Goldman Sachs has become a popular target of blame in the wake of the collapse of Silicon Valley Bank after the bank of choice for startups failed to secure US$2.25bn from a Goldman-led public equity sale that could have staved off its demise.
Rivals have since questioned the decision by SVB Financial (the bank's parent) and Goldman, acting as the key adviser, to publicly market the stock offering for one day on March 9 without an earlier wall-crossing exercise or other private funding backstop.
Commonly used in US ECM, a wall-crossing is a confidential marketing process with select big investors that typically ensures a deal is all but guaranteed when it is publicly launched.
"To think you can raise capital for a distressed bank without a guarantee is ludicrous,” one rival US ECM banker said. "All the European banks that needed equity right after the global financial crisis had some form of backstop."
A FIG ECM banker at another rival firm said: "It’s easy to say with hindsight but ideally you want to have everything already locked up when you announce an offering of that size."
Yet sources close to the deal insist that was not possible and the chain of events that ultimately led to SVB's offering getting pulled were beyond its control.
"It was a race against the clock," a banker said. "There was never any plan to do a fully private deal. We wanted to do a wall-cross but we ran out of time. And even if you had more time and did a wall-cross, you probably would have had to have the stock trade for a day anyway.
"No investor was going to look at this and take on the risk of the next day's market reaction. Unlike situations during the 2008 financial crisis, the stock had not adjusted yet to take account of the new information."
On the run
It didn't take long for the deal to run into trouble.
Just 20 minutes after the offering was launched after the close on March 8, crypto lender Silvergate Capital revealed it was voluntarily winding down.
This highlighted the risk facing banks such as Silvergate, SVB and Signature Bank (which also closed days later) that saw explosive deposit growth in recent years before interest rate rises and a downturn in venture funding triggered a sharp reversal.
Later that evening, Moody's announced a one-notch downgrade of SVB's credit ratings, citing a deterioration in the bank's funding, liquidity and profitability. Ratings agency pressure was a key factor in forcing SVB to launch the equity issue as it had otherwise faced a two-notch downgrade.
While SVB met with prospective investors on March 9, uninsured depositors, including many venture capital firms and their portfolio companies that were a staple of SVB's customer base, rushed to withdraw their funds from the bank.
Reports of a run on the bank, later disclosed at withdrawals of up to US$42bn or nearly one-quarter of the bank's US$170bn deposit base in just 24 hours, heavily contributed to a 60% slide in SVB's share price during that session. That evening, as the offering was scheduled to be priced, SVB's lawyers advised the bank that this was such a material change to its balance sheet that the stock offering could not proceed.
Goldman was leading the stock sale as joint bookrunner alongside SVB Securities, SVB's capital markets unit (which is now for sale).
SVB had planned to raise US$1.25bn of common equity and another US$500m from the sale of a mandatory convertible preferred securities, the latter an attractive security to many investors given it promised a 6%–6.5% dividend (versus no dividend on SVB common shares).
The bank had also lined up private equity firm General Atlantic to invest another US$500m via a concurrent private placement, though rather than a firm show of faith this investment was conditional on the overall financing going ahead.
Ironically, the bookrunners still managed to draw good demand from investors and, according to bankers on the deal, could have priced the offering were it not for the run on the bank.
Goldman has also come under scrutiny for earlier purchasing SVB's US$21bn "available-for-sale" securities portfolio, comprising Treasury and agency bonds.
SVB disclosed the sale when the equity was launched but did not identify Goldman as the buyer until March 14. The sale was struck on "negotiated terms" and, according to bank sources, on an "arm's length" basis.
Though media reports suggest Goldman stands to make US$100m from this transaction, Goldman expects its profits or proceeds would be about US$50m after allowing for market movements and hedging costs.
Goldman expects to sell the portfolio over the next few weeks.
The sale of the AFS portfolio crystallised a US$1.8bn loss that triggered the need to raise equity capital, but it also focused investor attention on a circa-US$15bn unrealised loss in the bank's "hold-to-maturity" portfolio, which was another reason SVB stock slumped after the stock sale was launched.
Bankers believe the turmoil of recent weeks will put pressure on smaller banks to raise equity capital to buffer their balance sheets, though few are expected to do so immediately given the risk that it could exacerbate liquidity/solvency fears.
Banks would only again look to sell stock once it was clear that the government’s intervention had “stuck”, it was clear banks were no longer vulnerable to runs, and likely changes to bank capital requirements were better understood, one mid-market ECM banker said.
“It’s just something that is going to take time to resolve itself,” the banker said.
“If conditions are too volatile to do public offerings, you would need to do something like a pure private or backstopped offering, but even then, it remains difficult to get investors to underwrite liquidity risks let alone credit problems."
A former head of ECM at Bank of America, Craig Coben, wrote for the Financial Times on Tuesday suggesting SVB may have been able to recapitalise via a deeply discounted rights issue, the path that troubled European banks have followed.
Yet such offerings are rarely, if ever, employed in US ECM and the heavy discount might have been alarming to unfamiliar investors.
There have been only 12 US$50m-plus rights issues by US-listed companies, according to Refinitiv data.
Though rights offerings have good application in distressed situations by enabling existing holders to average down, they require a cadre of other banks willing to guarantee proceeds, investor education and time, bankers say.