Analysis—For Goldman Sachs, SVB’s botched stock sale was a silver lining

Analysis—For Goldman Sachs, SVB’s botched stock sale was a silver lining

By Echo Wang, Lannan Nguyen and David French

NEW YORK (Reuters) – As SVB Financial Group wrestled with capital shortages and the prospect of a downgrade in its credit rating last week, it approached Goldman Sachs Group Inc and drafted an unusual two-part plan, according to people familiar with the discussions.

The investment bank will buy a $21.5 billion bond portfolio from SVB to boost its coffers, after startups began pulling their deposits from the technology-focused lender, which trades as Silicon Valley Bank.

But there was a hitch. Goldman’s offer for the portfolio was valued at $1.8 billion less than the book value assigned to SVB, as rising interest rates made it less valuable. SVB will have to book a loss on the portfolio, which consists of US Treasuries and related bonds.

The next step was to put together a solution for Goldman. It will help organize a $2.25 billion stock sale for SVB to fill a funding gap caused by the bond portfolio sale, two of the sources said.

Goldman delivered on the first phase of that plan. Once the bond portfolio deal was done, the storied investment bank didn’t have time to convince investors to lock in capital and overcome depositors’ concerns about pulling money out of SVB.

The tight turnaround left insufficient time for investors to prepare materials as early as last week, a source said. Stock sales collapsed and SVB became the largest US bank to fail since the 2008 financial crisis, raising concerns about other lenders and prompting regulatory intervention to backstop customer deposits.

Yet for Goldman, this unpleasant deal had a silver lining. The bond portfolio acquired from SVB is now overvalued, based on falling Treasury yields since the transaction. Traders not connected to the deal interviewed by Reuters estimated the price gains at several million dollars. A source familiar with the details of the hedge placed on the deal by Goldman’s trading desk said the profit would be less than $100 million.

It is unclear whether Goldman has retained or sold all or part of the bond portfolio. Goldman declined to comment. SVB did not respond to a request for comment. In a regulatory filing on Tuesday, SVB said the sale of its bond portfolio to Goldman was made at a “negotiated price”.

Goldman was not paid the agreed-upon underwriting fee for the stock sale because that deal fell through, two of the sources said. SVB did not disclose what that fee might be.

Details provided by six people familiar with the capital raising effort show that Goldman and SVB underestimated the challenges of pulling off the capital raise in terms of timing and investor interest. Only two private equity firms were ultimately invited to participate in the capital raising last week – General Atlantic and Warburg Pincus. SVB and Goldman expected stock market investors to chip in for the remainder, four of the sources said.

Warburg Pincus rejected the deal because it needed more time to conduct due diligence after being concerned that SVB could still face long-term funding problems, two of the sources said. General Atlantic pledged $500 million, but walked away after the capital raise fell through.

Warburg Pincus and General Atlantic declined to comment.

Banks also miscalculated how investors would react to the stock selloff. A source said the company believed investors would welcome the plan as a boon to SVB’s financial health, but it backfired and instead sent a worrisome signal that sent the bank’s shares plunging 60%. Investor mood was already tense after cryptocurrency-focused bank Silvergate Capital Corp collapsed earlier in the day on Goldman’s advice.

The handling of the SVB deal by Goldman, the most successful dealmaker based on league table data, has drawn Wall Street admiration and invited scrutiny.

Michael Ohlrog, an associate professor at New York University School of Law, said Goldman may not have “handled everything exactly right,” taking on a difficult task to begin with. “(SVB) put themselves in such a vulnerable position,” Ohlrog said.

Undisclosed role

SVB did not disclose to investors in its stock sale prospectus that Goldman was the acquirer of the bond portfolio it sold at a loss. But in the prospectus, SVB cited other relationships and potential conflicts of interest, such as SVB’s investment banking arm underwriting the deal.

SVB only disclosed Goldman’s role as the acquirer of the bond portfolio on Tuesday, the last day of the four-business day window in which the US Securities and Exchange Commission (SEC) allows companies to make such disclosures. Five securities lawyers interviewed by Reuters said SVB’s handling of the disclosure appeared to comply with the rules.

An SEC spokesman did not respond to a request for comment.

(Reporting by Echo Wang in Washington, DC and Lannan Nguyen and David French in New York; Additional reporting by David Barbuscia and Anirban Sen in New York; Editing by Greg Roumeliotis and Christopher Cushing)

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