(Bloomberg) -- Silicon Valley Bank is asking depositors to come back. Some may not have much of a choice.

That’s because for startups with loans from SVB, rules embedded in the legal documents governing the debt often require them to keep all or a portion of their cash with the lender. If the so-called covenants are broken, the companies could ultimately be considered in default.

SVB has so far asked clients that pulled money during last week’s bank run to get in touch to work out a solution, and has avoided anything more forceful. But legal experts say that in an extreme scenario, SVB or the loans’ future owners could demand immediate repayment of the debt — as well as terminate any other lending commitments — if borrowers fail to remedy the breaches.

“I don’t think that it’s a bad move to have taken money out,” said Jerrold Bregman, a partner at BG Law. “The question is whether they should put money back in, and I think that’s going to have to be decided in each case based on the borrower’s relationship with whoever the lender party turns out to be.”

Tim Mayopoulos, the chief executive officer of the new bridge bank created after SVB’s takeover by regulators last week, said on a Tuesday client call reviewed by Bloomberg that the firm is willing to discuss potential waivers for companies in breach of their covenants, and is “more than happy to work with people to have the money returned.”

A representative for the Federal Deposit Insurance Corp., which took control of SVB’s operations, declined to comment.

The requests for borrowers to pivot back to the bank comes amid a broader effort by SVB to rebuild its deposit base ahead of a potential exit from government oversight. Mayopoulos said on the client call that the bank could be recapitalized as a standalone entity, bought by another financial institution or non-bank entity, or if none of those options are available, wound down.

Firms including Apollo Global Management Inc., Ares Management Corp., Blackstone Inc., Carlyle Group Inc. and KKR & Co. are among those looking to buy pieces of SVB, and are conducting due diligence on the loan assets ahead of any potential offers, Bloomberg previously reported.

“Companies should proceed cautiously before making irrevocable decisions about compliance with loan facility covenants,” law firm Wilson Sonsini Goodrich & Rosati, a major player in Silicon Valley, wrote in a client memo posted on its website. The firm noted that SVB loan agreements may also contain liquidity requirements calculated based on funds held at the bank.

‘Ask for Forgiveness’

Yet even with all SVB deposits now guaranteed by the FDIC, some companies are hesitant to keep funds with the bank after the collapse briefly left them with no access to the cash they needed to pay suppliers and employees, according to Healy Jones, vice president of financial strategy at Kruze Consulting, an accounting firm for venture-backed startups.

Jones, whose clients had about $4 billion in total cash, about $2 billion of which sat with Silicon Valley Bank last Wednesday, said those with lending relationships with SVB have been told to hold off taking deposits out of the bank to avoid the risk of being in default.

“That money is moved or in the process of moving even if they’ve been told not to,” Jones said. “Most people are just going to go for it and ask for forgiveness.”

Venture Debt

It’s not unusual for firms in the niche business of lending to startups to require visibility into a borrower’s cash situation, according to market participants.

Venture debt is a particularly risky area of lending. Typically, corporate borrowers must prove a history of positive cash flow and operating profits to access debt financing. But startups tend to burn through funds as they seek to grow their business and their lenders require more protections.

“Normally, lenders assess creditworthiness based on cash flow or asset coverage. It’s a different analysis in venture debt,” said Morgan Edwards, head of debt capital markets at Crewe’s investment banking unit, who advised startups taking out loans with SVB. “None of these companies have cash flow, they’re losing money, and they don’t really have assets, all they have is their people. Their only other asset is cash.”

Companies that banked with SVB are now in limbo as they wait to see how the bank transforms in the wake of the regulatory takeover.

SVB borrowers should be “trying to obtain some assurance of the continued lending relationship, and if they can’t get reasonable assurances and get comfortable around that, it may be an appropriate decision to risk violating the covenant,” BG Law’s Bregman said.

--With assistance from Lisa Lee, Jenny Surane, Sarah Frier and Katanga Johnson.

©2023 Bloomberg L.P.