Update (1730ET): SVB must have seriously upset someone…

Founders Fund, the venture capital fund co-founded by Peter Thiel, has reportedly advised companies to pull money from Silicon Valley Bank..

The firm told portfolio companies that there was no downside to removing their money from the bank, according to the people, who asked not to be identified because the information isn’t public.

Additionally, Bloomberg reports that Garry Tan, the president and CEO of Y Combinator, warned its network of startups that solvency risk is real and implied they should consider limiting their exposure to the lender.

Venture firm Tribe Capital has advised its portfolio companies to move some, if not all, of their balances from SVB. 

An email thread of more than 1,000 founders from Andreessen Horowitz was abuzz with the news Thursday, with many encouraging each other to pull cash from the bank.

SIVB shares down further after hours (-70%), back below $80…

A cunning plan perhaps –  numerous VC icons potentially ganging up to crush a midsize bank  – which could be systemic. What better way to force Powell back into QE to ‘save the world’?

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Update (1500ET): As the day wore on and SIVB shares collapsed (and fear spread contagiously across other banks and asset-classes), The Information reports that Silicon Valley Bank CEO Greg Becker on Thursday told top venture capitalists in Silicon Valley to “stay calm” amid concerns around a capital crunch that wiped nearly $10 billion off the bank’s market valuation.

he said.

On a call, Becker said that

He added that the bank has “ample liquidity to support our clients with one exception: If everyone is telling each other SVB is in trouble that would be a challenge.”

Haven’t we heard that kind of reassurance before?

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Is the bursting of the tech bubble finally spilling over to the financial system?

One day after the biggest crypto-focused bank, Silvergate Capital, announced plans to unwind and liquidate after a deposit run effectively killed its core business model, this morning its far larger peer – the parent company of the venerable Silicon Valley Bank, SVB Financial Group – saw its shares plunge the most in more than two decades after the company took “steps to bolster its financial position” that included not only a highly dilutive stock offering but also a panicked asset sale that sparked fears of a liquidity crisis at one of the biggest and original providers of funding to the Venture Capital industry.

The Santa Clara-based company’s shares sank by as much as 60% on Thursday, their biggest decline in the company’s history since going public in 1987.

The slump in the shares to their lowest level since May 2020, came after SVB i) announced a stock offering, ii) sold substantially all of the available-for-sale securities in its portfolio and iii) updated its forecast for the year to include a sharper decline in net interest income.

Put in context, this 60% plunge smashes SIVB back to its lowest since 2016…

“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. Others clearly disagreed and dumped the stock at a pace not seen in a quarter century.

The bank also said it had sold about $21 billion of securities from its portfolio (with a plan to reinvest the proceeds but don’t hold your breath) which will result in an after-tax loss of $1.8 billion for the first quarter. And the cherry on top was SVB’s announcement of equity 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.

It wasn’t immediately clear whether the SIVB liquidity crisis is a function of assets, i.e., loans collateralized by toxic early stage investments that have turned sour… or liabilities, i.e., a good old-fashioned deposit bank run.

Multiple analysts have pointed to the high deposit outflows as the catalyst for the liquidity sale, which stoked fears for the banking industry as a whole.

Truist analyst Brandon King says “the increase in balance sheet asset sensitivity should lower the left tail risk to higher interest rates” but expects material value per share dilution from the proposed capital raise.”

KBW analyst Christopher McGratty says SVB Financial will exit 2023 on a notable lower earnings run rate due (NII and share count), and “it’s possible that 2024E is in the $16.00-$18.00/share range” pending the price of the capital raise

Evercore ISI analyst John Pancari:

Jefferies analyst Casey Haire says the balance sheet restructuring and capital raise will boost net interest income and nudge capital ratios higher…

Bloomberg Intelligence analyst Herman Chan notes the sale “comes as a surprise considering the bank’s ability to source off-balance-sheet client funds for deposit funding”

To ease the hit, SVB will raise $2.25 billion through common stock, depositary shares and a sale of shares to General Atlantic

In an earlier note, Chan notes that

$SIVB $SIVBP You can see $15.1 billion of unrealized losses on the HTM vs. $1.3 at 2021. This is all MBS and its toasted more now than at 12/31/22. Average yield on this book is a mere 190 bps. They can’t sell this. They are frozen. pic.twitter.com/3XMxtZ3ecV

— Lake Cornelia Research Management (@CorneliaLake) March 9, 2023

As Lake Cornelia Research Management goes on to note, the market implications of this situation are far and wide.  

We have a $210+ billion balance sheet (which was a mere 86 billion 2 years ago) that could well have an unwind.  It is not a stretch at all to argue that on a current mark to market basis that equity is negative to the tune of of billions (you can be insolvent but liquid and survive as a bank).  The hit to the startup eco-system of an impaired or vanquished $SIVB would be substantial.  

Beyond the negative duration risk we highlighted (asset side locked at sub 200 bps vs. liability side could increase to 200+), the simple mark to market on the HTM and the $88 billion of HTM and $70 billion of loans is likely far greater than the realized losses on the AFS securities sold at a $1.8 billion loss.  The asset growth since 2020 is crazy.  Total assets for $SIVB are 50% of $BSC at time of $JPM bid.  

We do not believe it would be crazy to see $SIVB at $50 or lower per share when this is all done.  The negative earnings loop, and associated balance sheet pressure, of higher deposit rates plus potential for fleeing private bank clients is a dark scenario.  There are many scenarios where they will need to raise more capital (dilution to existing holders) and this may not have fixed the situation.     

We have rarely seen a situation where buying a bank when it is down 40% on the day to be a good entry…these things can unwind far quicker than people realize.  People with facilities with $SIVB may well call them / draw which would further stress liquidity.  Just haircutting by 10% the value of the 21-22 growth of held loans and HTM securities alone would be a $5+ billion hit to book equity (which is $20 billion post these transactions). 

The GA concurrent PIPE we think was the wrong investor.  If there was ever a situation to bring in an “Elliot” / “Baupost” / $GS “Prop Desk” it was this one.  The balance sheet needs to be seen as credible and diligenced.  The earnings and conference call transcripts are farcical; the CEO talks about the VC funding environment and IPO pipeline as opposed to any questions on the balance sheet position.  If this plays out adversely, it will be another sad case of a storied franchise that had a great moat..and then woke up during the $ARKK boom and decided to blow it all on a $140+ billion balance sheet growth splurge on a mortgage and loan book yielding a blended 3.25% with massive correlation risk…which ran right into rising interest rates.   

Seeing the preferred stock trade down 15% today should be eye opening to many.  It is at $16.60.  This is distress debt mafia stuff.  Par is $25 for reference.  

Lot of digging to do and all the above could well be wrong.  Many / most people far smarter than I am on fins (and other things).  The point is we don’t think this is over and there are a lot of second and third order implications.