On March 17, SVB Financial Group (SVB Financial) filed a bankruptcy petition under Chapter 11 of the US Federal Bankruptcy Code. SVB Financial is the parent company of Silicon Valley Bank, an FDIC-insured California state-chartered bank (SVB). As we described in our March 14 client alert, the FDIC was appointed receiver of SVB on March 10 and soon thereafter the FDIC transferred substantially all of the bank's assets and all of its deposits (insured and uninsured) to the Silicon Valley Bridge Bank, N.A. (SVBB NA), a new FDIC-insured national bank.
I thought Silicon Valley Bank was taken over by the FDIC; why has there been a bankruptcy filing?
SVB Financial is the parent company of, and is separate from, SVB, the bank that was placed into receivership on March 10. It is also separate from SVBB NA, the new bridge bank that is backed by the FDIC and operating as the successor institution to SVB. SVB Financial—which is not a deposit-taking institution—is not insured by the FDIC. However, despite not taking deposits, SVB Financial does have creditors of its own that are separate from creditors of its subsidiary bank.
In announcing that it has filed for bankruptcy, SVB Financial has stated that it has approximately US$2.2bn in liquidity, alongside US$3.3bn in debt outstanding (primarily consisting of unsecured bond debt) and US$3.7bn of preferred equity outstanding.
What is a Chapter 11 bankruptcy proceeding?
Chapter 11 of the United States Bankruptcy Code is the primary US federal law tool for reorganizing distressed businesses. It can also be used to sell assets belonging to a distressed business or otherwise conduct an orderly liquidation.
At the most basic level, commencing a Chapter 11 case is relatively straightforward. A company simply needs to execute a form petition and then file that petition along with a nominal fee with a bankruptcy court in an appropriate venue. SVB Financial took these steps on March 17, and filed for Chapter 11 protection in the United States Bankruptcy Court for the Southern District of New York.
Immediately upon filing for Chapter 11 protection, SVB Financial and its assets (but not those of its non-filing subsidiaries) became protected by the "automatic stay"—a sweeping injunction prohibiting essentially any effort to commence or continue debt enforcement actions of any kind against SVB Financial or its property, wherever located.
Although starting a Chapter 11 case is technically easy, successfully running one is, in practice, much more involved. Typically, a Chapter 11 petition for a business of any meaningful size will also be accompanied by a series of "first day motions," which are requests for immediate relief designed to allow the business to continue functioning on a day-to-day basis.
These are items such as maintaining cash management practices, continuing employee payment and benefit programs and ensuring continued utility service. Also typical is a "first day declaration," which explains the company's history and how the company came to need Chapter 11 protection, and also provides evidentiary support for the first day motions.
SVB Financial, unusually, did not immediately file either a first day declaration or first day motions. The bankruptcy court then set a deadline of Sunday, March 19 at 4:00 pm EDT for those items to be filed. SVB Financial then did file a first day declaration, as well as a basic set of first day motions, ahead of the deadline.
According to the first day declaration, the filing was made necessary by the placement into FDIC receivership of the US portion of SVB. Also according to the first day declaration, in the days immediately before the filings, SVBB NA cut off SVB Financial's access to critical books and records, as well as certain electronic systems and key employees.
A first day hearing has been scheduled in the Chapter 11 case for Tuesday, March 21 at 3:00 pm EDT, during which we will doubtless learn more about SVB's Financial's current status and proposed next steps.
What is the status of Silicon Valley Bank?
SVBB NA is not subject to the Chapter 11 case of SVB Financial, and remains under the control of the FDIC. The FDIC has stated that SVBB NA is operating as the successor to SVB and has resumed normal banking hours and activities. The FDIC expects SVBB NA to meet its obligations to customers and counterparties, and for customers and counterparties to meet their obligations to SVBB NA.
Under the "systemic risk" authority invoked by the US government, all depositors, including those with balances above the FDIC insurance limit of US$250,000, will be made whole. The filing by SVB Financial under Chapter 11 does not change the status of SVBB NA.
The FDIC is reportedly undertaking efforts to sell SVBB NA and has reportedly engaged an investment banking firm to assist with the sale. The FDIC generally prefers to resolve failed banks through the acquisition of the troubled bank by a healthier bank acquiror in what is known as a whole bank acquisition.
On March 20, the FDIC announced it intends to hold separate auctions: one for the deposits and certain assets of SVB and another for the private bank affiliate of SVB, Silicon Valley Private Bank. The FDIC stated that "Qualified, insured banks, and qualified, insured banks in alliance with nonbank partners, will be able to submit whole-bank bids or bids on the deposits or assets of the institutions. Bank and non-bank financial firms will be permitted to bid on the asset portfolios."
The FDIC's announcement included an extension to its bidding window. Interested entities now have until 8:00 pm EDT on Wednesday, March 22, 2023, to submit bids for Silicon Valley Private Bank and until 8:00 pm EDT on Friday, March 24, 2023, to submit bids for SVBB NA.
If a whole bank acquisition is not possible, the FDIC may consider auctioning portions of the SVB asset and liability portfolio through a separate procedure.
How does the FDIC's auction process work?
There are procedures FDIC generally follows for the sale of failing institutions which it is likely following with SVBB NA.
In one of the earliest steps, the FDIC contacts and solicits bids from prospective buyers, which can include other banks or nonbank investors that have been prequalified to acquire a bank. Parties interested in potentially bidding should complete the pre-bid clearance process that the FDIC has in place (see more about the pre-qualification process).
In the case of SVB, this likely occurred at some point following the appointment of the FDIC as receiver before the formation of the bridge bank. These prospective buyers, after having an opportunity to perform due diligence on the failing institution, may then participate in a sealed bid process based on standard transaction terms. Bids are submitted electronically via a secured website to the FDIC which will then notify the participants of the results a few weeks later.
If the FDIC successfully finds a buyer for either SVBB NA or Silicon Valley Private Bank, then the entity's business would transition to the winning bidder, which could operate the bank as a separate subsidiary or integrate it into the winning bidder's existing operations. The terms of any loans or other assets conveyed via this process retain the same governing legal rights and obligations they had prior to the FDIC's bidding process and sale.
What happens if no one purchases either bank outright?
In the event that this week's auction occurs and does not succeed, there is always the possibility that the FDIC will try again at some later date. However, if the FDIC elects not try again, it may attempt to sell portions of SVB's portfolio through financial asset sales.
What did the FDIC do in the case of Signature Bank?
On March 19, the FDIC announced Flagstar Bank N.A.'s purchase of a portion of the assets and deposits of Signature Bank, which faced a similar run on its deposits and was placed into an FDIC receivership earlier this month. In announcing the transaction, the FDIC stated that the 40 former branches of Signature Bank will operate under Flagstar Bank beginning on Monday, March 20, 2023. The US$38.4bn in assets sold to Flagstar (a subsidiary of New York Community Bancorp) represented only a portion of Signature Bank's total assets, which amounted to US$110.4bn as of December 31, 2022. Approximately US$60bn in loans will remain in the receivership for later disposition by the FDIC.
What impact, if any, will SVB Financial's Bankruptcy have on SVBB NA's sale?
SVB Financial is the holding company of SVB. However, SVB Financial is not the holding company of SVBB NA, the bridge bank that the FDIC formed. The bankruptcy filing of SVB Financial should not affect the FDIC's efforts to sell SVBB NA.
The bankruptcy filing of SVB Financial could trigger a contest between creditors of SVB Financial and the FDIC, which will seek to maximize its recovery in order to reduce the government's cost of making SVB's depositors whole. The FDIC may pursue various claims, including that the holding company had an obligation to downstream additional capital into SVB before the bank failed.
Did SVB Financial have other subsidiaries? Are they now subject to bankruptcy proceedings also?
SVB was the lead bank in a larger financial services organization. SVB Financial is the top-tier holding company of that larger organization. The bankruptcy filing of SVB Financial does not necessarily cause the subsidiaries to be placed into a bankruptcy proceeding.
For example, SVB had a separately incorporated subsidiary bank in the United Kingdom, Silicon Valley Bank UK Limited. As described in a statement issued by the Bank of England, the UK regulators took actions resulting in the sale of Silicon Valley Bank UK Limited to HSBC UK Bank plc, as a result of which the UK subsidiary of SVB now operates as a subsidiary of HSBC UK Bank plc. The resolution of Silicon Valley Bank UK Limited is separate from the appointment of the FDIC as receiver for SVB and the subsequent establishment of the bridge bank in the US and is separate from the bankruptcy filing of SVB Financial.
In addition, SVB Securities LLC, an SEC-registered broker-dealer subsidiary of SVB Financial, announced on March 11 that the FDIC's appointment as receiver of SVB had no impact on the daily operations of SVB Securities LLC.
The situation with SVB (and other banks) continues to evolve. Stay tuned for further updates as events unfold.
If you have questions about what this means for you, please reach out to Eric Daucher (email@example.com, Tim Byrne (firstname.lastname@example.org), Tom Delaney (email@example.com), or your regular Norton Rose Fulbright contact.