Shares of US-based Silicon Valley Bank – a lender of choice to startups and tech firms – sank 60% on Thursday, as it launched a $1.75 billion capital raise to make up for $1.8 billion loss from a forced sale of its securities portfolio.
It sought to reassure investors and venture capital clients regarding the safety of their funds.
It’s now attempting to strengthen its balance sheet and sail through amid declining deposits from startups that are struggling for capital amid a funding winter.
Mega sale
The Bank on Wednesday announced a $1.75 billion share sale, comprising $1.25 billion of its common stock and $500 million of depositary shares. SVB and General Atlantic also entered into a subscription agreement, allowing GE to purchase up to $500 million of common shares in a separate private transaction, leading the total equity raised to touch $2.25 billion.
It further announced that it has completed the sale of its available securities portfolio, amounting to $21 billion – a sale that led to an after-tax loss of $1.8 billion in Q1CY23.
The large-scale fund-raise on short-notice spooked stockholders and clients alike, who began to withdraw their money.
CEO himself calls to reassure investors
CEO Greg Becker himself led calls convincing clients to remain invested and assuring them their funds are safe with the bank, despite founders and startups attempting to urgently withdraw money
He further said, “We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their Businesses.”
As the US Federal Reserve continued to hike rates in an attempt to combat sticky core inflation, VC funds have dried out, leading to startups to search for cash amid falling valuations.
Positive outlook
Fears of a recession led to startups pulling money out of their deposits with the lender
“While VC (venture capital) deployment has tracked our expectations, client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted,” Becker said in a letter to investors,” said the CEO.
Along with SVB, major US banking shares also took a hit.
Reality of the situation
Wells Fargo & Co was down 6%, JPMorgan Chase & Co lost 5.4%, Bank of America Corp slid 6% and Citigroup tanked 4%.
This slump led to over $80 billion in stock market value disappearing from the 18 banks in the S&P 500 banks index, as well as a $22 billion fall in JPMorgan’s valuation.
Consequently all the major Wall Street indices fell on Thursday. The Dow Jones Industrial Average fell 1.66%, the S&P 500 lost 1.85% and the Nasdaq Composite dropped 2.05%.
