Analysis-For Goldman Sachs, SVB's Botched Stock Sale Had a Silver Lining
US News is a recognized leader in college, grad school, hospital, mutual fund, and car rankings as well as a trusted source for news in politics, business, health, and education.
Echo Wang, Lananh Nguyen, and David French
NEW YORK (Reuters), SVB Financial Group was facing a capital shortage and the possibility of a credit rating downgrade last week. According to people familiar, the company went to Goldman Sachs Group Inc to devise a unique two-part plan.
After startups started withdrawing their deposits from SVB, the tech-focused lender that does business under the name Silicon Valley Bank, the investment bank would purchase a $21.5 billion portfolio of bonds from SVB to increase its cash flow.
There was one problem. The portfolio's book value was $1.8 billion lower than what Goldman offered, due to a decrease in its value from the rise of interest rates. SVB would have had to record a loss on the portfolio which included U.S. Treasuries as well as related bonds.
Goldman was next to create a solution. Two sources claimed that it would organize a $2.25 Billion stock sale for SVB in order to close the funding gap created by the sale of the bond portfolio.
Only the first step in that plan was completed by Goldman. The bond portfolio deal was closed, but Goldman didn't have the time to convince investors or overcome fears about SVB depositors withdrawing money.
One source said that the tight turnaround meant there was not enough time to prepare materials for investors before last week. SVB was the largest U.S. bank that failed since 2008's financial crisis. The collapse of the stock sale led to concern over other lenders, prompting regulatory intervention to protect customer deposits.
But for Goldman, there was a silver lining to the deal. Based on the decline in Treasury yields, the bond portfolio that it bought from SVB now has a higher value. Interviews with Reuters reporters by traders not associated with the deal estimated that the value of the transaction had increased to hundreds of millions of dollar. According to a source, the gain will be less than $100,000,000.
It is not clear whether Goldman retained all or part of the bond portfolio, or if it was sold. Goldman declined comment. SVB didn't respond to a request to comment. SVB stated in a regulatory filing that its sale of Goldman's bond portfolio to SVB was at "negotiated prices".
Two sources claim that Goldman did not receive the underwriting fee it agreed to for the stock sale due to the deal falling through. SVB has not revealed the amount of that fee.
Six people who were familiar with the attempted capital raising reveal that Goldman and SVB underestimated both the timing and investor interest challenges involved in the capital raise. Last week, only two private equity firms were invited to take part in the capital raise - General Atlantic (Warburg Pincus). Four sources claimed that SVB and Goldman had hoped stock market investors would contribute the rest.
Warburg Pincus declined the deal because it needed to do more due diligence after becoming concerned that SVB might still face funding problems in the long-term, according to two sources. General Atlantic had pledged $500 million but pulled out when the capital raise failed.
Warburg Pincus declined to comment, as did General Atlantic.
The banks also underestimated how investors would react. According to one source, the company thought that the stock sale would be a boon for SVB's financial health. However, it turned out to be a disaster and sent a worrying signal which led to a 60% drop in bank shares. The mood of investors was already tense after another bank advised by Goldman, cryptocurrency-focused bank Silvergate Capital Corp, collapsed the day before.
Wall Street has been fascinated by Goldman's handling of the SVB deal, which was based on league table data.
Michael Ohlrogge from the New York University School of Law said that although Goldman might not have done everything perfectly, it had accepted a difficult assignment. Ohlrogge stated that "SVB" had placed themselves in such a dangerous position.
SVB didn't disclose to investors in its stock sales prospectus that Goldman was the buyer of the bond portfolio it had sold at a loss. SVB did however mention potential conflicts of interests in its prospectus. For example, SVB's investment bank arm was responsible for the deal.
SVB revealed Goldman's role in the acquisition of the bond portfolio on Tuesday. This was the last day of a four day window that the U.S Securities and Exchange Commission (SEC), allows companies to make such disclosures. Five securities lawyers interviewed for Reuters stated that SVB's disclosures were in compliance with the rules.