Bankrupt SVB Financial Doesn't Seem Insolvent, Some Investors Could Get Meaningful Recoveries

Bankrupt SVB Financial Doesn't Seem Insolvent, Some Investors Could Get Meaningful Recoveries

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$SVB Financial Group(SIVB)$ (NASDAQ:SIVB) filed for Ch.11 bankruptcy in New York on March 17 (case 23-10367). Silicon Valley Bank was NOT part of the bankruptcy filing. While it is unlikely SIVB common shareholders get a recovery, holders of SVB Financial Group notes mayget a significant recovery, if not a full recovery, from cash and the sale of the bank's parent company's remaining assets under a Ch.11 reorganization plan. Even preferred shareholders (NASDAQ:SIVBP) stand an excellent chance of getting a very meaningful recovery.

Ch.11 Bankruptcy Filing

It looks like they did some typical "shopping" for a favorable bankruptcy court when they filed in New York and not in California where they are headquartered. The bankruptcy judge assigned to this case is the Chief Judge for the Southern District of New York, Martin Glenn. The First Day Motions hearing is set for 3pm on Tuesday, March 21. (Iplan to attend via zoom.) Judge Glenn is also currently presiding over Celsius Network's bankruptcy case.

There is some confusion on what is included in the actual filing. Silicon Valley Bank is not part of the filing. That bank was taken over by the FDIC and is now called Silicon Valley Bridge Bank, N.A. SVB Private is also not included in the bankruptcy filing. SVB Capital, a venture capital firm, and SVB Securities, a broker-dealer and investment banker, were also not part of the bankruptcy filing, but both entities might be sold during the Ch.11 process as they try to seek "strategic alternatives" for them. None of the general partner entities are included in the bankruptcy filing.

It does not seem that SVB Financial Group is actually insolvent. They filed to be able to use the automatic stay provision undersection 362of the bankruptcy code to allow them to sell most or all their assets in an orderly manner instead of having a "fire sale".

The bankruptcy filing (docket #1) included an estimate of assets of $1 billion-$10 billion and liabilities of $1 billion - $10 billion. A critical box was checked indicating that "Funds will be available for distribution to unsecured creditors". Also included in the filing is an additional asset number as of December 31, 2022 of $19.679 billion, which includes $15.456 billion Silicon Valley Bank assets, and total debts of $3.675 billion. The Silicon Valley Bank value is now most likely worthless.

12/31/22 Condensed Balance Sheet Parent Company Only (10-K)

sec.gov

Potential Investor Recoveries Unsecured Notes

On December 31 they had $2.258 billion cash and cash equivalents, which normally is not an issue, but I am assuming most, if not all, of their cash was at various SVB branches on March 10. The deposits are only protected up to $250,000 by the FDIC. President Biden has stated that all the deposits will be protected, but because this has become a political football game, I still have some concerns that some politician might assert that those accounts associated in any way with SVB will have to wait to get their funds from FDIC for recoveries over the $250,000 limit. I would expect Judge Glenn will ask during the First Day Hearing where their cash is located and if it is in fact fully available.

Assuming for the sake of discussion that they currently have available cash and cash equivalents of $2.258 billion, that would imply that 68.4% of their $3.3 billion long-term debt's claim is covered by cash. The 68.4% is even before the actual operating entities and other significant assets are included in the valuation of their assets. This would seem to indicate SVB Financial Group notes may get a full recovery under a Ch.11 reorganization plan.

Noteholders do not, however, actually have any direct claims on either SVB Capital or SVB Securities. If the either is sold for cash, that cash would go to SVB Financial Group and noteholders would receive their recoveries via a Ch.11 reorganization plan.

Long-Term Debt

$350m 3.50% Senior Notes due 2025

$650m 1.800% Senior Notes due 2026

$500m 2.100% Senior Notes due 2028

$350m 4.345% Senior Fixed Rate/Floating Rate Notes due 2028

$500m 3.125% Senior Notes due 2030

$500m 1.800% Senior Notes due 2031

$450m 4.570% Senior Fixed Rate/Floating Rate Notes due 2033

Total $3.30 billion long-term debt

3.5% 1/29/25 Unsecured Note Prices

finra-markets.morningstar.com

Potential Shareholder Recoveries

The $3.646 billion preferred shares might be the fulcrum securities in this bankruptcy case. Their recovery seems mostly dependent upon asset sales. I can also see a potential issue developing here and that is a potential fight with common SIVB shareholders. In theory, as we were all taught in Econ 101, preferred shares get full recovery before common shareholders get anything. In theory. In practice that does not always happen. For example, bankrupt mall REIT CBL & Associates had a Ch.11 reorganization plan confirmed by the court that had preferred and common stock share a "recovery pot" (docket 1163is the confirmed plan). Many CBL preferred shareholders were upset, but both were being "gifted" their recoveries, so the preferred shareholders lost their objection.

In order for SIVB shareholders to get a recovery both the $3.3 billion unsecured noteholders and $3.846 billion preferred shareholders would have to get full recoveries. In addition, various bankruptcy expenses, especially fees for lawyers/financial advisors, would have to be fully paid. These professional fees are not modest. While I do not expect they will be anything close to the $300 million that was paid during the Sears Holdings bankruptcy process, it will be many millions of dollars.

Even if preferred shareholders were willing to "gift" to SIVB common shareholders to get their support for a reorganization plan and to avoid litigation cost, it is unclear if Judge Glenn could confirm a plan that includes "gifting" because in the past the 2nd Circuit, where the Southern District of New York is located in, ruled against gifting in DBSD North America (text of the opinion). The 2nd Circuit asserted that gifting violated the absolute priority rule -section 1129(b)(2)(B). However, Breitburn Energy Partners, which also filed for Ch.11 in SDNY, had their plan confirmed by Judge Bernstein that included about an 11% cash recovery for unsecured noteholders who were not accredited investors. (Note: this recovery was the result of Seeking Alpha readers who actually were in court asserting their case.) The CBL bankruptcy case was confirmed by Judge David Jones in Texas, which is in the Fifth Circuit that allows gifting. If the SVB Financial's bankruptcy case was filed in Texas or any other district that allows gifting, I would be more optimistic for a SIVB common shareholder recovery.

Preferred Shares Outstanding 12/31/2022

sec.gov

Assets to Be Sold

Since SVB Financial Group does not have secured debt there will be no "credit bidding" for SVB Capital and SVB Securities. I would expect them to try to negotiate for a potential buyer to become a "stalking horse" bidder and conduct an auction undersection 363.

Part of the problem, in my opinion, estimating the value for either SVB Capital and SVB Securities is that some of their services might have been part of a "package deal" that included loans or banking with Silicon Valley Bank. Valuing them away from the bank could be challenging for any potential buyer. In addition, both now have a certain amount of negative stigma associated with them. I would not be surprised if there were name changes after any purchase.

SVB Capital had pre-tax loss of $180 million in 2022 compared to $416 million pre-tax income in 2021. SVB Securities had a pre-tax loss of $95 million in 2022 compared to $48 million pre-tax income in 2021.

I am assuming that their $491 million investment securities and $475 million other assets as of December 31 includes their general partner interests and equity warrants, but it is unclear because of how their financials were reported in their latest 10-K. It is also extremely difficult to actually estimate their true values instead of just using their reported values on GAAP balance sheets. Because these assets are not very liquid, I would not be surprised if they were kept by SVB Financial, and that entity exits Ch.11 after selling SVB Capital and SVB Securities. Shares of the NewCo SVB Financial would, under my Ch.11 reorganization plan "guesstimate", be distributed to current preferred shareholders along with the remaining cash after the sale of SVB Capital and SVB Securities and the payment in full to noteholders.

Trading In SVB Financial Group Securities

Trading in the unsecured notes continues, but trading in SIVB common and SIVBP preferred shares was stopped by the NASD on March 10. According to recentfilingboth securities will be suspended on March 28. It is expected they will trade on the pink sheets under new ticker symbols.

Conclusion

While Silicon Valley Bank failed, the parent holding company, SVB Financial Group, is actually not insolvent because the holding company did not have a massive amount of debt. The holding company's investment in the bank is now most likely completely wiped out, but the holding company still owns assets that are somewhat valuable.

Using the potential proceeds from the sale of SVB Capital and SVB Securities along with the cash already available, I am expecting unsecured noteholders will get a full recovery. Preferred shareholders are expected to get a meaningful recovery, but because of potential "gifting" issues with the SDNY bankruptcy court, I am very cautious about predicting any recovery for SIVB common shareholders.

Since the common are not currently trading, we don't know the latest price; therefore, I have a neutral rating on them, but I have a buy rating on the notes.

Source: Seeking Alpha

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  • YewKhoon
    ·2023-03-21
    Fault of too conservati ve
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  • spkek
    ·2023-03-21
    Ok
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  • SherylS
    ·2023-03-21
    Ok
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  • Universe宇宙
    ·2023-03-21
    [Cool]
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  • SpiDeY_UnLtD
    ·2023-03-21
    ok
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  • 虎火
    ·2023-03-21
    Ok
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  • Jeanius
    ·2023-03-21
    Ok
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  • EKT
    ·2023-03-20
    🙏
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  • Kingcat
    ·2023-03-20
    interesting
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  • LengLeng
    ·2023-03-20
    K
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