Silicon Valley Bank Faces Some Insolvency Issues
Posted on 03/09/2023
Silicon Valley Bank (SVB) is a subsidiary of SVB Financial Group and an important lender for early-stage businesses. Shares of SVB Financial Group dropped around 42% on March 9, 2023. In reporting fourth quarter 2023 earnings in January 2023, SVB Financial forecasted a continued challenging market and interest rate environment. This included continued slow public markets, further declines in venture capital deployment, and a modest decline in cash burn in the first and second quarters of 2023. While venture capital deployment has tracked their expectations, client cash burn has remained elevated and increased further in February 2023, resulting in lower deposits than forecasted. The related shift in SVB’s funding mix to higher-cost deposits and short-term borrowings, coupled with higher interest rates, continues to pressure net interest income and net interest margin. SVB Financial expects that client cash burn will remain elevated for the first half of 2023. Essentially, SVB is facing a decline in deposits from startups. When SVB was getting big deposits from startups before the raising of interest rates, the bank moved these deposits into long-dated securities like U.S. treasuries. However, these “safe” investments are worth less as the Federal Reserve started increasing interest rates.
SVB Financial hired Goldman Sachs to advise on a capital raise.
On March 8, 2023, SVB Financial announced a series of strategic actions, including the sale of substantially all of SVB Financial’s available-for-sale securities portfolio, designed to reposition SVB Financial’s balance sheet to increase asset sensitivity, partially lock in funding costs, better protect net interest income and net interest margin, and enhance future profitability. SVB Financial took these actions because of expectations of continued higher interest rates, pressured public and private markets, and elevated cash burn levels from SVB Financial’s clients as they invest in continuing to build their businesses. The same day SVB Financial completed the sale of US$ 21 billion of available-for-sale securities, consisting of U.S. treasuries and agencies, to Goldman Sachs. The securities sold had an average yield of 1.79% and a duration of between three and six years. The sale to Goldman Sachs resulted in an after-tax loss of approximately US$ 1.8 billion in the first quarter of 2023. In exchange for buying US$ 21.4 billion of debt from Silicon Valley Bank, which the failed lender booked at a loss of US$ 1.8 billion, Goldman Sachs could make around US$ 100 million. The treasury team at SVB is reconstructing the AFS portfolio with short term, fixed rate treasury securities; hedging the reconstructed AFS portfolio with receive-floating swaps; increasing term borrowings from US$ 15 billion at December 31, 2022 to US$ 30 billion; and hedging term borrowings to lock in borrowing costs, according to a recent SEC filing.
Silicon Valley Bank is a major bank lender to U.S. tech and life sciences startups.
Capital Raise
Silicon Valley Bank will launch US$ 1.75 billion common stock sale. In addition, SVB disclosed that private equity firm General Atlantic (SPV), L.P is buying US$ 500 million of common stock in a separate transaction. The subscription agreement with General Atlantic is contingent on the closing of the concurrent common stock offering.