Silicon Valley Bank: what happens now

Silicon Valley Bank (SVB) was closed by its California state regulators on Friday, March 10, 2023, and the Federal Deposit Insurance Corporation (FDIC) was appointed as receiver. As the market absorbed these developments, customers of SVB and other regional banks rushed to protect their deposits over the weekend, resulting in the closure of Signature Bank in New York, and the announcement on Sunday that all deposits at SVB and SB were moved to newly formed bridge banks.

What you need to know:

• Silicon Valley Bridge Bank, N.A. (SVB NA) will conduct the operations of SVB as a going concern while the FDIC undertakes a sale process of SVB.  SVB NA has assumed substantially all of SVB’s contractual obligations, and all parties are expected to perform their respective obligations in the ordinary course.  This means, among other things, going forward depositors should be able to access all funds formerly held at SVB, SVB NA will fund draw requests under its loan agreements, and borrowers are to make any interest and principal payments owing when due. Loan covenants requiring borrowers to maintain deposits with SVB still apply.
• Although SVB’s senior management has been terminated, the employees of SVB have been given offers to stay with SVB NA during this period, so customers of SVB should be able to continue to work with their existing bank contacts.
• While SVB’s receivership may have triggered typical “Defaulting Lender” loan agreement provisions, because the loans have been transferred to SVB NA which is not in receivership, those provisions should no longer be applicable.
• The foregoing applies in the same manner to Signature Bank and its bridge bank, Signature Bridge Bank NA.
• To help stabilize the markets and allay concerns about the viability of other regional banks, the Federal Reserve established a bank term funding program which will make one-year loans to eligible FDIC-insured banks, secured by assets valued at par (as opposed to market) value.

The near- and long-term impact of this situation is difficult to predict, especially given that events are subject to rapid change. We recommend that you review your contractual rights and obligations with either of these banks and be prepared for further developments. Investors whose portfolio companies had deposits or loans with these failed banks should be prepared to address their portfolio companies’ liquidity needs.