Yahoo Finance SVB Financial's path forward, explained
Updated on March 17 to reflect continuing developments.
In the wake of SVB’s collapse, the FDIC and a group of SVB Financial Group-appointed board members are considering options for the sale of the company’s assets.
These two groups will help direct the fate of SVB Financial, which is made up of four entities:
Silicon Valley Bank handled deposits, loans and related services for tech and life sciences startups, as well as VC and PE firms. The FDIC now controls the defunct bank, which has resumed operations.
SVB Private is the private banking and wealth management arm that catered to PE and VC investors along with startup executives.
SVB Capital is an investment platform with VC and debt funds that primarily invested on behalf of LPs. The firm managed $9.5 billion in assets at the end of 2022.
SVB Securities is the investment banking arm that advised clients on mergers and acquisitions and other financial services.
The auction is drawing buyers interested in a variety of assets, at a discount, that could give the next owners an entry point into new markets or build on existing business offerings. Here are three things that could shape the outcome:
1. The FDIC wants to find a buyer, but SVB's loans issued to startups make it a tricky asset to value.
Last weekend, the government's first auction to sell the bank's assets failed to reach resolution. For now, those assets are safe, but they’re still in limbo and remain under temporary receivership.
On Wednesday, the FDIC asked interested bank buyers to submit their bids for both SVB and Signature Bank by Friday. The agency reportedly wants to sell SVB Private, the $17 billion wealth management arm, as part of this auction.
But the FDIC also doesn’t have to accept the result of this auction. Technically, bridge banks have up to two years to either liquidate the portfolio of assets or find buyers for the failed bank. This deadline can also get up to three one-year-long extensions, meaning the process could take up to five years.
Through SVB’s bridge bank, the FDIC has two priorities. The first is to mitigate costs to the Deposit Insurance Fund, an industry-funded vehicle used to protect depositors and resolve failed banks.
One of the FDIC's next goals is to get money back to senior bond holders, which means the bond portfolio needs to sell for a strong price. If the agency doesn’t receive an adequate offer in this weekend’s auction, the process will continue.
In a bank failure like this one, the FDIC acts as the insurer of the bank’s deposits, paying the depositors back up to its insurance limit. It also is the bank’s receiver, which means the corporation is now responsible for selling and collecting the assets of the failed bank and selling off its debts.
Banks that are put into FDIC receivership have historically found a new buyer fairly quickly. In the case of Washington Mutual—the largest bank failure in US history—the FDIC seized the bank in 2008 and sold the majority of its assets within a day.
In the case of SVB, the bank's $6.7 billion book of loans to startups makes finding a buyer a bit trickier—and the process a lot longer.
“While there’s optimism that this bank will be purchased, it still has liabilities that are unresolved, meaning that if it has equity in a bunch of startups and these startups haven’t gone through down rounds yet, then it’s going to be difficult for a purchaser to buy something where the downside is currently unknown,” said Constantine Lizas, former FDIC lead counsel and current partner at law firm Harris Beach.
2. Potential buyers may want protection against losses.
The fate of SVB’s assets comes down to two factors: The loss and the extent to which the FDIC is willing to cover the deficit in a loss-sharing agreement, Lizas added. That type of agreement helps protect the acquirer from losses beyond a negotiated threshold when it buys the assets of the failed bank.
Three factors determine the size of the payment the FDIC could make: the discount the bidder got for buying the company, the franchise value bid of the failed institution’s deposit base, and the difference between the value of assets and liabilities. If the combination of these factors results in a negative sum, the FDIC pays the acquirer its loss-sharing agreement up front. If it’s positive, the buyer pays the FDIC the difference.
If the FDIC proposes a generous loss-sharing agreement (something like 80% reimbursement on the losses on covered assets or above), the risk for the buyer goes down. But Lizas said he doesn’t think the FDIC is inclined to offer an overly generous loss-sharing agreement, which makes SVB a less attractive acquisition target.
“People want SVB to survive,” Lizas added. “It has an important role in the tech startup world. But on the other hand, no one’s going to want to buy something with a huge liability unless they believe that acquiring that business model is worth the loss.”
Current bond trading implies that the market doesn’t expect a loss-sharing agreement would be required. SVB Financial Group’s bonds are trading at 60.25 cents on the dollar, up from 37 cents on the dollar on Friday and reflecting a stronger market sentiment for the value of SVB’s portfolio, according to FINRA’s TRACE. If the market felt the entity held no value, the bond price would have likely stayed down.
One thing that SVB has going for a potential acquirer is access to the venture capital asset class, said Jay Levy, co-founder and partner of Zelkova Ventures.
“There seems to be a positive sentiment around SVB from the founder and investor community,” Levy said. “This probably will make a potential acquisition more appealing to another bank.”
Another option: The private market could also come to the rescue with some kind of recapitalization as an independent bank with PE and VC backing, Levy added.
3. Bankruptcy filing opens the door for further restructuring
SVB’s parent company SVB Financial Group filed for Chapter 11 bankruptcy in New York on Friday, led by the five-member restructuring committee appointed by the company’s board of directors.
Silicon Valley Bridge Bank N.A. is not part of the Chapter 11 filing and remains in the hands of the FDIC. SVB Financial Group is no longer affiliated with SVB N.A. or SVB Private, a statement said.
The funds and GP entities under SVB Securities and SVB Capital are not included in the filing; SVB Financial Group said in a statement that it is continuing to look for “strategic alternatives” for these businesses.
William Kosturos, SVB Financial Group’s chief restructuring officer, said that the bankruptcy process will allow the holding company to “preserve value” as it continues to look for strategic alternatives for the businesses and underlying assets of SVB Capital and SVB Securities.
“SVB Financial Group will continue to work cooperatively with Silicon Valley Bridge Bank," Kosturos said. "We are committed to finding practical solutions to maximize the recoverable value for stakeholders of both entities."
SVB Financial Group estimated that it has around $2.2 billion of liquidity and its funded debt lands at over $3 billion. The company also has $3.7 billion of preferred equity outstanding.
A bankruptcy process is attractive to a potential buyer because it adds an extra layer of confidence in SVB’s assets, said Larry Katz, a partner at Hirschler, a Virginia-based law firm.
“At the end of any kind of sale process, the successful buyer has the protection of a bankruptcy order that says ‘this is what you’re getting and you’re getting it without all of the liabilities that would otherwise go with it,’” Katz said. “You don't want to buy assets without knowing for sure that you're not also inheriting a lot of headaches.”
In addition to aiding in the process of finding a buyer for fund management and investment banking divisions, a bankruptcy process could also help SVB executives skirt any civil litigation brought against the holding company for mismanagement of the company.
“The owner may end up filing for bankruptcy as a means to avoid some of the claims that might otherwise be asserted against the holding company,” Katz added on Thursday.
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This article originally appeared on PitchBook News
