Silicon Valley Bank’s Run Up and Potential Run

The insolvency debate for Silicon Valley Bank ($SIVB) is being tested this week, as General Atlantic and others have swooped in to reposition the bank’s balance sheet, as made public in March 8^th’s “Strategic Actions/Q1’23 Mid-Quarter Update” for investors.

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The Mandatory Convertible Structure reported “Depositary shares each representing a 1/20th interest in a share of mandatory convertible preferred stock ($1,000 liquidation preference per share of preferred stock,” which seems astonishing given the $106.04 per share close price.

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Naturally at ApeVue, we find it relevant to compare the premier bank for startups historical returns versus the ApeVue50, an index referencing the 50 most active private unicorn-sized “startup” companies in the secondary market.  However, in isolation, the correlation between the two decoupled dramatically yesterday.

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With clarity, ApeVue expects that SVB’s loans deemed “more sensitive to market correction,” those being Early Stage (3%), Growth Stage (6%), and Innovation C&I (12%), had a profound impact on assurances of repayment.  In our view these hold substantial duration risk, given the counterparties are typically beholden to markets for when they can next raise or structure new capital deals.

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What ultimately was carved out for the AFS Portfolio Sale was $21-billion of US Treasuries and Agency Securities, with an average duration of 3.6 years and 1.79% yield; painful when compared to ~5.25% on a 1-year treasury today.  The expected loss on the sale as of March 8th was $1.8-billion after tax.  The rising interest rate environment seems to have caught SVB off-guard irrespective of the risk on their loan book more broadly.  The result is a more conforming Reconstruct AFS Portfolio which is increasingly now focused on increased hedging and wider use of Short Duration US Treasuries, but we do not anticipate the troubles to be over.

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