and regulations that govern the marijuana industry change. CIBC and TD both said they assess clients on a case-by-case basis.

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BMO declined to comment on the Canopy deal.

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