As private credit investors comb through the $74bn loan portfolio of Silicon Valley Bank, they are finding vast portions that are not all appealing.
The Federal Deposit Insurance Corporation is auctioning the loan book and other parts of the California lender after a bank run led to its collapse this month. After failing to find a regulated bank willing to buy SVB’s commercial bank in its entirety, the regulator in recent days opened a “data room” to other potential buyers ahead of a Friday deadline to place their bids.
Blackstone, Apollo, Carlyle, Sixth Street and HPS Investment Partners are among the alternative investment groups inspecting SVB’s loans to prepare possible offers, a cohort that mostly had been excluded from the data room during the FDIC’s earlier auctions for SVB, according to people with knowledge of the matter.
But the composition of the portfolio suggests that some types of loans will receive far weaker demand than others.
“The FDIC is really in a challenging situation,” said a person involved in the bidding process. It is “such a unique book of business compared to any other [bank]”.
The largest portion of the loan book, worth $41.3bn at the end of 2022, consists primarily of so-called subscription lines SVB offered to private equity and venture capital funds. It could also prove to be the hardest for the FDIC to sell, said several people who studied the loan book.
Subscription lines help bridge the period between when a fund buys a company or makes an investment, and when that fund receives cash it has been promised from backers, typically endowments, pensions and sovereign wealth funds.
The sale of the subscription lines is complicated by three factors, said people with knowledge of the loan book. First, their yields generally fall short of the returns big private credit funds promise to their investors.
Second, the loans are not rated by major credit rating agencies, potentially deterring potential bids from insurance companies that seek rated assets. Third, big banks including Wells Fargo and Citigroup have been scaling back their subscription line businesses, making them less likely to bid for these loans.
A rival subscription line lender said they had received calls from some of SVB’s clients since the bank’s collapse, but found the borrowing costs SVB was offering were far better than anything they were willing to provide, sometimes by 1 or 2 percentage points.
SVB also has about $6.7bn of loans to early- and growth-stage companies that it had previously warned in securities filings would likely only be repaid on a so-called exit event, such as an initial public offering or sale of the company. But with financial markets mostly closed to new flotations and many companies struggling to find investors willing to pump in new money, the riskiness of the debt is in question.
“There’s no [reason] to believe these are bad loans,” said one person involved in the auction. “They’ve just got a bad owner.”
The credit investors are focused on about $10bn to $12bn worth of loans that SVB had made to companies such as doctors’ office network Oak Street Health, robotics group Automation Anywhere and fintech group DailyPay, which helps companies pay their employees daily.
The remainder of the book is a smattering of pieces including $1.2bn of loans to wineries, $10.5bn of loans to clients of its private bank — predominantly mortgages and home equity lines of credit — and a relatively small $2.6bn business of lending to commercial real estate projects.
As bids are cobbled together, private credit investors are said to expect partnerships with venture capital firms, distressed debt shops and traditional banks, given how varied the loans are.
“There’s this mythical, enormous loan book,” said one person involved in the process. “It’s complicated because it’s huge. Everyone is scurrying around, looking for a partner or needs an insurance arm.”
The loan book is just one part of a sale the FDIC is orchestrating as it also looks to find a buyer of SVB’s private bank. Separately, advisers to SVB’s parent company, SVB Financial, which filed for bankruptcy protection last week, are seeking bidders for its investment bank and venture capital investing arm.
Investors are also watching for how the FDIC and its advisers at Piper Sandler attempt to sell down SVB’s mammoth portfolio of Treasury bonds and mortgage-backed securities, and whether a bank or other investor will come in to bid on those assets at a discount.
Traders were struck by the fact that a separate auction the FDIC ran for Signature Bank, which it took over earlier this month, ended with the regulator retaining a large real estate portfolio after it sold part of the bank to New York Community Bancorp. It signalled to some credit investors the difficulties facing the FDIC as it looks to sell bank assets.
The FDIC on Monday said it had received “substantial interest from multiple parties” for SVB and its assets and that it needed more time to explore options. It has hoped to sell the vast majority of SVB to a single regulated bank.
The regulator said it expected to announce a decision on the auction this weekend.
“Every time there is a crisis everyone thinks there is a massive opportunity for us, and my experience has been . . . maybe,” said a person studying SVB’s loan book. “When you deal with a regulated financial institution, the last thing that occurs is for that regulator to sign off on the bids in a fire sale.”
Source: Financial Times