TMX clearing shift would undermine system, Canada pot firm says

Any move by the Toronto Stock Exchange owner to stop settling trades for marijuana companies with U.S. operations would undermine the market’s regulatory system, according to one Canadian pot company.

CannaRoyalty Corp. already went through a “very formal” review with the Ontario Securities Commission in which its operations and assets were scrutinized before being allowed to list on an exchange, said Chief Executive Officer Marc Lustig. Lawyers for the Ottawa-based company, which has the bulk of its assets in the U.S., are reviewing whether any decision to stop clearing trades would be enforceable, he said.

“We have a legal strategy that’s been initiated,” Lusting said by phone. “For the TSX to exercise that decision it undermines the efficiency of an independent marketplace and it completely undermines, in my opinion, the regulatory scrutiny that the securities commission exercises at the time of listing these companies.”

‘Close Examination’

TMX Group Inc. is discussing with regulators how its clearing house, the Canadian Depository for Securities, should deal with marijuana companies that have operations or investments in the U.S. While some U.S. states have legalized marijuana for medical and recreational use, it remains illegal at the federal level.

The exchange operator said last week it’s working to provide clarity for investors and the matter requires “close examination and careful consideration.” Major U.S. exchanges, such as the Nasdaq, won’t accept listings for cannabis companies and banks and other lenders remain wary of the industry.

A policy change could bring upheaval to Canada’s nascent marijuana market, which has ballooned amid investor optimism that legal recreational sales could reach C$6 billion annually ($4.8 billion) by 2021.

Market Uncertainty

CDS clears trades for the TSX and the TSX Venture exchanges as well as the Canadian Securities Exchange, where many Canadian companies and U.S.-focused corporations are traded. There are five marijuana companies listed on the TSX, another 18 on the TSX Venture, and 44 on the CSE, according to exchange data.

Shares of CannaRoyalty fell 15 percent this month in Toronto amid the uncertainty, while other peers with U.S. exposure including Aphria Inc. declined 9.4 percent and iAnthus Capital Holdings Inc. dropped 12 percent. Aphria said in a statement Monday it’s pleased the TMX is working to clarify the CDS issue.

A major policy change is unlikely as more than a dozen companies have public exposure to the U.S. marketplace and regulators would probably not allow TMX to disrupt the liquidity in an market with more than C$2 billion worth of securities, said Julius Kalcevich, chief financial officer for iAnthus, which has offices in New York and Toronto.

Any material change to CDS rules must go through an approval process with provincial regulators, according to an Ontario Securities Commission order. Commission staff would review the rule and allow a time period for public comment, according to the document.

U.S. Clearing

“When you add all of that up, the stakeholders and the amount of money that could be impacted or left vulnerable, it’s something that the regulators aren’t going to take lightly,” Kalcevich said by phone.

As deliberations over Canadian continue, CannaRoyalty and iAnthus are also exploring clearing their trades in the U.S. CannaRoyalty has been approved for trading on the OTCQB venture market in the U.S. and is eligible to settle trades through the Depository Trust Company, Lustig said. iAnthus currently clears between 20 and 30 percent of trade volumes through the U.S. and plans to shift more volume there in the event of a policy change, Kalcevich said.

“This is uncharted territory,” said James Munro, a partner and co-chair of the cannabis practice group at McMillan LLP’s Vancouver office. “Ultimately, it will be the Ontario Securities Commission which will likely have to make a decision.”


Canada’s big banks stand to lose on credit card debt in the next downturn: Moody’s

The next economic downturn will result in higher credit card losses at Canadian banks than the last recession due to the “unprecedented” levels of consumer debt fuelled by the housing boom, says Moody’s Investors Service.

With many Canadians already pushed to the limit by high housing costs, job losses or other “cash flow shocks” will put higher credit card balances at risk of default, the ratings agency concludes.

“When the economy turns, many consumers will struggle to meet their credit card payments because they’ll be too concerned about making their mortgage payment,” said Jason Mercer, lead author of the report published Wednesday.

Credit card portfolios tend to take the hit in times of stress because homeowners prioritize repayment of mortgages, explained Mercer, and the banks hold no collateral against credit card loans.


“Consumers are more likely to default on credit cards before their mortgage because they won’t lose an asset such as their house or their car,” he told the Financial Post. “The banks have limited recourse to a defaulted credit card borrower other than giving them a black mark on their credit history.”

During the next downturn, the ratings agency expects the losses from credit card portfolios to climb between 50 and 100 basis points above the past peak charge-offs of 5.8 per cent in 2009.

“In the event of job loss, consumers will not only prioritize mortgage and other loan payments, but may also increase their credit card borrowing to pay the bills until they find another job, resulting in higher balances at default,” the report warns. “Credit cards are also sensitive to increases in interest rates, albeit indirectly.”

If rising interest rates result in higher servicing costs when a mortgage is refinanced, this can drive credit card repayments further down the list of a homeowner’s priorities, the report explains.

The big five

Canada’s five largest banks are dominant players in the domestic credit card business, with a combined estimated market share of between 70 and 85 per cent, Mercer said. But despite their exposure to the overall segment, the Moody’s analysts note that credit cards account for only five per cent of the lenders’ total consumer loan portfolios. Mortgages, roughly half of which are secured, make up the bulk of those portfolios.

The small relative exposure to credit card debt should dull the impact of the expected fallout from a downturn, the report notes, as should the higher fixed interest rates Canadian banks tend to charge their credit card customers compared to peers in the United States and United Kingdom.

“The research suggests Canadians repay their credit cards at a higher rate than in the U.S. and the U.K. because it’s more expensive to carry a balance,” Mercer said. “The flip side is that these rates lead to higher profitability for the (Canadian) banks.”

In the last recessions in the U.S. and U.K, credit card loss rates rose to 11.5 per cent and 12 per cent respectively, according to Moody’s. That’s well above the ratings agency’s prediction of 6.3 per cent to 6.8 per cent for Canada in the next downturn.

Debt load

The expectation of additional losses is not surprising when considering Canadians’ growing debt burden. As Moody’s points out, as of March 31 of this year, just a penny shy of $1.70 was owed for each dollar earned.

That’s “nearly twice the level of 30 years ago,” the ratings agency points out, adding that the trend has been driven by a combination of low interest rates, minimal economic stress, and increasing housing prices.

Canada’s record high household debt has attracted attention and warnings from international organizations such as the Bank for International Settlements. A key ratio of credit to gross domestic product tracked by the BIS suggests Canada is among a group of developed countries most vulnerable to a financial crisis.

This week’s Moody’s report suggests high household leverage will play out differently in regions across the country. Consumers in Toronto and Vancouver, for example, are flagged as particularly vulnerable to “cash-flow” shocks such as job losses or rapidly increasing interest rates, due to more dramatic house price increases in those pockets. In the oil-producing provinces of Alberta and Saskatchewan, meanwhile, there have already been indications of an uptick in delinquencies in consumer debt portfolios in the aftermath of a slump in crude prices, the report says.

Initial unemployment insurance claims in those oil-dependent provinces nearly doubled in the latter half of 2016 from the start of that year.

“Although we expect losses to be moderate and manageable for large, geographically diversified banks, card loan performance in these Prairie provinces in coming quarters will be an illustrative first test of the ongoing strength of Canadian credit card portfolios,” the ratings agency report said.

RBC net income jumps 5% on wealth management profits

By Matt Scuffham

TORONTO — Royal Bank of Canada on Wednesday reported a 5 per cent increase in underlying third-quarter net income, helped by double-digit growth at its wealth management business which offset a weaker showing in capital markets.

Net income at Canada’s biggest lender, excluding one-off items such as costs of integrating U.S.-based City National, bought in November 2015, rose to $2.8 billion for the quarter to June 30.

Earnings per share also excluding one-off items reached $1.89 compared with an average analyst forecast of $1.87, according to Thomson Reuters I/B/E/S data.

Net income at RBC’s retail banking division grew by 6 per cent to $1.4 billion, while net income in wealth management increased by 25 per cent to $486 million, including a first-time contribution from City National.

RBC said net income from its capital markets business fell 4 per cent to $611 million. The bank reported a decline in fixed income activity, reflecting less volatility in the market.

The bank announced a 5 per cent increase in its quarterly dividend to $0.91 per share.

Its core Tier 1 ratio, a key measure of a bank’s financial strength, increased by 30 basis points to 10.9 per cent.

RBC is the first of Canada’s biggest banks to report quarterly results. Canadian Imperial Bank of Commerce is due to report on Thursday, followed by Bank of Montreal , Toronto-Dominion Bank and Bank of Nova Scotia next week.

© Thomson Reuters 2017

Wine industry ablush as Canadians quaff record amounts of the photogenic pink drink

A week into Earls Restaurants’ summer rosé promotion, Dave Stansfield realized he was going to need more wine — a lot more wine.

Stansfield, corporate sommelier for the Vancouver-based restaurant chain, expected his new wine list featuring rosé from around the world to be popular. But popular turned out to be an understatement.

Rosé sales at Earls have grown 700 per cent from last summer, driving a total increase in wine sales of 25 per cent across the chain’s 70 locations.

“After the first week, we were like, ‘Holy crap,’” he said. “We had to get more rosé on the water from Europe, because we were going to run out.”

On Earls patios and at backyard barbecues, at vineyard wine tastings and bachelorette parties, rosé is being quaffed in quantities like never before. Skyrocketing North American sales of the photogenic pink drink have spawned an entire spinoff economy of tourism, T-shirts and Instagram marketing, not to mention more varieties of the wine than ever before.

Canadians purchased the equivalent of 21.2 million bottles of rosé in 2016, four million more than they bought five years ago, according to data from U.K. researcher Euromonitor. The 7.4-per-cent growth in rosé sales in 2016 over 2015 handily outpaced the country’s 4.1-per-cent growth in overall wine consumption.

Rosé has clearly entered the mainstream, enjoyed by people of all ages and genders, and the new drier, more complex varieties available have trumped its outdated image as a sickly sweet discount pick.

“It was over there in a corner and once in a while we would drink it, a certain demographic that wanted sweet cougar juice,” Stansfield said. “But in North America, we’ve discovered it’s just another wine.”

In Europe, however, the trend is headed in the opposite direction: Sales of rosé are flat, but wine consumption overall is down as young people move away from the drinking traditions of their parents.

“Those long lunches where you have a bottle of wine over lunch, that’s just dead,” said James Wainscott, communications manager for Wine Intelligence Ltd., a U.K.-based market research firm.

But if Europeans don’t want their own wine, North Americans are happy to step in and buy it.

A rosé cruise.

France’s Provence region is particularly well known for making the type of light, dry rosé the new world is going wild for and now exports 40 per cent of the pink wine it makes.

Other wine regions around the world are adding rosé to their offerings for the first time. You can buy rosés from South Africa and New Zealand, and Portugal is even experimenting with rosé ports.

There was a previous attempt at reviving rosé about 10 years ago by re-branding it “blush wine.” But Alan Middleton, a marketing professor at York University’s Schulich School of Business in Toronto, points out it never took off for one simple reason: It was terrible.

“The only blush you got was from being seen drinking it,” he said. “The product didn’t really deliver.”

But like an aging pop star, rosé has now pulled off its improbable image makeover. To find out how, we turn to the summer of 2014 in the Hamptons, the tony summer seaside destination for New York City’s elite.

In August that summer, the New York Post published tragic breaking news: “Rosé running dangerously low in the Hamptons,” because “the summering hordes have been tirelessly swilling all season long.”

People started searching for more information on the wine shortage that was sending New York’s high society into a panic.

Sarah Billstein decided to quit her finance job and make promoting the rosé lifestyle a full-time job via her Instagram account.

Some of those searches brought them to the Instagram account @roseseason, run by 33-year-old finance professional Sarah Billstein.

Billstein started the account to promote her Etsy store, where she started selling T-shirts emblazoned with “It’s rosé season” after noticing the trend in the Hamptons herself. She watched her follower count spike after the publication of the Post article.

After a trip to France in the summer of 2015, Billstein decided to quit her finance job and make promoting the rosé lifestyle a full-time job. With sales from her online store, event appearances and sponsored posts on her Instagram account, Billstein has been able to pull in about eight times more revenue this summer than she did last year.

Asked why rosé inspires people to broadcast their enthusiasm to the world through hashtags and tank top slogans, she has a concise answer. “It’s pretty people drinking pretty drinks in pretty places. And they want to Instagram it.”

Joshua Corea, co-owner of downtown Toronto wine bar Archive, agrees that rosé’s photogenic qualities have helped its popularity with young wine fans.

“I think Instagram has helped wine drinking in general, with people taking pictures of their bottles, showing through Instagram all their friends who are drinking wine,” he said. “It becomes cool.”

Rosé’s association with the Hamptons helps, too and professor Middleton was not surprised to learn the area was at the heart of the wine’s revival.

“There’s a status-conscious society if there ever was one,” he said. “You’ve got to be seen to be on the leading edge — ‘Oh, you mean you haven’t tried this nice little rosé from Argentina?’”

Indeed, Middleton recently participated in a similar exchange at a dinner party, persuading his friends to overcome their skepticism and try the rosé he brought.

Rosé has become a way for people to signal that they’re in the know — and cooler than those of a certain generation holding onto outdated ideas about the wine.

Drinking rosé also signals a certain conspicuous free-spiritedness: I am having a good time, I am off the clock, I am too chill to care if anyone thinks my pink drink is silly.

The most popular hashtags associated with rosé on social media tend to evoke a lighthearted escapism: “Rosé all day,” “Yes way rosé,” “Slay (i.e., kick butt; do a great job) then rosé.”

Because rosé is associated with pool loungers and patios rather than dimly-lit bars, expressing a desire to drink it all day comes off as a flight of fancy, not a sign it’s time to check into rehab.

Aside from Instagramming their rosé, young people also love showing off their vacation destinations, and Canadian wineries are giving them plenty of opportunities to combine the two.

Rosé-themed wares on Etsy.

Del Rollo, chair of the Winery and Grower Alliance of Ontario, said rosé has given tourism in the province’s wine regions a bump.

“It’s a wine that, in Ontario, we can make extremely well, with our cool climate,” Rollo said. “People want to come out and see where it’s grown and where it’s made and start to understand the different nuances.”

At Liquor Control Board of Ontario stores, sales of rosé carrying the Vintners Quality Alliance seal grew 47 per cent over the past 12 months compared to the previous year. 

Matt Dixon, vice-president of sales at Colio Estate Wines, said he’s noticed a new rosé at almost every Ontario winery he visits.

Colio’s Girls Night Out brand is the LCBO’s best-selling VQA rosé, with sales up 35 per cent over last year. 

“People graduate up from drinking flavoured wines to drinking table wines,” Dixon said. “They’re familiar with the Girls’ Night Out brand. So they’ll go up to the VQA wines and often the first stop is rosé.”

It’s hard to say how long the skyrocketing growth rates will last, but the wine industry seems to be taking inspiration from Billstein and her Instagram rosé empire.

“Finding a business model where I can slay AND rosé, rather than slay THEN rosé, makes me happy,” she said on her website.

After all, it’s always rosé season somewhere.

Financial Post


One week into negotiations, Trump says he’ll ‘probably’ cancel NAFTA

WASHINGTON — Donald Trump has threatened to blow up NAFTA less than one week into the renegotiation of the trade agreement, providing an early indication that the upcoming talks might occur under a cloud of menace.

The president’s threat itself is no surprise. A common topic of hallway chatter at last week’s first round of talks last week was just when he might deploy that withdrawal threat, which many view as his principal source of negotiating leverage.

The only surprise is how quickly it came.

“Personally, I don’t think we can make a deal,” Trump told a campaign-style rally in Arizona late Tuesday night. “Because we have been so badly taken advantage of. They have made such great deals — both of the countries, but in particular Mexico — that I don’t think we can make a deal.

“So I think we’ll end up probably terminating NAFTA at some point.”

He repeated it: “I told you from the first day, we will renegotiate NAFTA or we will terminate NAFTA. I personally don’t think you can make a deal without termination but we’ll see what happens. You’re in good hands, I can tell you.”

He’s made the threat numerous times, but this is the first time he’s done it since Canada, the U.S. and Mexico began talks last week.

Mexico’s foreign minister shrugged it off as a leverage play: “No surprise: we’re in a negotiation,” Luis Videgaray tweeted in response. “Mexico will remain at the table with calmness, firmness, and in the national interest.”

Insiders say they expect him to keep making these threats. It’s his main source of power to force the other countries to reach an agreement. One well-connected Washington lobbyist at last week’s talks said he was convinced the threat was coming: “Almost 100 per cent.”

The former deputy trade czar under Barack Obama said it’s an obvious move and he thinks the president made it too early. In an interview several weeks ago, Robert Holleyman said it was a serious tactical error when Trump made the threat in April.

He said Canada and Mexico gained valuable insight that will render Trump’s threats less powerful at the negotiating table: in April, the U.S. Congress pushed back against him, the business community fumed, and his own cabinet members pleaded against it.

U.S. President Donald Trump and Canadian Prime Minister Justin Trudeau meet in the Oval Office.

“It was, at a minimum, terrible timing,” said Holleyman, Obama’s deputy United States Trade Representative.

“You do that at the 11th hour in the negotiation — not at the throat-clearing stage … I suspect President Trump will be unable to play that card again. And if he does play it, it won’t be as strong as it would’ve been… The Canadians and Mexicans will say, ‘You… will face a huge backlash in your own Congress.”‘

That episode in April underscored the complexity of ending NAFTA.

Without the support of Congress, a president might withdraw the U.S. from the international agreement, but he could not singlehandedly wave away the law on the U.S. books that implemented NAFTA.

An international economic law professor and former State Department lawyer said he believes it would ultimately end up in court. And he said U.S. courts would ultimately conclude that the president can’t rip up NAFTA without congressional support.

That’s because the president can’t just erase the 1994 NAFTA Implementation Act passed by Congress. Only Congress can pass laws. In addition, the U.S. Constitution makes clear that Congress has power over international commerce.

“If the president were to rip up NAFTA, and then sort of jack tariffs way up, I think somebody would be able to come in and say… ‘You’re actually violating U.S. domestic law,”‘ said Tim Meyer, a Vanderbilt professor, former government lawyer, and onetime clerk for Neil Gorsuch, whom Trump appointed to the Supreme Court.

“I think courts are going to be sympathetic to the idea that the president can’t ignore the legislation that implements these trade agreements. Congress has not repealed that legislation, and they’ve given no indication they intend to.”

That being said, several observers suggest a presidential attempt to withdraw could set up a legal and political tug of war with Congress over the setting of new tariff schedules — and that would foster economic uncertainty.

The Canadian Press

Crunch Report | First Day YC S17 Wraps Up

LinkedIn now allows anyone to upload video to the platform, Databricks raises $140 million and Druva raises $80 million, the first day of Y Combinator’s Summer 2017 Demo Days wraps up and Verizon throttles down to 480p for its unlimited plan. All this on Crunch Report. Read More

Bayer faces in-depth EU review of $66 billion Monsanto deal

By Gaspard Sebag and Aoife White

Bayer AG faces months of haggling with European Union antitrust regulators who opened an in-depth probe into its $66 billion combination with Monsanto Co. amid concerns the takeover may reduce competition for pesticides, seeds and plant traits.

The European Commission flagged worries that the deal to create the world’s largest pesticides and seeds company risked raising prices for farmers, lowering quality and reducing choice and innovation. It set a Jan. 8 deadline for its merger investigation.

“Seeds and pesticide products are essential for farmers and ultimately consumers,” Margrethe Vestager, the EU’s competition commissioner, said in an emailed statement on Tuesday. “We need to ensure effective competition so that farmers can have access to innovative products, better quality and also purchase products at competitive prices.”

The Monsanto tie-up is the last of a trio of mega-deals reshaping the global agrochemicals industry. The first two drew intense scrutiny, with regulators saying they wanted to ensure that fewer suppliers of crop-protection products and other critical inputs for farmers wouldn’t ultimately lead to higher prices for consumers.

‘Expected’ by Bayer

Bayer said it had expected an extended review “due to the size and scope of the transaction.” The company said the deal “will be highly beneficial for farmers and consumers” and it will work constructively with the EU.

Monsanto said it was committed to working with regulators globally “with a view to receiving approval of the proposed transaction by the end of 2017.” It said it looked forward to supporting growers’ efforts to be more productive, profitable and sustainable.

Monsanto and Bayer are “two of a limited number of competitors” making pesticides that are capable of discovering new active ingredients and developing new formulations to tackle issues such as weed resistance to older products, the EU said. Regulators also flagged possible problems over high market shares for vegetable seeds. Bayer is one of the few rivals Monsanto faces for plant traits, such as herbicide tolerance, it said.

The combined firm will have the largest portfolio of pesticides products and the strongest global market positions in seeds and traits. The EU said it will check if rivals’ access to distributors and farmers could worsen if the company were to link sales of pesticides or seeds to digital services that provide tailored advice or aggregated data to farmers.

Regulators’ concerns over innovation for agricultural chemicals saw DuPont Co. offer to sell part of its pesticides business and related research and development operations before it won EU approval to merge with Dow Chemical Co. earlier this year. China National Chemical Corp. also had to make concessions before the EU would clear its $43 billion takeover of Swiss pesticide maker Syngenta AG.

Environmental Lobbying

Environmental campaigners have bombarded Vestager with hundreds of tweets in recent weeks, asking her to block the deal, on top of more than 50,000 emails and more than 5,000 postcards and letters the EU said it’s received. Avaaz, a campaign group, called on Vestager “to show she has the guts to choose the public interest over corporate greed.”

Vestager posted a response to petitioners on the EU’s website, saying she was “carefully investigating the merger” and that her review would be limited to competition issues. Other concerns raised by petitioners fall under EU and national rules to protect food safety, consumers, the environment and the climate.

Commitments submitted by Bayer and Monsanto in July to address the EU regulator’s concerns were considered insufficient to send to rivals for feedback, the commission said.

The EU is cooperating closely with the U.S. Department of Justice and antitrust authorities in Australia, Brazil, Canada and South Africa, it said.


Alberta challenges ruling that says its outside of province beer tax violates trade rules

EDMONTON — Alberta’s beer war is opening on a new front.

The government says it will appeal a trade panel ruling that found the province’s incentive for Alberta brewers violates interprovincial free-trade obligations.

“We stand firmly with Alberta small brewers. We will not abandon them now,” Finance Minister Joe Ceci said Tuesday at the legislature.

“There have been 18 small breweries opened up in the year since the program started. It’s doing what it’s intended to do. Jobs are happening.”

Three weeks ago, a three-member dispute resolution panel of the Agreement on Internal Trade determined that the incentive violates trade rules agreed upon by all provinces and the federal government.

The challenge was filed by Artisan Ales, a Calgary-based importer of beer from places such as Quebec and Europe.

Artisan Ales co-owner Mike Tessier said he was not surprised Ceci has chosen to appeal. He said the province can’t give ground when it is also facing court challenges from two out-of province brewers over the program.

“They more or less have to do this,” Tessier said in an interview.

The price changes have damaged his business and hurt other distributors, he said.

“They’ve had the rug ripped out from them overnight.”

Ceci should have pursued options to help small brewers in a trade-compliant way without inflicting collateral damage on others in the industry, Tessier suggested.

Ric McIver, finance critic for the United Conservative Party, said Ceci needs to accept the trade ruling and fix the incentive program.

McIver said the party wants businesses, including small brewers, to thrive but “we do not, however, agree that violating trade agreements with protectionist measures does anything to help these businesses thrive.”

The dispute began almost two years ago when Ceci announced changes to government markups on beer sales. Until then, beer producers had been charged a markup on a sliding scale. Large producers paid the maximum of $1.25 a litre.

In October 2015, Alberta kept the sliding scale for provinces in the New West Partnership at that time — Saskatchewan, Alberta and British Columbia — but made all other brewers pay the maximum $1.25 regardless of how much or how little they sold.

Opponents argued this was a violation of free trade and Alberta ultimately acquiesced. A year ago, it changed the beer rules again.

This time, it made all beer producers in Alberta and elsewhere pay the same $1.25 a litre. But it also introduced grants to help Alberta producers expand their businesses.

Artisan Ales filed a complaint with the internal trade panel. The brewer argued the incentive program and the one-price markup were effectively retaining the previous approach through the back door.

Alberta argued that the $1.25 across-the-board markup and the grants are two different things and are both allowed under interprovincial free-trade rules.

In a 2-1 decision, the panel agreed with Artisan.

Ceci declined to elaborate on the legal arguments the government will use to try to overturn the decision when the appeal goes before another panel.

Alberta has the most open liquor market in Canada — vendors simply have to fill out a form to sell. Access to shelves in other provinces is controlled by liquor boards.

Ceci said he is watching ongoing talks among provinces on revising liquor trade rules under the new Canadian Free Trade Agreement.

“I’m certainly hopeful that will bring some better co-operation amongst all provinces.”