The parent company of the government-intervened California-based Silicon Valley Bank is filing for Chapter 11 bankruptcy today as it continues to explore alternatives and interested parties that would like to scoop up two of its active subsidiaries.
The bankruptcy proceeding, SVB Financial explained, does not include SVB Securities and SVB Capital. These are the broker-dealer, investment banking, and venture capital units of the demised financial conglomerate that have kept operating despite what happened to the bank.
A Chapter 11 bankruptcy will give the business time to restructure its operations to find alternatives to repay its $3.3 billion in outstanding debt and $3.7 billion in preferred equity.
Centerview Partners have been proposed by SVB Financial as the company’s financial advisor along with Sullivan & Cromwell LLP as legal counselors and Alvarez & Marsal as restructuring advisors.
Why is SVB Financial Filing for Bankruptcy?
The Silicon Valley Bank and SVB Private – the former private banking unit owned by SVB Financial – are also not part of the group anymore as the Federal Deposit Insurance Company (FDIC) was forced to seize the assets of the two financial institutions after they failed to honor several billions in withdrawals from customers.
The seizure immediately deprived SVB Financial Group of its most important source of revenue, leaving the group with little to no alternative than to resort to bankruptcy to protect itself from lawsuits from its creditors until it reorganizes its operations.
The group’s risk disclosures emphasize the consequences that such an event could have on SVB Financial Group:
“SVB Financial is a holding company and is a separate and distinct legal entity from its subsidiaries. It receives most of its cash revenues from a few primary funding sources: income from equity warrant assets and investment securities, from periodic capital markets transactions offering debt and equity instruments in the public and private markets, and, to the extent declared, cash dividends paid by subsidiaries, primarily the Bank”.
The disclosure continues: “In the event SVB Financial does not receive revenue from its subsidiaries, SVB Financial may not be able to pay operating and borrowing costs and, to the extent authorized or declared, fund dividends to holders of its capital stock and stock repurchase programs”.
SVB Financial Group Faced Huge Losses from the Sale of Fixed-Income Securities
Back on 8 March, SVB Financial announced a controverted common and preferred stock offering. The financial conglomerate disclosed back then that it was forced to sell a big chunk of its portfolio of securities including US Treasury bonds and other fixed-income instruments valued at $21 billion.
The group incurred a $1.8 billion after-tax loss as a result of this operation due to the impact that the Federal Reserve’s multiple interest rate hikes have had on the value of fixed-income assets in the past couple of years.
SVB Financial’s stock plummeted by 38% right after the announcement as investors feared that the offering was kind of a “canary in the coal mine” warning that the company could be struggling financially as a result of the losses it experienced from the sale of those assets.
The graveness of the situation was exacerbated by a flood of withdrawal requests received from customers who probably feared the worst for the bank. On 9 April alone, the bank had to honor over $42 billion in withdrawals from customers. This represented almost a quarter of the bank’s total deposits based on the figures provided by SVB Financial Group in its 2022 annual report.
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The FDIC, the Treasury Department, and the Federal Reserve were forced to intervene by assuring depositors that the money they had with the Silicon Valley Bank will be completely accessible to be withdrawn by last Monday.
This brought some calm to the financial markets and the general public as there were already fears that other financial institutions could struggle to honor withdrawals if bank runs spread across the country.
However, a report from the FDIC indicates that banks are sitting on over $600 billion in unrealized losses on their investment securities. This makes banks vulnerable and exposes them to significant losses if they are forced, for whatever reason, to sell a portion of the portfolio of securities, similar to what happened to SVB.
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