Silicon Valley Bank Failure and Implications for IROs

Silicon Valley Bank

Background

Last Wednesday, March 8, 2023, Silicon Valley Bank announced that it had sold about $21 billion of assets taking a $1.8 billion loss on the sales.  They also announced an equity offering to address recent financial concerns, including a potential downgrade by Moodys.  On Thursday, depositors began withdrawing their cash balances. Customers of the bank were possibly made even more fearful by warnings from a number of private equity firms who had backed their early funding and were reported to have recommended the withdrawals. Over the course of the day, the bank’s customers withdrew $42 billion. To put that in perspective, when Washington Mutual failed in 2008, it was the largest bank failure ever.  Customers of Washington Mutual drove the bank to collapse by withdrawing almost $17 billion over 10 days.  

The Problem

Banks operate by taking deposits from customers and investing those to generate returns.  When clients make withdrawals, the bank has assets available to fund the withdrawals.  The strategic problem SVB faced is that they were reported to have held a large proportion of the funds received from customers in longer-term securities (like bonds). In the current interest rate environment, as rates increased, the value of these investments decreased, meaning that any needing to be sold now are sold at a loss.  The $42 billion of withdrawals represent about 25% of the total deposits in the bank. As more customers rush to withdraw their balances, more securities need to be sold, generating more losses. This feeds more panic and withdrawals, eventually leading to complete collapse.  So, Friday morning, US Federal regulators took control of the bank to prevent a collapse.  Over the weekend, UK regulators took similar action with Silicon Valley Bank UK Limited, which is a separate legal entity that was experiencing similar challenges.

What’s Next

With the bank in the hands of regulators, the company’s stock, SIVB, will be replaced on Wednesday in the S&P 500 index by Insulet (ticker: PODD). Additionally, almost 500 firms have signed an online statement expressing their willingness to work again with SVB under new ownership. On Sunday, March 12, 2023, Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg released a statement announcing that they would be making a “systemic risk exception” for Silicon Valley Bank and Signature bank. This ensures that all customers will have access to their deposits starting today.  They also stated that no losses from the banks will be borne by taxpayers.

Implications for IROs

IROs at financial institutions have already been deluged with questions from investors.  Other banks have seen their stocks hit hard and will be closely monitored as the market absorbs the news of the weekend.  Their focus will undoubtedly be on corporate messaging intended to assure their customers.

IROs, especially those at small and microcap companies, should be preparing to answer questions about their exposure to SVB. While this story is constantly evolving, the Q4 team has been monitoring disclosures and commentary already made public as this situation has unfolded. Of the 103 companies we have found that have made statements, 50 companies have stated that they do not currently hold any cash deposits, investment securities, or lines of credit at Silicon Valley Bank.  We identified 44 companies that have minimal or de minimis balances (suggesting less than 10% of cash, cash equivalents, and investments). There were 9 companies identified which have greater exposure. These reflect holdings greater than 10% of cash, cash equivalents, or investments at SIVB, or cash held at SIVB above the FDIC-insured limit of $250K, or any cash balance above $10M if it is considered as material exposure. The list also captures commentary made by companies whose deposits at SIVB are largely uninsured. In some cases, these relationships with SVB represent exposures over $1 billion.

IROs at companies whose customers or suppliers may be affected by SVB’s failure may also be affected.  They should work internally to understand any key relationships which exist and determine plans for communications to investors in the event customers cannot meet their financial obligations or suppliers cannot meet their contractual obligations.  

This series of events has heightened attention on financial stability.  All investor relations teams should be prepared for questions about liquidity and the diversity of company banking relationships.  Decisions to make specific statements should be confirmed with the management team and possibly the board.  IR professionals should double down on reminders to internal team members throughout the company to ensure they are not communicating with members of the investment community.  Additionally, IR should work closely with internal communications teams to ensure corporate messaging, which is communicated externally, is shared with all internal stakeholders.

Sources: FactSet, AlphaSense

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