Description

*Note: This is a highly speculative investment.   As more news comes out, I may look increasingly stupid for pitching this

            Background

SIVB’s FDIC insured bank holding company (Silicon Valley Bank) was closed by California regulators and put into FDIC receivership today.  The Company had invested a significant amount of their capital into long duration, low yielding FI securities (MBS, muni bonds, etc.) at a time of 0 interest rates, resulting in a $20+ bn hole in its BS as interest rates have risen.  The rise in interest rates has also resulted in a massive slowdown in the technology sector, causing deposits to fall and increasing funding costs.  The Company attempted to do a common and preferred stock offering, in addition to the sale of substantially all their AFS securities, to plug the hole but was unable to get it done, as depositors withdrew funds in a panic.    

Thesis

With that said, the BHC maintains assets in excess of its deposit liabilities (on a mark-to-market basis), resulting in equity value at the subsidiary which should be a source of value that creditors can seize; the capital structure is ~$15,000 of structurally senior claims at the BHC mostly consisting of FHLB advances and then ~$3.7 bn of senior unsecured notes at the Holdco.  Attached below is a picture of my back of the envelope liquidation analysis, where I marked the BHC’s assets to market.  I believe my assumptions are conservative, assigning no value to any of SIVB’s ongoing operations (except for its investment banking division, SVB Securities, which is not housed within the BHC), as it is no longer the parent company of the bank.   Also of note, I have included SVB Capital’s assets in the waterfall, as it is unclear if this unit is housed within the BHC or owned through a separate subsidiary similar to SVB Securities; if SVB Capital is housed in a separate subsidiary, the assets would likely flow directly to the Holdco creditors as they do with the investment bank.  The yield on SVB’s loan book may seem small but this is primarily due to its large presence in fund finance (lending to PE or credit funds, usually against LP commitments) and has strong loan performance; further, the vast majority of the loan portfolio is floating rate.  I calculate a 1.5x targeted MOIC but believe this has more upside and given the small debt balance vs. the total asset value, incremental changes in asset values have a substantial flow through.   

The biggest risk here is how the administrative process of the receivership will play out.  According to the FDIC website, the waterfall should be admin expenses, deposits, senior unsecured debt, general creditors / subordinated debt, and then any excess to the equity – essentially the same as a normal bankruptcy.  One area of concern I have is that technically SVIB is no longer the parent company of the BHC, as disclosed in an 8k filled on March 10^th.  My deduction is that any excess proceeds from a sale of the assets / liquidation of the bank would be distributed to SVIB, the former parent, and the entire thesis hinges on this point but there’s not a ton of information out there.  Further, I believe that the SBV Securities subsidiary should be insulated from the BHC liquidation and be able to be sold / operated independently but it is hard to know for certain without more information.

The second biggest risk is how long it takes to realize a return.  Given the small size of these classes of debt and their poor liquidity, which is likely only going to get worse, I would get comfortable with holding this until the liquidation is complete.  I am hopeful given that the majority of assets are fairly liquid (FI securities) or the loan book which I imagine can be sold off in one go that this will not drag out; since there should be more than enough asset value to pay out depositors, I think the FDIC will want to get liquidity for them as soon as possible.    The 3.5% senior notes, which is the tranche I have looked at, is not guaranteed by the BHC so it may take longer for proceeds to be seen here, given that depositors and FHLB advances will be paid off first. 

I wanted to get this out prior to Monday, so kept it brief.  Happy to discuss further in the comments

Catalyst

Wind down of SVB (the bank holding company)

Restructuring of SVIB (holdco)

Sale / spin-off of SVB Securities (investment banking division)