Creditors of Silicon Valley Bank’s parent company could benefit if the parent company sells off its wealth management unit and other assets.
Creditors of Silicon Valley Bank’s parent company, Silicon Financial Group, are gearing up for a potential fight to receive the highest valuation of the company’s assets.
Pimco, Centerbridge Partners and Davidson Kempner, plus additional investors already engaged PJT Partners (PJT) – Get a free reportin case the holding company files for bankruptcy, sources told The Wall Street Journal.
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Selling the private wealth unit and other divisions could generate profit for them, the sources said.
Creditors hold a slew of SVB Financial bonds that were bought over the weekend when they plummeted to just 30 cents on the dollar, the WSJ reported. There is a total face value of $3.4 billion in bonds.
The creditor group wants SVB Financial to file for bankruptcy so that business divisions that are not related to the bank are sold. A sale under bankruptcy supervision could attract a larger number of bidders, Lucilio (Louie) Couto, former president and CEO of American Plus Bank in Arcadia, California, told TheStreet.
The parent company said its board created a restructuring committee on March 13 to determine its options and plans to sell its subsidiaries, SVB Capital and SVB Securities, as well as additional assets and investments.
SVB Securities operates as its investment banking arm, while SVB Capital serves as a $9.5 billion private credit and venture capital fund for outside investors. SVB Private runs its wealth management unit.
The FDIC shut down its banking business, Silicon Valley Bank, on March 10. The FDIC and the Federal Reserve said on March 12 that they would make sure all depositors got their money, even those with balances above the $250,000 insured threshold.
The SVB bankruptcy is the second largest bankruptcy in US history and has rattled many investors. It was the result of a bank run, triggered by the company’s announcement that it failed to raise the additional capital to increase liquidity.
Rate hikes crushed the bank’s bond holdings
Silicon Valley Bank made investments in long-term government securities, including Treasury bonds. Its sale resulted in a loss of $1.8 billion and the California bank tried to raise $2.25 billion in capital by issuing new common and convertible preferred shares to cover the shortfall.
Depositors made a run on the bank, withdrawing their cash and transferring it to other banks last week.
The company owns $3 billion of financed debt held by the holding company, which is not guaranteed by the subsidiaries.
Creditors can sometimes receive more proceeds through a bankruptcy sale if there are more bidders, since there is no shortage of time compared to the FDIC wanting to sell a bank quickly, said Couto, who was a senior bank examiner at the FDIC. for 16 years.
Non-bank assets, including cash and securities, could net creditors $4.75 billion if there was a liquidation, according to a research note from Stifel Financial. Most of the funds would come from the sale of SVB Private.
The lending division had $200 billion in assets and SVB Financial had $2.6 billion worth of cash and securities as of December 31, 2022, according to the note.
Lehman Brothers was able to auction off its assets through bankruptcy in 2008.
Only bank holding companies can file for bankruptcy protection, while the banks themselves, which are often a bank holding company’s primary asset, end up in receivership by the FDIC, Couto said.
The FDIC wants profit too
“Banks and holding companies file joint tax returns, so when the bank is taken over by the FDIC, the FDIC wants the holding company to file a tax return for a massive tax refund and send it to the FDIC,” he said.
Shareholders of a holding company “want the value of the holding’s remaining assets to stay with the holding company,” which could result in a battle with creditors, Couto said.
Since bank holding companies often have other assets, shareholders also want a percentage of those sales, he said.
Everyone wants a piece of the proceeds from a sale, whether it’s shareholders, creditors, or even regulators like the FDIC so they can recoup losses from the Deposit Insurance Fund.
But the FDIC also wants the value of the holding “to offset any insurance losses, as the bank’s assets may not sell enough to cover the FDIC’s costs,” Couto said.
The best alternative would have been for the banks to be sold via a blanket sale with the most available potential buyers before regulators intervened, he said.
“When the FDIC markets and makes a sale, potential bidders could be limited,” Couto said.
FDIC sales typically have a tight market because there can only be a few bidders, especially for a niche-focused bank like Silicon Valley Bank, which has worked primarily with venture capital-backed startups.
Creditors often prefer a company’s assets to be sold through bankruptcy, as the number of buyers could be larger and there is more marketing of the assets, Couto said.
“In most industries that’s exactly what happens, but it’s not allowed for banks, only holding companies,” he said.
