SVB - valuation & musings

SVB was a victim of its own success. Having attracted so many startups and VCs, it struggled to invest the money. In order to keep profits up, it decided to invest its short-dated deposits in long dated bonds. When rates went up, it went bust.

It all happened in barely one year. The 2022 10-K showed a $15bn mark-to-market loss in held-to-maturity securities. By comparison, the 2021 10-K had held-to-maturity securities near market value.

$15bn is a big hole - more than SVB's entire capital base. So we know where it went wrong, but can anything be saved? What did the rest of the balance sheet look like? What does the loan book look like? What does it mean for deposit recovery values?

Our analysis is "top-down" - we don't have access to the data room. We are however, clearly, an interested party for the UK and European assets.

1. The Balance Sheet Assets

Taking a closer look: $14.7bn of stuff (most of it $13bn actual cash); AFS securities - the B/S value will be about right, though it's likely a reasonable amount has already been sold; HTM securities - we know there's a $15bn hole; and the loan book - that's the bit everyone's really interested in.

2. The Loan Book

Here's a brief explanation, together with a discount we think is applicable:

• Global fund banking (lending against capital calls): SVB is one of the most aggressive players, so unlikely anyone will bid par. 15% discount.
• Investor Dependent (Venture Debt book): surprisingly small, and pretty troubled - ¼ of their early-stage 2021 venture debt loans are "criticized". 50% haircut on early-stage, 40% on growth stage.
• SLBO (Sponsor-Led Buy-Out): 30% discount.
• Innovation C&I: 25% discount.
• Private bank (stock-backed lending to entrepreneurs): residential based but some may be second-lien, and all on stock that's at least 60% down. 30% discount.
• CRE: this is always where the worst outcomes are. 50% discount.
• Everything else: 30% discount.

In summary, there's probably a $17bn difference between book value and the bid for those.

3. Recovery Value

We're going to have to make a few guesstimates: amounts of deposits already removed before Friday's collapse - we suspect at least $40bn of deposits were already gone before Friday; and assets already sold before Friday - it's likely most/all of the AFS were sold in February.

Conclusion

We started this analysis thinking it was going to be pretty bad - most of us at Nighthawk have lived through GFC. This really isn't bad at all. What it does show is that the banking system is more resilient now than ever before, and that SVB, despite making the amateur-ish error of mismatching assets and liabilities, had reasonable capital and a good business model.

UK Footnote

SVB changed its UK operations last year from a branch of the US bank to a fully independent UK entity, so there's preciously little published about that in the public domain. The UK may be very different, but it's unlikely. We come across them fairly regularly in the deals we're involved in, and they very much seem to be "one culture" between the US and the European operations.

Disclaimer: This is our best guess. You shouldn't trade on it. You shouldn't ever trade on anything you haven't done your own work on.