Silicon Valley Bank’s Owner Drops Most on Record as Clients Face Cash Crunch

With the floundering of prominent startups — including crypto exchange FTX, which ultimately went bankrupt — venture investors have been reckoning with the repercussions of years of exuberant investment in emerging companies and their founders

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By Max Reyes and Bre Bradham
March 09, 2023 | 06:38 PM

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Bloomberg — SVB Financial Group (SIVB) took steps to shore up capital after being hit by losses on its securities portfolio and a slowdown in funding at the venture capital-backed firms it banks. The company’s shares plunged by the most on record.

The slump in the stock, its worst in more than 35 years, came after Santa Clara, California-based SVB announced a stock offering, sold substantially all of the available-for-sale securities in its portfolio and updated its forecast for the year to include a sharper decline in net interest income.

“We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash-burn levels from our clients as they invest in their businesses,” SVB Chief Executive Officer Greg Becker said in a letter to shareholders Wednesday.

The company — the parent of Silicon Valley Bank — declined to comment beyond the letter. SVB’s shares sank 60% on Thursday, closing at their lowest level since September 2016, erasing $9.6 billion in market value.

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With the floundering of prominent startups — including crypto exchange FTX, which ultimately went bankrupt — venture investors have been reckoning with the repercussions of years of exuberant investment in emerging companies and their founders. Firms have slowed their pace of investing, offering stingier terms to founders while demanding greater transparency and rigor during due diligence to try to avoid additional fallout.

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The bank’s troubles echo some of the issues that ended up sinking Silvergate Capital Corp., another California lender that targeted a specific market. In Silvergate’s case, it was cryptocurrency firms. The volatility of crypto-related deposits combined with losses the bank sustained on its securities portfolio led Silvergate to wind down operations and liquidate its bank.

SVB has far greater strength and staying power in its franchise, analysts said.

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Silvergate and SVB “in fact are victims of the same phenomenon as Fed tightening extinguishes froth from those parts of the economy with the most excess — and it’s hard to find more excess than in crypto and tech startups,” said Adam Crisafulli of Vital Knowledge.

SVB led a plunge in the KBW Bank Index on Thursday, as the gauge fell the most since June 2020. JPMorgan Chase & Co. and Wells Fargo & Co. were among banks that fell more than 5%. For SVB, the rout came alongside elevated volume. More than 33 million shares were traded Thursday, more than 3,700% of its three-month average, according to data compiled by Bloomberg.

According to SVB’s website, it does business with nearly half of all US venture capital-backed startups, and 44% of US venture-backed technology and health-care companies that went public last year. Those sectors have been ravaged as rate hikes enacted to combat inflation tank valuations and force companies to search for cash.

“This has everything to do with cash burn,” Odeon Capital analyst Dick Bove said. “Technology companies in Silicon Valley are hitting this bank left and right for money, and the bank has to give it to them.”

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SVB said it had sold about $21 billion of securities from its portfolio with a plan to reinvest the proceeds, which will result in an after-tax loss of $1.8 billion for the first quarter. SVB also announced offerings for $1.25 billion of its common stock and $500 million of securities that represent convertible preferred shares. Additionally, General Atlantic committed to purchase $500 million of common stock, taking the total amount being raised to about $2.25 billion.

“While we view these actions combined with a weaker guide as a clear negative, we do not believe that SIVB is in a liquidity crisis, especially following the significant proceeds” from its sale of securities, Wedbush analyst David Chiaverini wrote as he cut his price target for the company to $200 from $250.

The offering is expected to price Thursday after the market closes and trade on Friday, according to a person familiar with the matter.

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What Bloomberg Intelligence Says: “SVB’s decision to sell $21 billion in available-for-sale securities, resulting in a $1.8 billion after-tax loss, comes as a surprise considering the bank’s ability to source off-balance-sheet client funds for deposit funding. To ease the capital hit, SVB will issue $1.25 billion in common stock and a $500 million mandatory convertible preferred offering. General Atlantic will also buy $500 million in common shares in a separate deal.” --Herman Chan, BI senior industry analyst, and Sergio Ferreira, BI associate analyst

Moody’s Investors Service cut the bank’s issuer ratings following the moves. The downgrade “reflects the deterioration in the bank’s funding, liquidity and profitability, which prompted SVB to announce actions to restructure its balance sheet,” Moody’s said.

SVB’s move “repositions its balance sheet towards asset-sensitive, which will benefit profitability at the cost of realized losses on sales of investments,” the ratings company said late Wednesday. “Nonetheless, Moody’s does not expect the environment will recover enough for SVB to materially improve its profitability, funding and liquidity, which prompted today’s action.”

While Silicon Valley Bank “has earnings challenges going forward,” it also has the potential for a comeback, said Abbott Cooper, an activist investor focused on the banking sector.

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“They’re not going to be as profitable,” Cooper said. “But if you’re betting on the quote-unquote innovation economy coming back — which it always seems to do — Silicon Valley is a proxy for that.”

--With assistance from Drew Singer and Maxwell Zeff

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