Mar 20, 2023
SVB’s Failed Stock Offering Shows Banks the Value of Secrecy
(Bloomberg) -- Silicon Valley Bank’s collapse and the ensuing market chaos could have been mitigated if its last-gasp $1.3 billion stock offering had been more fully negotiated in secret, dealmakers say.
In fact, to Steve Maletzky, head of equity capital markets at William Blair & Co., the deal failed because SVB publicly introduced risk to depositors and investors by announcing a need for capital.
“The mistake that was made in the SVB offering was that they announced their capital need publicly before they had secured capital,” Maletzky said. “If you’re a bank, trust is paramount.”
SVB’s unsuccessful equity raise on March 10 marked a key point for investors, who began to realize that there could be much broader problems in the banking system. During the next two sessions after the deal collapsed, the KBW Bank Index plunged 15% for its worst two-day stretch since the onset of the pandemic. Trading in SVB has been halted since the stock offering’s expected trading date.
As a result, Maletzky expects future equity raises by lenders will be arranged in private before getting disclosed to the public, which is more common during times of turmoil.
Private negotiations allow companies to share nonpublic information with potential investors before announcing funding plans. In exchange, the investors promise to keep the information secret and refrain from trading on it. The process, known as wall-crossing, is designed to score commitments to buy shares in advance, so dealmakers know the offering can get completed before announcing it publicly.
“Of all the deals that have been getting done, most or all of them are done with premarketing ahead of the transaction,” said James VanMilder, head of equity capital markets at Nomura Greentech.
First Republic Bank, for example, is planning to sell shares privately, according to a New York Times report on Friday. The embattled bank’s stock is plunging further on Monday after its credit rating was cut for the second time in a week.
Read more: First Republic’s $30 Billion Rescue Fails to Quell Investor Fear
During the 2008 financial crisis, most new share issues by financial institutions were private transactions. The use of wall crossings came back into fashion and spread to other industries during last year’s market turmoil.
SVB’s March 8 offering included a commitment from General Atlantic to buy $500 million of common stock. But that signaled to the market that SVB may have failed to secure all of the $2.25 billion it was seeking.
“When they announced the common equity raise, they essentially shined a giant spotlight on their abnormally large unrealized losses,”said Jason O’Donnell, president and chief investment officer of CFI Fund, a hedge fund that focuses on community banks. “When the capital raise was rejected, it threw gasoline on the fire and then everybody in the capital markets system looked at that rejection as an indicator of extreme financial weakness.”
The offering could have fared better if SVB had held its loss-making asset sales until after acquiring the capital, he said.
A spokesperson for Goldman Sachs, which underwrote SVB’s stock offering, declined to comment.
Liquidity is a key aspect of investing in financial stocks due to the highly levered nature of banks, O’Donnell said.
“First and foremost, a bank needs to project financial strength,” he said. “Everything SVB did in that process ultimately cast a lot of doubt on their financial strength, and that’s why they ended up where they did. Any sort of minor financial pain will be met with extreme fear.”
--With assistance from Felice Maranz.
(Updates fourth paragraph to add details about SVB’s trading halt. A prior version corrected the spelling of ‘Maletzky’ in fifth paragraph)
©2023 Bloomberg L.P.