Silicon Valley Bank’s demise began with downgrade threat

By Echo Wang

(Reuters) – In the middle of last week, Moody’s Investors Service Inc delivered alarming news to SVB Financial Group, the parent of Silicon Valley Bank: the ratings firm was preparing to downgrade the bank’s credit.That phone call, described by two people familiar with the situation, began the process toward Friday’s spectacular collapse of the startup-focused lender, the biggest bank failure since the 2008 financial crisis.

Friday’s financial crisis sent jitters through the world and crashed banking stocks. Investors are concerned that aggressive interest rate increases by the Federal Reserve to combat inflation could expose financial system vulnerabilities.

Reuters first reports details of SVB’s response to the threat of a downgrade. California’s startup sector was also affected by the failure, with many businesses unsure of how much they can recover from their deposits and worried about making payroll.

After SVB’s money was parked in bonds, the Moody’s called.

The team of SVB Chief Executive Greg Becker called Goldman Sachs Group Inc bankers to get advice. They then flew to New York to meet with Moody’s and other rating firms, as they were concerned that the downgrade might undermine investors’ and clients’ confidence in the bank’s financial health.

    The sources asked not to be identified because they are bound by confidentiality agreements.

SVB developed a plan over the weekend that would increase its holdings’ value. It would sell bonds with low yields worth over $20 billion, and then reinvest the proceeds to invest in assets that offer higher returns.

According to sources, although the transaction will result in a loss, SVB would be able to fill that funding gap by selling shares and avoid a multi-notch downgrade.

This plan was a disaster.

The news of the sale of shares scared clients, mostly technology startups. They rushed to withdraw their funds, disrupting capital raising. Friday saw regulators intervene and shut down the bank, putting it into receivership.

Reps from SVB, Goldman Sachs or Moody’s didn’t immediately respond to inquiries for comment.

THE UNRAVELING

The sources revealed that Moody’s had informed the SVB executives about the imminent downgrade.

SVB quickly reacted in the hope of mitigating the damage.

According to sources, General Atlantic, a private equity firm, was contacted by the bank and agreed to purchase $500 million of the $2.25 Billion stock sale. Another investor, however, stated that it couldn’t reach a deal within the SVB timeline.

SVB had already sold its bond portfolio, resulting in a loss of $1.8 billion by Wednesday.

Moody’s downgraded SVB’s bank by one notch, but that was due to SVB’s bond portfolio selling and plan for capital raising.

To avoid any possible stock sales being delayed by news about the sale, it would be ideal that the stock sale was completed before the market opens on Thursday. The tight deadline meant that that was not possible, according to sources.

SVB had not completed the preparations required to sign confidentiality agreements to investors who would be willing to commit to such a large deal. The bank was advised by its lawyers that investors would require at least 24 hours to process new downbeat financial projections, according to sources.

Reuters could not determine the reason why SVB did’t begin these preparations earlier.

SVB stock plunged upon the announcement of the share sale. It ended Thursday at $106.04, down 60%. According to sources, Goldman Sachs bankers still believed that they could close this sale at $95, according to them.

Venture capital firms advised startups to withdraw money from Silicon Valley Bank in fear of a bank run.

This became quickly a self-fulfilling prophecy. General Atlantic and other investors left, and the stock sales collapsed.

General Atlantic has not responded to a request for comments.

California’s banking regulators shut down the bank on Friday, and appointed the Federal Deposit Insurance Corporation as receiver. The assets will be disposed of by the FDIC.

The regulator has in the past struck quick deals, sometimes within a week, which experts believe could be the case with SVB.

(Reporting from Echo Wang in Washington; Editing: Greg Roumeliotis, William Mallard).