March 11 (Reuters) – In the middle of last week, Moody’s Investors Service Inc delivered alarming news to SVB Financial Group (SIVB.O), the parent company of Silicon Valley Bank: the ratings firm was about to downgrade the bank’s credit.
That phone call, described by two people familiar with the situation, started the process towards Friday’s dramatic collapse of the startup-focused lender, the biggest bank failure since the 2008 financial crisis.
Friday’s collapse jittered global markets and rattled banking stocks. Investors fear that the Federal Reserve’s aggressive interest rate hikes to fight inflation could expose vulnerabilities in the financial system.
Details of SVB’s failed response to the prospect of a downgrade, first reported by Reuters, show how quickly trust in financial institutions can erode. The failure also sent shockwaves through California’s startup economy, with many companies unsure how much of their deposits they can recover and worried about how to make the payroll.
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Moody’s call came after the value of the bonds where SVB had placed its money fell due to rising interest rates.
Fearing that the downgrade could undermine investor and customer confidence in the bank’s financial health, SVB chief executive Greg Becker’s team called on bankers at Goldman Sachs Group Inc (GS.N) for clarification. advice and flew to New York for meetings with Moody’s and other ratings firms, the sources said.
The sources asked not to be identified as they are bound by confidentiality agreements.
SVB then worked on a plan over the weekend to increase the value of their holdings. He would sell more than $20 billion worth of low-yielding bonds and reinvest the proceeds in assets offering higher yields.
The transaction would generate a loss, but if SVB could fill this funding hole by selling shares, it would avoid a multi-notch downgrade, the sources said.
The plan failed.
News of the stock sale spooked clients, mostly tech startups, who rushed to withdraw their deposits, upending the capital raise. Regulators intervened on Friday, closing the bank and putting it into receivership.
Representatives for SVB, Goldman Sachs and Moody’s did not immediately respond to requests for comment.
As SVB executives debated when to proceed with the fundraising, they learned from Moody’s that the downgrade was coming this week, the sources said.
SVB swung into action in hopes of softening the blow.
The bank lined up private equity firm General Atlantic, which agreed to buy $500 million of the $2.25 billion share sale, while another investor said it could not. unable to reach an agreement on SVB’s schedule, the sources said.
On Wednesday, SVB had sold the bond portfolio for a loss of $1.8 billion.
Moody’s downgraded the bank, but only one notch due to the sale of SVB’s bond portfolio and its fundraising plan.
Ideally, the stock sale would have been completed before the market opened on Thursday, to avoid the sale being jeopardized by a drop in SVB shares once news of the sale broke. But sources said that was not an option given the tight schedule.
SVB had not done the necessary groundwork to sign confidentiality agreements with investors who would engage in such a large transaction. His lawyers advised the bank that investors would need at least 24 hours to digest further pessimistic financial projections and complete the sale, the sources said.
Reuters could not determine why SVB did not start these preparations sooner.
Shares of SVB plunged on news of the stock sale, ending Thursday down 60% at $106.04. Bankers at Goldman Sachs were still hopeful they could complete the sale at $95, the sources said.
Then news came of venture capitalists advising startups they had invested in to pull money from Silicon Valley Bank for fear of an impending bank run.
It quickly became a self-fulfilling prophecy: General Atlantic and other investors pulled out and the stock sale collapsed.
General Atlantic did not respond to a request for comment.
California banking regulators closed the bank on Friday and appointed the Federal Deposit Insurance Corporation (FDIC) receiver. The FDIC will dispose of its assets.
In the past, the regulator has made deals quickly, sometimes in just a weekend, which some experts say could happen with SVB.
Reporting by Echo Wang in Washington; Editing by Greg Roumeliotis and William Mallard
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