Silicon Valley Bank (SVB) tried to strengthen its finances this week with a $1.75 billion share sale, but the move backfired dramatically. The bank’s shares plunged to their lowest level since 2016—a record 60% drop in a single day—and fell another 25% after markets closed on Thursday.
This is concerning on its own, but because SVB is the banking partner for over 40% of U.S. venture-backed tech and healthcare companies, the impact is rippling across the entire lending ecosystem.
By Friday morning, the four largest U.S. banks alone had already lost roughly US$50 billion in market share, while more than US$80 billion in stock-market value had evaporated from the 18 banks making up the S&P 500. Unsurprisingly, similar declines were felt across Asian and European markets, with shares in HSBC and Barclays falling 4.8 per cent and 3.8 per cent, respectively.
What set off this steep drop for SVB—and, by 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. The value of these bonds goes up and down with interest rates. Normally, a drop in bond values isn’t a problem—unless the bank is forced to sell them to cover losses elsewhere, like from bad investments or a decline in deposits.
In SVB’s case, the bank tried to sell off more than $21 billion in mostly U.S.-backed bonds—bonds it had bought just before interest rates went up, which hurt their value. The portfolio was only earning an average return of 1.79%, far below the 10-year Treasury yield of 3.9% at the time of SVB’s fire sale. As a result, SVB lost about $1.8 billion on the transaction.
To offset those losses, SVB announced on Thursday that it would launch a US$2.25-billion share sale. The plan called for US$1.75 million in stock and a US$500 million anchor commitment from investment firm General Atlantic.
Instead of shoring up SVB’s losses, the moves pushed Moody’s to downgrade the bank’s credit rating, triggering what can politely be described as an exodus of investor goodwill.
Clients—including many high-profile startups backed by SVB—didn’t wait to move their money out of SVB accounts, according to multiple reports in the media.
This has put SVB in a very tough spot.
The bank has already tried to raise cash from stakeholders and sell assets to offset losses, but it’s limited in selling more problematic bonds. Doing so could trigger accounting rules that would only speed up the decline.
So, while the situation is still unfolding and losses may continue to change throughout the day, Moody’s credit downgrade (not to mention the shaken confidence of SVB-backed startups) will likely cast a long shadow over SVB’s future.
The broader worry (to return to the domino effect) is that many banks are sitting on bond portfolios now worth less than they paid for them. That’s not a problem when deposits are flowing in and the books stay in the black, but it becomes a slippery slope when banks have to sell those bonds at a loss.
And bad news spreads quickly.
Many startup founders spent much of Thursday on the phone, scrambling to figure out their next move. Many who had cash with SVB pulled it out.
How should start-ups respond to the news and manage their finances? There’s no simple answer: markets are inherently temperamental, and businesses would do well to diversify their capital sources to guard against potential downturns.
John Can Karayel, VP of Product at Boast AI
Even the best-laid plans couldn’t shield every company from the pain of SVB’s historic fall. However, founders who deliberately pursue multiple avenues of capital—beyond traditional venture capital—are generally better insulated, at least partly, from the overall fallout.
At Boast AI, we help innovative startups find new ways to access capital, so they can extend their runway by tapping into non-dilutive funding designed for cutting-edge solutions.
To learn more about building an R&D capital strategy that diversifies your equity sources, watch our webinar with John Can Karayel, VP of Product at Boast AI and former investment director.
