Silicon Valley Bank collapse: How downgrade threat led to SVB's demise
Friday's collapse sent tremors through global markets and walloped banking stocks
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The spectacular collapse of SVB Financial Group, the parent company of Silicon Valley Bank, was triggered by Moody's Investors Service Inc's phone call that it was preparing to downgrade the bank's credit, sources close to the development revealed.
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The news sent jitters through global markets, and investors began to worry that the Federal Reserve's aggressive interest rate increases to fight inflation were exposing vulnerabilities in the financial system.
SVB's failed response to the downgrade prospect was reported by Reuters and demonstrated how quickly confidence in financial institutions can erode. Here's is deeper look the events that happened in the past few days.
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Moody's decided to downgrade SVB
The Moody's call came after the value of the bonds where SVB had parked its money fell due to the higher interest rates.
Worried the downgrade could undermine the confidence of investors and clients in the bank's financial health, SVB Chief Executive Greg Becker's team called Goldman Sachs Group Inc bankers for advice and flew to New York for meetings with Moody's and other ratings firms, the sources said.
SVB tries selling $20 bn low-yielding bonds
SVB attempted to boost the value of its holdings by selling more than $20 billion worth of low-yielding bonds and reinvesting the proceeds in assets that delivered higher returns. However, the plan backfired. The news of the share sale spooked clients, primarily technology startups, that rushed to withdraw their deposits, upending the capital raising. Regulators stepped in on Friday, shutting down the bank and putting it in receivership.
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SVB had not done the preparatory work needed to sign confidentiality agreements with investors who would commit to a deal of such a size. Its lawyers advised the bank that investors would need at least 24 hours to digest new downbeat financial projections and complete the sale, the sources said.
General Atlantic agrees to buy $500 mn stocks, later walks away
SVB sprang into action in the hopes of softening the blow. The bank lined up private equity firm General Atlantic, which agreed to buy $500 million of the $2.25 billion stock sale, while another investor said it could not reach a deal on SVB's timeline, the sources said. By Wednesday, SVB had sold the bond portfolio for a $1.8 billion loss. Moody's downgraded the bank, but only by a notch because of SVB's bond portfolio sale and plan to raise capital.
Ideally, the stock sale would have been completed by before the market opened on Thursday, to avoid the sale being jeopardized by any declines in SVB's shares once news of the sale got out. But the sources said that was not an option given the tight schedule.
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SVB's stock plunged on news of the share sale, ending Thursday down 60% at $106.04. General Atlantic and other investors walked away, and the stock sale collapsed. California banking regulators closed the bank on Friday and appointed the Federal Deposit Insurance Corporation (FDIC) receiver.
(With inputs from agencies)
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