3/10/23 – Silicon Valley Bank (“SVB”), the nations 18th largest Bank has collapsed. Federal regulators seized the banks assets and closed its doors. This is the 2nd largest bank failure in US history just behind Washington Mutual. The collapse essentially took place over a 2 day period, blindsiding many (but not all) of the Bank’s customers who had little time to react.
The Bank’s failure was certainly unique. The following is a simplistic summary of what happened.
SVB had a special focus on banking Venture Capital and Private Equity backed firms. While it also provided more traditional loans (home loans, real estate, etc…) its focus was on entrepreneurs, startup ventures and wealthy executives. Like many banks, It sought to be a one stop shop for its customers. Since it provided some unique products and credit lines, it was in a position to leverage its customers for additional products, loans and banking services. As the bank grew rapidly over the years its cash deposits also grew. With substantial deposits and a seemingly solid balance sheet the bank elected to invest some of those deposits into US Treasuries and other investment grade bonds. On the surface that would seem prudent. However, what wasn’t prudent is that SVB purchased long duration treasuries and bonds vs those with short term durations. As interest rates rose, the value of SVB’s bond portfolio fell significantly. When marking-to-market the value of its portfolio it became clear that the bank needed to raise cash to keep its ratios in line. On Wednesday March 8, 2023 the bank announced that it sold its entire $21 billion bond portfolio for a $1.8 Billion loss. That announcement along with rumors of financial instability, caused its customers to scramble and move their cash out of the bank. In short order, these events caused the bank to collapse.
For the New England Real Estate Community this is not only unfortunate but may have a painful ripple effect. In 2021 SVB purchased Boston Private Bank. We all have friends, clients and colleagues who have banked with Boston Private. Presumably, many of those are now SVB customers. Aside from the possible devastating financial losses for New England based customers, the ripple effects may extend far beyond.
SVB was heavy into Tech, PE & Life Science banking and they had strong presence in Boston via the Boston Private acquisition. We presume that many of our New England based Life Science startups and younger companies may have some level of exposure to SVB. SVB processed payroll for many companies / tenants, they extended credit lines to these tenants & they provided general banking services to these tenants. SVB also provided credit to many of the PE firms which backed these companies / tenants. Lastly, SVB often provided personal banking services to the Executives of many of these firms.
More than 90% of SVB’s clients had deposits well in excess of the $250k covered by FDIC Insurance. We truly hope that when the dust settles most of SVB’s clients can recover most, if not all of their funds. In the meantime, we are faced with the following… Tenants & Landlords will need to scramble to open new banking accounts and credit lines at other institutions. Today, we spoke with a client who spent the day opening new accounts at a new bank and filling out paperwork and modifying legal documentation to keep his operations running with as little disruption as possible. Tenants and Landlords who may have had attractive credit facilities will likely need to find new sources of credit based on today’s higher rates and spreads, thus throwing a curveball into any previous forecasts or pro-formas they were relying on for 2023. Finally, and most unknown is what impact will SVB’s collapse have on the Life Science & Tech tenants in our region in what has already become an oversaturated market. If the Private Equity firms supporting many of these new tenants are damaged from SVB’s collapse, will they pause and pullback as they work to get their own houses in order? Will they return?
When an event like this occurs it’s a reminder that Diversification is Critical. At EagleBridge Capital, we always emphasize to our clients that we are “lender agnostic” and it’s critical to have multiple lending relationships at all times. The allure of one lending institution “providing all of your loans”, personal banking and business banking can seem convenient, but during Black Swan events such this, can not only be inconvenient but devastating to your future.
EagleBridge Capital specializes in Debt and JV-Equity placement for all asset classes of commercial real estate. The firm’s Principals have more than 40 years of experience within the industry and a network of more than 850 capital sources which extend throughout the United States and internationally. The firm’s capital sources include Banks, Life Companies, Debt Funds, CMBS, Advisors, Agency, Finance Companies, Private Lenders & JV Equity providers. As a single point of contact, EagleBridge Capital navigates this ever-changing landscape of capital sources on behalf of its clients to advise, facilitate and deliver the most competitive financing terms available within the marketplace.