The Big Idea
SVB goes into receivership
Dan Bruzzo, CFA | March 10, 2023
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Bank regulators on Friday placed SVB Financial (SIVB: Baa1/BBB) into receivership after the bank failed to raise sufficient capital and later failed to find a buyer in an emergency sale. Efforts to recapitalize earlier in the week could not stem deposit withdrawals and a freefall in the company’s share price. Trading in the stock was halted early in Friday’s session after falling 70% in pre-market trading following a 60% drop in the previous session. Meanwhile, trading in SIVB debt has become extremely tenuous as the market awaits further developments. SIVB preferred securities are currently offered at around $20 with no real indicated bid side, while intermediate senior debt securities are indicated just at or below fifty cents on the dollar.
Bondholders will now need to assess the total capital shortfall at the bank and the recovery value on debt securities. The $21 billion available-for-sale (AFS) securities portfolio was underwater by about $1.8 billion, at least according to the banks plan to liquidate that portion of holdings. However, there is no telling how much of a potential loss is lurking in the held-to-maturity (HTM) portion of their holdings – likely a very substantial amount. That will play a big role in determining the bank’s total capital shortfall before regulators begin unwinding the bank’s assets.
It is very safe to assume that losses will be absorbed at both the preferred and senior debt levels. The preferred debt will likely be wiped out or nearly wiped out, which is indicated by the current markets on those securities. The recovery value on seniors will likely be considerably low as well, possibly below 50 cents on the dollar. There is no way at this point to come up with an exact figure, and it may take some time for regulators to reconcile the hit that senior bondholders may need to take. This situation presents an opportunity for the Fed to reinforce to the market that holding company debt is in fact “loss absorbing” in nature. All the post-crisis efforts to restructure the banks and draft legislation for a stressed re-organization of a bank were designed for exactly this type of scenario.
There were reports late yesterday that venture capital and private equity firms continued to urge their portfolio companies to withdraw deposits from SIVB after the bank’s recapitalization plans became public. Other options, such as a direct investment into the bank from a private investor appeared to quickly come off the table as the situation escalated, and eventually the prospect of a sale was additionally shot down by regulators.
Away from SIVB, the markets do appear to be showing some stability in the broader banking sector as the story unfolds. And increasingly it seems apparent that this bank was unique on many levels. SIVB’s difficulties have very much been a perfect storm of venture capital cash drying up, a rapid increase in interest rates, an abnormally large investment portfolio, and a dwindling net interest margin. And while some of those characteristics are present elsewhere, few other banks seem to have that exact mix of factors weighing on their potential survival. There were even reports that the hardest hit West Coast banks—such as First Republic (FRC) and PacWest (PACW), whose share prices were hit hard on contagion concerns—are possibly seeing deposits flow in from customers leaving SIVB. That could all be hearsay, but the stories are out there, and it is not completely unreasonable to believe as those customers need to go somewhere. Meanwhile, East Coast-based Signature Bank (SBNY) continues to see its shares sell off on concerns that the bank’s large depositors could flee as well.
On Wednesday, SIVB announced through an 8K filing that it would offer $1.25 billion in common stock and a $500 million private placement direct to General Atlantic. It also planned to execute a $500 million mandatory convertible preferred stock offering. In addition, the bank revealed plans to sell its entire available-for-sale securities portfolio for approximately $21 billion and take a $1.8 billion realized loss on the transaction. SIVB’s intention was to purchase short duration US Treasury securities, which the bank would hedge with floating-rate swaps. The plan was to presumably create a much more liquid position in SIVB’s AFS securities holdings, giving the bank easier access to liquidity as necessary amidst deposit flight.
Moody’s quickly downgraded the senior debt rating to Baa1 from A3, reflecting deterioration in the bank’s funding, liquidity and profitability. The rating agency believed the proposed actions from management would help reverse the negative trends of the past 12 months but wouldl likely not be enough to revert to the bank’s typical position within the next 12 to 18 months, and therefore believed the downgrade was warranted. Moody’s cited an 11% decline in average client funds, with the majority coming from off balance sheet funds. S&P, which rates the senior debt of SIVB lower at mid-BBB, did not respond to the proposed transactions. SIVB relies on deposits from venture capital and life sciences companies, which had seen sharp reductions in funding in the last year.
The bank was profiled back in August of last year, just prior to many of the current difficulties having a significant impact on the overall credit posture in the second half of 2022. Most notably, deposit outflows have significantly increased SIVB’s reliance on wholesale funding sources, sparking concerns that further deterioration among the bank’s core customer base could further pressure the bank’s funding profile. By year-end 2022 reliance on wholesale funding increased to just over 10% from a level of 1.52% as of prior year-end.
SIVB is headquartered in Santa Clara, California, with 26 branches—15 in the Silicon Valley area, five in Massachusetts and the remainder in Beijing, Shanghai, Hong Kong, London, Frankfurt and Herzliya, as part of the bank’s global expansion. The bank had approximately $212 billion in total assets as of year-end 2022, $173 billion in total deposits and $74 billion in total loans and leases, resulting in a very low loan-to-deposit funding ratio of less than 43%. The bank had more than doubled in size by total assets since 2020 as venture capital funds we flush with capital.