SVB Financial in Bankruptcy After Bank Unit Failure: Explained

SVB Financial Group, the parent of Silicon Valley Bank, has filed for Chapter 11, highlighting the unique bankruptcy processes for bank holding companies.

Silicon Valley Bank is not part of the Chapter 11 case. The now-shuttered bank’s assets have been taken over by the Federal Deposit Insurance Corp. as the agency pays out customers’ deposits.

But the bank’s parent will look to take full advantage of bankruptcy protection benefits—such as a pause on litigation and debt collection—while it figures out how to unload assets to raise money.

According to filings, the company has about $3.37 billion of total funded debt, all of it unsecured and deriving from issued bonds.

The Chapter 11 case involves solely the parent company. SVB Financial’s other main units—SVB Capital, the venture capital unit, and SVB Securities, the group’s broker-dealer arm—haven’t filed for bankruptcy protection, but they will be among the assets that the parent will look to sell.

SVB Financial said its stock will be delisted from NASDAQ later this month.

US Bankruptcy Judge Martin Glenn is expected to conduct a hearing on the case on Tuesday.

Why did the holding company declare bankruptcy and not the bank?

Banks play a central role in the financial system, so US laws handle their failures differently than how ordinary businesses reorganize or shut down through bankruptcy.

The FDIC, which generally handles failing banks, appointed March 10 a receiver to take over Silicon Valley Bank’s operations and assets.

The FDIC said the bank’s depositors—even those whose deposits aren’t insured because they exceed the agency’s $250,000 insurance limit— would be fully repaid. But the bank’s shareholders and unsecured debt holders won’t be protected, the FDIC said.

After Silicon Valley Bank was taken over, the parent company on March 13 said it was exploring potential transactions for SVB Capital and SVB Securities.

It’s still too early to say how the sale proceeds will be used. SVB Financial could use them to pay back some of its debt. A large chunk of its debt is held by its bondholders, who are unsecured creditors surely to line up to ask to be repaid.

The company says it about $2 billion in cash is held at Silicon Valley Bank and it has $92.8 million in marketable securities.

With SVB Financial no longer tied to its banking operations, the company’s bankrupty can unfold in ways similar to other Chapter 11 cases.

How will the bankruptcy process unfold and who will lead it?

SVB Financial will primarily seek to wrap up its Chapter 11 by selling its assets through the Chapter 11 process. The sale of its units and assets has already generated significant interest, the company said.

A five-member restructuring committee appointed by the group’s board of directors will lead the bankruptcy process. Alvarez & Marsal will work as the committee’s restructuring adviser. The committee appointed William Kosturos as its chief restructuring officer.

Chapter 11 automatically suspends all litigation, judgments, and creditor collection activities that happened before the filing. The stay is meant to give the debtor a breathing spell to try to negotiate with creditors and resolve financial issues.

SVB Financial will also be able to use the bankruptcy to sell assets to a buyer “free and clear” of liens and certain liabilities, though there are exceptions.

The restructuring committee plans to “explore strategic alternatives” for its assets and business divisions, including “potential transactions for the SVB Capital and SVB Securities businesses.”

These subsidiaries plan to operate normally while the parent SVB Financial undergoes bankruptcy. But any potential sale of these divisions would take place under bankruptcy court oversight.

What will happen to the holding company’s creditors and shareholders?

SVB Financial’s Chapter 11 filing is intended to use its assets to pay creditors, not the depositors and creditors of Silicon Valley Bank. But it’s possible the FDIC receiver will assert claims against the parent company with a demand for payment before unsecured creditors get anything.

SVB Financial Group estimates it has about $2.2 billion of liquidity, including cash and interests in SVB Capital and SVB Securities. It owes bondholders—all of which are unsecured—about $3.3 billion.

A US Treasury official said in a call with reporters last week that bondholders will be “wiped out.”

Still, creditors will likely play an active role in its restructuring. Bloomberg News reported Mar. 15 that some bondholders have banded together to protect their interests. The bonds also traded higher throughout the fallout last week, showing some speculation of a meaningful recovery.

Shareholders are often among the last stakeholders to paid be in bankruptcy, especially if creditors aren’t paid back in full. Some SVB Financial shareholders will likely look to pare their losses through future litigation over the bank’s management and collapse. Shareholders have already sued the holding company and its senior executives for securities fraud.

To Learn More:

—from Bloomberg News

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—With assistance from Evan Weinberger