March 11 (Reuters) – In the middle of last week, Moody’s Investors Service Inc delivered alarming news to Silicon Valley bank parent SVB Financial Group (SIVB.O): the ratings firm was preparing to downgrade the bank’s credit . That phone call, described by two people familiar with the situation, began the process of Friday’s spectacular collapse of the startup-focused lender, which was the biggest bank failure since the 2008 financial crisis.
Friday’s fall decimated global markets and banking stocks. Investors worry that the Federal Reserve’s aggressive interest rate hikes to fight inflation are exposing weaknesses in the financial system.
The details of the SVB’s failed response to the prospect of a downgrade, first reported by Reuters, show how quickly confidence in financial institutions can erode. The failure also sent shockwaves through California’s startup economy, with many companies unsure how much they can recover their deposits and worrying about how to make payroll.
Moody’s call came after higher interest rates caused the value of the bonds where SVB had put its money.
The downgrade could undermine investor and customer confidence in the bank’s financial health, SVB Chief Executive Greg Baker’s team called on Goldman Sachs Group Inc. (GS.N) bankers for advice, and along with Moody’s and other ratings firms Flew to New York for meetings. sources said.
The sources asked not to be identified because they are bound by confidentiality agreements.
SVB worked on a plan over the weekend to boost the value of its holdings. It will sell more than $20 billion worth of low-yielding bonds and reinvest the proceeds in higher-yielding assets.
Sources said the transaction will be loss-making, but if SVB can fill that funding hole by selling shares, it will avoid a multi-notch downgrade.
The plan backfired.
News of the share sale spooked customers, mainly technology startups, who rushed to withdraw their deposits, prompting a rush to raise capital. Regulators stepped in on Friday, shutting down the bank and putting it into receivership.
Representatives for SVB, Goldman Sachs and Moody’s did not immediately respond to requests for comment.
The sources said that when SVB officials discussed moving forward with the fundraising, they heard from Moody’s that a downgrade was coming this week.
The SVB swung into action in the hope of softening the blow.
Sources said 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 make a deal on SVB’s timeline.
As of Wednesday, SVB had sold the bond portfolio at a loss of $1.8 billion.
Moody’s downgraded the bank, but only because of the sale of SVB’s bond portfolio and plans to raise capital.
Ideally, the stock sale should be completed before the market opens on Thursday, so that the sale is not jeopardized by any fall in SVB’s shares following news of the sale. But sources said that was not an option considering the busy schedule.
SVB had not done the necessary preparatory work to sign confidentiality agreements with investors who would commit to such a large deal. The sources said its lawyers advised the bank that investors would need at least 24 hours to digest the new downbeat financial projections and complete the sale.
Reuters could not determine why the SVB did not begin those preparations earlier.
SVB’s stock plummeted on news of the share sale, closing Thursday down 60% at $106.04. The sources said bankers at Goldman Sachs are still hopeful they can close the selloff at $95.
Then came the news that venture capital firms advised the start-ups they had invested in to pull money out of Silicon Valley Bank for fear of an impending bank run.
It soon became a self-fulfilling prophecy: General Atlantic and other investors left and stock sales plummeted.
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, regulators have completed deals quickly, sometimes in just a weekend, something experts said could happen with SVB.
Reporting by Echo Wang in Washington; Editing by Greg Roumeliotis and William Mallard
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