SVB exposure?

searcher profile

March 11, 2023

by a searcher from IE Business School in Newport Beach, CA, USA

Assuming less so than our VC counterparts, but wondering if there are any current operators/investors navigating the SVB bust right now? Would love to know the exposure on the search side of things and if there are any that are successfully navigating things (payroll, deposits, etc)?

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commentor profile
Reply by a lender
from University of Missouri in St. Louis, MO, USA
HI Chase, interesting topic to discuss. I don't think SVB has ever made noise on the search fund or SBA space so it shouldn't have a material impact on this forum, at least not yet. SVB played to the tech sector which was getting hit hard and had depletion in deposits. Then they sold bonds baked in at rates before rates started to rise to cover at a major loss to generate liquidity but couldn't raise capital to offset. Unless tech losses foreshadow losses in the broader economy, this shouldn't hit most of the banking community, albeit we are all taking a stock beating as a result in the short term. More specific to search funds, this could hit SBA lenders if defaults start to occur. While the SBA guarantees a loss at 75% (90% for a period during Covid) that can be a little misleading. It isn't a given that the guarantee is honored, especially if you were hyper aggressive on the eligibility. Even if the guarantee is honored, there can be a capital crunch since you have to allocate capital to cover the entire uncollateralized portion of the loan until the guarantee is paid. That can be months and ever years in some instances. So a possible comparable situation is that SBA lenders who were hyper aggressive the last 5-7 years COULD have a capital crunch and have top pull back. This would depend on their liquidity and their assets base. However it would be reasonable to assume some SBA lenders will get hit if they did a bunch of loans that barely worked at 5.5% (i.e. only one year of cash flow dependent on dubious addbacks) and now have that same loan at 10.5% and rising. depending on their balance sheet, they would have to fund losses either through raising more capital, or selling assets the way SVB did. I don't believe this would be a broad impact but more specific to individual banks. Unlike 2008, most banks have strong balance sheets after a 10 years+ run of strong performance. This isn't to say it couldn't get worse, but this one bank failure for a bank operating in a volatile space, hopefully, isn't a harbinger of things to come.
commentor profile
Reply by a lender
from Audencia Business School in Boston, MA, USA
Higher rates have definitely put a higher strain on certain banks. While funds may not be accessible now, it is likely they will be in the coming week or so and businesses / VCs will need to be ready to manage risk exposure / funds immediately. It is start to open bank accounts at other institutions in the meantime. KeyBank is ready to step up to take deposits quickly: • Key is in a very strong financial position with high levels of liquidity and capital: o We have a stable, investment grade credit and a regulatory capital ratio of 250+ basis points o Our liquidity levels remain consistently above the 110% regulatory LCR ratio minimums and we have a loan-to-deposit ratio below 90% • Key will pay market rates based on size and duration. • To move quickly for clients who want to move deposits to Key, we have mobilized our teams across Key’s front, middle and back offices to provide you white glove service and expedited account openings: fund as quickly as possible, within###-###-#### hours
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