SVBF agrees in principle to transfer VC business to creditors

The bankruptcy of the bank’s parent is redefining how ‘Silicon Valley’ functions, and has highlighted the vulnerability of banks. 

SVB Financial and a group of its senior bondholders have agreed on a proposal to resolve SVBF’s bankruptcy in a way that transfers the venture capital business to certain creditors.

SVBF is the former parent of Silicon Valley Bank. The proposal is the latest twist in a saga that began in March 2023 when the underlying bank entered FDIC receivership.

In the plan, set out in a filing with the bankruptcy court in New York City, the counsel for the debtor, Sullivan & Cromwell, said the debtor is at this time “not seeking Court approval of the Restructuring Support Agreement, and it is being provided for informational purposes only”. It is still quite tentative.

According to the same filing, the plan entails the creation of a new entity that would hold the VC arm, SVB Capital, as well as billions in net operating losses (NOLs) that could be carried forward for tax purposes.

The proposed entity will issue 100 percent of its common stock to “Holders of Allowed General Unsecured Claims… subject to dilution by a NewCo rights offering, if any”.

A Reuters report estimates that the coalition backing this deal holds about 48 percent of SVB Financial’s most senior debt. But it seems likely such a plan would meet with opposition. Creditors not among the backers may demand that the VC business be sold at auction, so that its value accrues to the estate as a whole, rather than to the specific creditors who are parts of the agreement.

Advocates of the plan maintain that the company did explore such a sale, but received what it regards as unacceptably low bids. Its analysts say the VC operation is worth $572 million. The best bid was $55 million below that.

The creditors that participated in this negotiation and that stand to receive shares in NewCo reportedly include King Street Capital Management and Davidson Kempner. King Street is a global investment firm active in private debt, with assets under management of $23 billion. According to Private Debt International data, it closed a $2.3 billion distressed debt fund, the King Street Global Drawdown Fund II, last October. It had no comment on the proposal.

There was also no comment from Davidson Kempner, an investment management concern with approximately $37 billion of AUM. Like King Street, Davidson Kempner is active in the private debt space. According to PDI data, it closed a $3 billion distressed-debt fund (Davidson Kempner Opportunities Fund VI) in July 2023. But a person familiar with the firm said Friday that it no longer holds a position in SVB.

Silicon Valley Bank is the third-largest bank failure in US history. More important than size, though: the failure was a unique blow to the venture-capital industry that SVB served. Many of its depositors were VC-supported tech start-ups.

Its failure was, on one level, an old-fashioned bank run fueled by some managerial misjudgments.

On another level, though, it demonstrated for the financial system the significance of the new social media, because rumors that once might have festered for weeks can now circle the world in hours. Silicon Valley’s customers sought to withdraw $140 billion over just two days.