Joe & Jill Retail deserve to know BMO's SIV exposure
Most investors won’t know it, but Bank of Montreal (BMO:TSX) has been actively reducing its exposure to the US$24 billion LINKS Structured Investment Vehicle (see prior posts “SIV values may mean more pain to come” January 16-08 and “The self-serving but sensible ‘bailout’” October 16-07). LINKS is probably the key risk associated with the institution right now, as they are the sponsoring agent on the fund. Unfortunately, there hasn’t been a single press release over the past many weeks outlining how BMO is dealing with a very sticky issue.
And sticky these SIVs are. Citibank recently repatriated onto their own balance sheet US$47 billion of SIV product they sponsored. This move, in part, undercut the bank’s capital ratios and for this among other reasons they’ve raised US$14.5 billion of new equity since the subprime mess turned into the disaster that it is.
Citibank’s decision put pressure on other international banks to follow the same path, and acquire the SIVs that they’ve created and sponsored over the years. Bank of Montreal has avoided this step to date, and have instead advanced about $1.25 billion of new capital to the LINKS vehicle as a means of keeping it afloat while the world turns its back on the short term financing of these financial bags of snakes.
But that’s not to say that BMO management haven’t been hard at work. If you were an institutional investor, you might have read the following research note produced by CIBC’s equity research banking analyst on Jan. 16, 2008 regarding an RBC Banking Conference held in Toronto last month:
“BMO provided updated information on one of its SIVs yesterday. BMO told investors that Links (the largest SIV managed by BMO) has approximately $15.1 bln in assets. This would compare to $18.7 bln at year-end and $23.4 bln as of last July. Links’ NAV was also well above defeasance triggers.
Further, CEO Bill Downe also commented that Links’ funding schedule is devoid of spikes until mid-February. Based upon publicly available information, we believe there is at least $1.6 billion of liabilities maturing from now until February 15 and about $2 billion by the end of February.
BMO’s SIVs are selling off assets in an orderly fashion and paying down debt while avoiding defeasance triggers and maintaining credit ratings. BMO is also resisting the outright consolidation of these vehicles onto its balance sheet, all in, a prudent approach in our view.
BMO’s SIV exposure is diminishing while its stock trades at a meaningful discount to its peers. BMO’s 2008E P/E is 9.5x, at 87% of its peer group (historical avg 99%). As these exposures shrink and balance sheet concerns decline, we would expect BMO’s relative valuation to improve. Maintain Sector Overweight.”
Good news for BMO shareholders. But there’s just one problem. If you weren’t an institutional shareholder, you wouldn’t necessarily know that LINKS is shrinking; and a smaller LINKS can only be good for BMO’s risk profile. Nor would you have known that LINKS will experience a $2 billion “funding spike” over the next 10 days.
“Spike” is code for “we have liabilities coming due and there are no guarantees that someone will buy the paper we plan to issue”.
From an investor relations standpoint, BMO put news of the RBC conference up on its website and provided an archived feature that allowed shareholders access to a taped version of the conference’s Q&A session for 30 days. But these are not the same thing as proactive disclosure, and would underwhelm the tens of thousands of shareholders that don’t regularly review BMO’s IR webpage.
As time passes, it may well be that the lessons of the legendary Nortel (NT:TSX) IR fiasco have been lost on a new generation of investor relations practitioners and in-house lawyers. In that case, Nortel executives provided some insights to an exclusive New York institutional investor conference. After the meeting, portfolio managers hit the phones with the news in hand and the stock moved materially. What’s happened to our stock, asked retail investors? What news? Regulation FD was soon upon us.
Would investors not want to know that BMO had reduced the size of the SIV it manages by $3.6 billion following the fiscal year end disclosure? As the fund size shrinks, so too may shrink the risks associated with the LINKS vehicle. Unless, of course, the most conservative assets are all that have found buyers at par.
I’m not sure why the decreasing SIV size and the large funding needs doesn’t warrant a press release. The news bar isn’t that high as it is. Just the other day, for example, BMO issued a press release regarding a new $1.5 million bank branch in Richmond Hill. Regularly updating all shareholders on the progress of reducing the bank’s exposure and possible liability to the Links SIV seems to be the prudent thing to do.
It’s good news, after all. And shareholders of all stripes would welcome a tad bit of good news in the wake of the challenges that many banks have experienced over the past year.
(disclosure – I own BMO)