Silicon Valley Bank (SVB), regarded as a pillar of the startup ecosystem for 40 years, has gone bankrupt. Even the world’s most powerful investment bank could not be saved.
The US Silicon Valley Bank (SVB), known as a major lender for startups, suddenly went bankrupt on March 10th. The role played by the mega-investment bank, arguably the most powerful investment bank on the planet, in all of this has gone largely unreported.
SVB’s financial holding company, SVB Financial Group, has turned to Goldman Sachs to help it navigate the tough times it faces.
In the good times when tech clients were doing well, deposits thrived. suggested a reduction in
No doubt Goldman Sachs could have saved SVB. It used to be said in American industry that “You can’t get fired just because you signed with Goldman Sachs.”
Still, SVB went bankrupt. It was the second-largest US bank failure in history, with total assets of just over $200 billion.
Goldman Sachs’ failure was a rare case, raising questions about whether advice was inappropriate or inadequate. What really happened there?
Moody’s warns of rating downgrade
The incident began in early March when US rating agency Moody’s Investors Service told SVB it was considering lowering the company’s rating given the difficult business environment. rice field.
For SVB, which has provided financial services for venture capital (VC) and startups since its founding in 1983, a major downgrade could be fatal.
Unlike companies in the industrial goods and retail sectors, where a downgrade would not have much of an impact on their business, banks could threaten to undermine confidence in their financial foundations and therefore signal downgrades or possible downgrades. There are weaknesses in reporting.
In response, SVB turned to its longtime adviser, Goldman Sachs, to move forward with a plan to raise capital by issuing equity to shore up its finances. If it can be realized, it thought that it would be a material to persuade Moody’s to reduce the size of the downgrade.
To interrupt the story, this article is of course not speculation, but the testimony of two people who are familiar with the internal affairs of SVB or the series of events, as well as current and former bankers on Wall Street, financial and securities business. It consists of facts based on interviews with lawyers who specialize in
Now, ideally, an investment bank would receive a request from a client company to organize a distressed investment transaction through closed-door meetings with the investor. A non-disclosure agreement is desirable.
By doing so, bankers can protect their clients, attract investors, and announce to the market when a deal is finalized. In industry parlance, it’s called “brought over the wall” of information for investors.
During the global financial crisis of 2008-09, banks used this method to strengthen their balance sheets.
However, according to people involved in the SVB capital increase, it was highly likely that it would take longer than Goldman had expected to complete the deal using this method. Moody’s was preparing to announce a downgrade decision within days, so it would be too late.
It generally takes 48 to 72 hours for an investor to evaluate a deal. When it comes to a capital increase to repair an already damaged balance sheet like this one, it will require ample time for careful consideration.
As mentioned earlier, investors must agree to confidentiality not to share non-public information externally, and often create post-capitalization financial models and data for the exchange and sharing of confidential information. I also need to set up a room. Interviews with people involved said that it would take at least a week.
Still, Goldman has taken action, with some bankers working all weekend.
But as a result, either due to lack of time or a lack of buyers (for the newly issued shares), the SVB and Goldman never closed a private deal.
SVB and Goldman were forced to announce a capital increase and seek a buyer through a public offering. In other words, it is almost synonymous with asking a short-selling investor to come over.
Shorting is a common strategy in the open market. When a company sells its shares, hedge funds find that they are weak in terms of finances and management. try to get
Therefore, the shares that SVB planned to issue for its capital increase were likely to be short-selling targets (or more likely to be duped) from the beginning, and were set up for high volatility (price fluctuations). .
Whatever the case, Goldman had a deal closed by March 8.
SVB issues $1.25 billion in common stock and $500 million in convertible preferred stock, and General Atlantic (U.S.) as an anchor investor (an institutional investor with a large investment that leads to external credit) Separately, the company promised to purchase 500 million dollars of common stock, and finalized a financing plan totaling 2.25 billion dollars.
Even though I struggle to buy support until the end…
SVB is now ready to embark on a public offering. After trading hours on March 8, the bank issued a press release announcing its plans.
The text of the release was full of financial terms, and the impression stood out that it was written for investors rather than startups and venture customers who have savings accounts with the bank.
Towards the end of the press release, the company sold $21 billion worth of bonds from its portfolio, resulting in a loss of $1.8 billion, to restructure its balance sheet and provide liquidity to meet client withdrawals. There was a statement that it was accounted for.
One of the people Insider spoke to said that the end of the release seemed like a strange place to make such an abrupt and all-important confession without the necessary context.
SVB wasn’t the only one to surprise the market.
Coincidentally, at the same time on the same day, Silvergate Capital, the holding company of Silvergate Bank, whose main business is trading with cryptocurrency-related companies, also closed the bank after suffering from an increase in deposit outflows. announced a voluntary reduction in operations.
On the same day, Moody’s announced a downgrade of the SVB rating.
Since the bank had already announced funding to strengthen its finances, the reduction was only one notch from “A3” to “Baa1”, but Moody’s said that the bank’s financial situation had deteriorated and that it would be “from 12 to 12 years.” “I don’t think we’ll see a return to the strong levels of the past in 18 months,” he warned.
Shares of SVB plummeted in after-hours trading after the market closed. The decline continued until the end of the aftermarket. A person interviewed by Insider, who is not involved in stock trading, said:
“Once the cheap (trading below the previous day’s closing price) hits 40%, you’re done, because at that point the short fund will close out (buying back).”
As a result, the stock price on the following day, March 9, closed at $106.04, down more than 60% from the previous day’s closing price. Some VC investors have advised startup founders to withdraw their deposits and withdraw their funds.
Stock prices continued to fall after the close of trading on the same day.
At the time, Goldman was scrambling to attract investors to back up the stock at just below closing price.
Goldman, SVB and lawyers never got around to setting a price, however, as deposits flowed out at such a rapid rate that they reached levels that would seriously disrupt operations.
At noon on March 10, SVB came under the control of the Federal Deposit Insurance Corporation (FDIC).
Instead of Goldman, it was Centerview Partners, an elite boutique investment bank, that was entrusted with helping to sort things out.
[original text]
(Translation and editing: Chikara Kawamura)
Source: BusinessInsider
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