An attempt by SIlicon Valley Bank (SVB) to boost its finances via a $1.75 billion share sale this week roundly backfired, sending the bank’s stocks to their lowest point since 2016—a record 60 percent one-day drop—with shares sinking another 25 percent after markets closed Thursday.
While this is alarming in isolation, as SVB is the banking partner for more than 40 percent of U.S. venture-backed technology and healthcare companies, it’s having major repercussions across the entire lending landscape.
As of Friday morning, the four largest U.S. banks alone lost roughly $50 billion dollars in market share, while more than $80 billion in stock market value evaporated from the 18 banks making up the S&P 500. Perhaps needless to say, similar declines were felt across markets in Asia and Europe, with shares in HSBC and Barclays dropping 4.8 percent and 3.8 percent, respectively.
What triggered this sharp fall for SVB—and in a domino effect, the global lending system? In a word: Bonds. In two words: Interest rates.
Like most banks (and this is key to understanding the domino effect), SVB has traditionally held a large portfolio of bonds. While the value of these bonds is prone to fluctuate alongside interest rates, a dip in a bond portfolio’s value isn’t necessarily a problem for banks unless they are forced to sell them to cover losses elsewhere—whether that’s money lost from poor investments, or a decline in deposits.
In SVB’s case, the bank was looking to offload more than $21 billion in largely U.S-backed bonds—which had been purchase just before interest rates were raised, significantly dinging their value. The portfolio was only yielding an average 1.79% return, which was well below the current 10-year Treasury year of 3.9%, at the time of SVBs firesale. As a result, SVB ended up losing roughly $1.8 billion on the whole maneuver.
To shore up these losses, SVB announced on Thursday that it would be embarking on a $2.25 billion share sale to counter the losses from the bank’s bond sale. This would be in the form of $1.75 million of stock and a $500 million anchor commitment from investment firm General Atlantic.
But rather than shore up SVB’s losses, the moves pushed Moody’s to downgrade the bank’s credit rating, which triggered what can kindly be described as an exodus of goodwill from investors.
Clients—including many of the notable startups that SVB has backed—wasted no time in wiring money out of their SVB accounts, according to numerous sources who have spoken widely to the press.
Needless to say, this puts SVB in a serious bind.
The bank has already tried to raise cash from stakeholders and sell assets to counter losses, but are limited from selling the bulk of additional problematic bonds because it could trigger accounting rules that ultimately only accelerates the decline.
So while the story is still playing out and losses are sure to fluctuate throughout the day, the downgraded credit rating from Moody’s (to say nothing of the personal sentiments of SVB-backed ventures) will likely stain SVB’s outlook.
What makes this concerning for the larger market (to loop back to the domino effect) is that many, many banks are sitting on bond portfolios that are worth less than what they were paid for. Again, while this isn’t a problem when banks have enough deposits coming in to remain in the black, it’s a slippery slope when banks have to sell these bonds at a loss.
What’s more? Bad news travels fast.
Many startup founders spent much of their Thursday on the phone trying to figure out what to do next, and many who had cash tied up in SVB pulled it out.
“How should startups be reacting to the news and considering their finances? There’s no easy answer, as the markets are by nature temperamental and businesses are wise to diversify their sources of capital in defense against potential downturns.”John Can Karayel, VP of Product at Boast AI
While even the best-laid-plans couldn’t shield some businesses from feeling the hurt of SVB’s historic fall, founders who are wise about exploring many avenues for capital and funding beyond traditional venture capital are likely shielded—at least in part—from the total fallout.
At Boast AI, we help innovative startups discover new avenues for equity that help them extend their runway by tapping into non-dilutive funding options that specifically target innovative new solutions.
To learn more about how to build an R&D capital strategy that diversifies your sources of equity, check out our webinar with John Can Karayel, VP of Product at Boast AI and former investment director.