The role of Silicon Valley Bank, arguably the world’s most powerful investment bank, is often overlooked in the media coverage surrounding the fall of Silicon Valley Bank.
Last week, SVB Financial Group , the parent company of the group, turned to Goldman Sachs for assistance in navigating a difficult financial situation.
SVB was bursting with deposits during the good times for its clients in technology-industry. However, SVB had been losing deposits as these same clients pulled down their accounts to pay payroll and satisfy vendors. A rating agency informed it that it could be forced to downgrade the company.
It’s possible that Goldman Sachs could be of assistance. Corporate America is echoing an older industrial logic, where you won’t be fired for hiring Goldman Sachs.
Yet, Silicon Valley Bank collapsed on Friday. This was the second-largest US bank collapse. This was a rare failure for Goldman Sachs, raising questions about the quality of investment bank advice.
What happened then?
Moody’s warns about a rating change
SVB was informed by Moody’s Investors Service last week that the agency was planning to reduce its credit rating in response to the challenging operating environment.
SVB could be affected by a large downgrade. SVB has been serving customers in the startup and venture capital ecosystems since 1983. Banks are more vulnerable than retail or industrial companies, which might be able weather downgrades. This is because it can undermine trust in their financial underpinnings.
The company then turned to Goldman Sachs, a long-term advisor, to devise a plan to raise equity to support SVB’s finances. It could, it was thought, convince Moody’s to lower the severity of its downgrade.
This account was based on conversations between two people who were familiar with the events or briefed about them. They are current and former Wall Street bankers, as well as a securities lawyer.
Companies and their investment banks would prefer to arrange distressed transactions in private meetings where they can agree not to disclose sensitive information. This allows bankers to protect their clients and line up investors before announcing a deal to the public. Investors are “brought over to the wall,” according to industry parlance.
This approach was used repeatedly by banks during the financial crisis to shore up their balance sheets.
One person said that it would likely take a longer time than the banker or company had anticipated. Moody’s was expected to release its ruling in a matter of days.
Deal evaluations take investors between 48 and 72 hours, depending on whether the deal will be used to fill a gap in the balance sheet. Investors must agree to not share non-public information. In many cases financial models will need to be developed and data rooms established. It could take up to a week, according to one person.
Goldman was quick to act, and some of its bankers worked through the weekend. SVB and Goldman were unable to make a private deal due to a lackluster buyer or time crunch.
They would then have to announce the transaction, find buyers on the public market and open the company to short-term investors.
This is a standard practice in the public securities market. Hedge funds may look to shorten shares if there is weakness in a company and then later buy the stock to make up the difference.
This means that the stock of the company is susceptible to being shorted or set up for volatility.
Goldman had already negotiated a deal for SVB to raise $2.25 Billion of preferred and common equity. This included a $500 Million anchor investment from General Atlantic.
The offer is met with a hostile reaction
SVB was ready for its offering. The bank released a press release after the close of trading to announce the plan.
However, the language in the press release was heavy on financial jargon, and it seemed that it was written more for investors than for the customers of venture companies and startups who had their deposits at the bank.
In a press release, the company stated that it had sold approximately $21 billion worth of bonds for $1.8 billion. This was to restructure the company’s balance sheet and allow it to withdraw more easily.
One person said that it was strange for someone to make such an admission in an unfamiliar place without providing context.
SVB wasn’t the only bank that surprised the market. Silvergate Capital Corp. (parent of crypto lender Silvergate Bank) announced that it would voluntarily cease operations following massive withdrawals from its crypto business.
Moody’s also released its rating downgrade. They settled on a single notch due to the promise of capital raise but cautioning about SVB’s continuing weakness.
Moody’s stated that while the restructuring of the balance sheet is encouraging in reversing some negative trends from 2022, it did not believe that SVB’s financial profile would revert back to its historical high levels within the next 12-18 months.
The bank also provided more information about what it considered SVB’s diminished ability to meet its deposit outflows. SVB was unable to access a separate portfolio with $15 billion in unrealized losses.
Stocks plunged aftermarket.
SVB’s stock continued to decline the day before. One person, who wasn’t involved in the deal, stated that SVB’s stock had dropped 40% by the time it closed. “Because then, the vultures will be out.”
The stock closed at $106.04 after closing the day down 60%. Venture capitalists started warning founders of startups that they should withdraw their funds.
After the market closed, it fell further.
Goldman had already lined up investors to purchase the stock at close to the closing price. However, with deposits fleeing at an alarming pace – a material disruption to the company’s business, Goldman and its lawyers were unable to price the deal.
The Federal Deposit Insurance Corp. took the bank into receivership by noon Friday.
It was Centerview, a boutique mergers advisory, that helped the bank pick up the pieces.