Last Friday evening the Federal Deposit Insurance Corp. (FDIC) took control of Silicon Valley Bank (SVB), the 16th largest bank in the US. SVB was the dominant bank in the tech industry, serving hundreds of tech companies through services ranging from current accounts, through deposits, loans, lines of credit and onto personal banking services that included mortgages and trading.
Those who acted swiftly managed to withdraw their money immediately were saved, but those who hesitated or listened to the bank representatives who advised that they wait and support them in their difficult hour – lost access to their money until at least Monday. Now, even if they succeed in getting to part of it or all of it, they must wait a long time and recalculate the financing of their companies.
Even if at the last minute a large bank offers to acquire SVB’s assets and the customers get to cash out all their money as a consequence, the damage to the tech industry has already been done. Many in the industry described SVB as the main financing artery of the industry, the bank that provided companies with a flexible and professional service and one whose closure could make services provided to companies more expensive. “Closing SVB is for us is like blocking the Ayalon Highway,” says a senior investor who asked to remain anonymous. “At the outbreak of Covid, when nobody wanted to look out for tech companies, SVB was the first bank to come forward to support companies. Without them, it will be more difficult for companies. Going back to regular banks – in the US or Israel – is not a good option for us.”
The immediate damage and long-term damage to the industry
Long-term damage to the tech industry will be expressed not only in a decline in the quality of banking services, but also in an expected increase in the risk premium that will be attached to investing in companies in the field. More investors will stay away from the industry, the amount of capital available to venture capital funds and companies will fall, the value of startups will be cut, and the end of the crisis in the industry will be further away. In the short term, Israel companies will now need to rethink their expenses, and hope that they will be able to recover their money soon.
Some companies have already managed to get their money out of the bank. Cybersecurity company Ermetic and ad-tech company Minute Media, for example, claimed that they had quickly withdrawn all their funds from the bank on Thursday. eToro, formerly a large client of SVB, also managed to reduce all exposure. Fintech company Mesh Payments just managed to get out, despite a small loan remaining in the bank. However, as reported by “Globes”, AI-based transcription services company Verbit – a unicorn – still has $100 million in the bank after CEO Tom Livne refused to withdraw it.
Israeli institutional investors exposed to SVB
A long list of Israeli companies have used SVB’s services in recent years including WalkMe, Similarweb, Innovid, Claroty, Axonius, Pyramid, Analytix, Fireblocks and Capitolis. Many venture capital funds were also customers of the bank including Aleph, Team8, Zeev Ventures, North83, Pico Ventures, Blumberg and TLV Partners. Aleph has exposure of several tens of thousands of dollars to the bank and North83 was able to successfully withdraw its money in time. Most of the funds were not harmed by the bank’s closure since they raise capital in small portions so that only a small part of the funds is in the bank at any one time. However, “Globes” has learned of at least one Israeli fund that received a transfer to its account at SVB – which has been frozen at a crucial point when it was about to start investing in companies.
What will happen from here on? Among the hundreds of Israeli companies that receive services from SVB, there are four main risk groups: current account holders, deposit holders, loan takers, and traders. Globes analyzes the implications for each risk group.
Current account holders won’t see their money any time soon
Most of the Israeli companies that have liquid current accounts were able to withdraw their money from the bank. From Thursday afternoon, foreign and Israeli venture capital funds sent messages to their entrepreneurs to hurry up and withdraw their money from the bank. Some reported difficulties and delays in withdrawing the funds, which continued until Sunday. On Friday evening, at 18:40 California time, access to the bank was closed and the possibility of transferring capital to other accounts was blocked.
Insured accounts, only 3% of accounts in the bank, will automatically receive $250,000 on Monday. Although this is not an amount that will help the startups overcome financing difficulties, according to Meitar law firm high-tech partner Adv. Itay Frishman, as early as this week account holders should receive about 50% of their money through the realization of assets that will be carried out by the FDIC.
Frishman says, “Other estimates see it taking longer to get the rest of the money, but it will be possible to redeem even 80% of it depending on the bank’s ability to sell its assets. It should be remembered that this is not about assets of the type that were available to Lehman Brothers (which collapsed in 2008). Here we are talking about loans to tech companies and government-backed assets that are an attractive asset for many banks. All this will make it easier for the FDIC to realize assets quickly and return money to startups.”
The biggest victims and the likelihood of this fueling a tech crisis
The biggest victims of this dramatic weekend in Silicon Valley are the companies that chose to deposit the funds they raised in closed dollar deposits to benefit from accumulated interest. Most of them all wanted to redeem the money, but since this action takes several business days, the money remains in the bank. “Whoever gave an order on Thursday evening received an answer that the process takes two or three days, and now access to them is blocked,” Frishman says.
But industry experts are also optimistic about these: according to correspondence passed on from investors close to SVB, it appears that it has at its disposal assets totaling $165 billion, of which $130 billion, 67%, are liquid assets to be redeemed and distributed to companies this week. The bank’s liquid assets include $39 billion in cash and another $91 billion in government securities and other liquid assets. Those familiar with SVB estimate that it will be possible to realize them at a discount at a price of $110 billion.
The collapse of the bank freezes the flow that was supposed to enter the coffers of many companies that requested a loan from SVB. This means entrepreneurs will have to rearrange the company’s expenses and could even result in additional waves of layoffs in the tech sector.
And not only that. Those taking loans from SVB were obliged as part of the loan agreement to keep all dollar deposits in the bank. Thus, they actually faced a catch when reports of the bank’s collapse began to flow last weekend: if they asked to withdraw the deposits, the terms of their loan would be violated, so many of them did not withdraw deposits in real time.
At the same time, Frishman explains, those who do not wish to repay the loan will be able to deduct the interest payment from the remaining loan amount. SVB has $74 billion left in loans, and those close to the bank estimate that they will be able to sell it after a discount for $69 billion. Together with the loans, SVB hopes to sell assets for $179 billion dollars, 108% of total liabilities today. The bank’s shareholders – Vanguard, J. P. Morgan, and Blackrock will be forced to significantly dilute their holdings.
Traders will be unable to execute transactions
SVB has allowed investment institutions, mainly venture capital funds, to trade in assets such as bonds, ETFs or funds. Accounts were held in custody so that investments themselves are not in the bank accounts but in external accounts, and the bank is a kind of intermediary between the funds and those accounts where the assets are traded. Although the assets are not in real danger, since they are held in external accounts, access to them has been blocked and investment managers are unable to carry out new operations in their investment portfolio. In the coming week, when market volatility is expected, this freeze has a dramatic meaning for the traders.
The collapse of Silicon Valley Bank (SVB) is a very significant event for the global financial system and one that has not been seen since the sub-prime crisis in 2008. In fact, this is the second largest bank collapse in US history and has broad implications for Israel due to the large exposure of tech companies and institutional investors to SVB.
Published by Globes, Israel business news – en.globes.co.il – on March 13, 2023.
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