The FT article above summarises the issue well. SVB was a victim of its own success. Having attracted so many startups and VCs, it struggled to invest the money. In order to keeps profits up, it decided to invest its short-dated deposits in long dated bonds. When rates went up, it went bust.
It all happened in barely one year. Here's the 2022 10-K, showing a $15bn mark-to-market loss in held-to-maturity securities.
By comparison, here's the 2021 10-K, where held-to-maturity securities were near market value.
$15bn is a big hole - more than SVB's entire capital base. So we know where it went wrong, but can anything be saved? Specifically:
What did the rest of the balance sheet look like?
The loan book - that's the core - what does that look like?
What does it mean for deposit recovery values?
Our analysis it "top-down" - we don't have access to the data room at present. We are however, clearly, an interested party for the UK and European assets.
For now, let's have a look at the entirety of SVB, as it is interesting.
1. The balance sheet assets
If you're wondering about the size discrepancy between the earlier numbers and these, it's year-end vs average over the year
Taking a closer look, we have:
The $14.7bn of stuff: there's a small amount of repos, but most of it ($13bn) is actual cash - details here.
AFS - the B/S value will be about right. However, it's likely a reasonable amount has already been sold - why else would SVB have to resort to crystallizing losses in its HTM securities?
The HTM securities - we know there's a $15bn hole.
The loan book. That's the bit everyone's really interested in.
2. The Loan Book
Here's a brief explanation, together with a discount we think is applicable to all of them:
Global fund banking: mostly lending against capital calls. This is a good business, but SVB is known as one of the most aggressive player in this market, so it's unlikely anyone will bid par. 15% discount
Investor Dependent: this is their Venture Debt book. It's surprisingly small given it's what SVB is famous for. It's also pretty troubled, e.g. ¼ of their early-stage 2021 venture debt loans are "criticized". 50% haircut on the early-stage, 40% of the growth stage
SLBO (Sponsor-Led Buy-Out): 30% discount
Innovation C&I: 25% discount
Private bank: this is stock-backed lending to entrepreneurs. The advantage is much of it is residential based, so there'll be some property collateral. The disadvantage is some of it may be second-lien, and all of it is on stock that is at least 60% down on the last valuation. 30% discount
CRE: this is always were the worse outcomes are. 50% discount
Everything else: 30% discount
Remember these are bids that are likely to be given. There's quite a bit more to this analysis than we're posting here, but it'd make the post too long if we went through it. Contact us if you have further questions.
In summary:
So there's probably a $17bn difference between book value and the bid for those.
3. Recovery Value
We're going to have to make a few guesstimates here:
a) Amounts of deposits already removed before Friday's collapse. Given anecdotal evidence - from newspapers, to the simple fact they had to sell $20bn of HTM securities, we suspect at least $40bn of deposits were already gone before Friday.
b) Assets already sold before Friday - it's likely most/all of the AFS were sold in February. The rest will have partially been filled with the HTM assets sold.
So we have:
Conclusion
We started this analysis thinking it was going to be pretty bad - most of us at Nighthawk have lived through GFC - Xavier ran a $5bn credit book during it - so we've seen things go from bad, to worse, to outright crazy. This really isn't bad at all.
What it does show is that the banking system is more resilient now than ever before, and that SVB, despite making the amateur-ish error of mismatching assets and liabilities, had reasonable capital and a good business model.
UK footnote
Obviously, as a UK based venture debt provider, we'd be more interested in the exact details of the UK book. Unfortunately, SVB changed its UK operations last year from a branch of the US bank to a fully independent UK entity. so there's preciously little published about that in the public domain.
That's why we looked at the global book. The UK may be very different, but it's unlikely. We do come across them fairly regularly in the deals we're involved in, and they very much seem to be "one culture" between the US and the European operations.
Disclaimer
This is obviously our best guess. You shouldn't trade on it. You shouldn't ever trade on anything you haven't done your own work on. And it could be worse - a lot worse. Frankly, this looks almost too good to be true.
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