Shadow Lenders Enter SVB Fray as Trapped Clients Seek Lifelines

Carmen Arroyo, Davide Scigliuzzo, Rachel Butt and Silas Brown

Sun, March 12, 2023 at 4:56 p.m. GMT-5·5 min read

Shadow Lenders Enter SVB Fray as Trapped Clients Seek Lifelines

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  • SIVB0.00%
  • KKR-0.93%

(Bloomberg) — As US authorities race to stem the fallout from the failure of California’s Silicon Valley Bank, an array of shadow lenders are stepping in to offer liquidity to the companies and funds whose cash has suddenly become trapped — at costs that ranged from moderate premiums to distressed prices.

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Private lenders including HPS Investment Partners, Oaktree Capital Management, Ares Management Corp. and KKR & Co. were among the firms discussing deals that would offer backup financing for clients of the failed bank, according to people with knowledge of the matter. The head of tech lender Liquidity Group said his firm was planning to offer about $3 billion in emergency loans to startup clients of SVB. A shadow market for deposit claims against the failed bank was also starting to form, said some of the people, who asked not to be identified because the talks are private.

These negotiations are separate, forming something of a parallel track, to the efforts of US banking supervisors who are frantically trying to line up buyers for the failed bank. In some cases, the lifelines are emergency measures in case SVB clients can’t access their uninsured deposits by Monday.

The prices offered by some lenders for claims on deposits have crept higher in the past 24 hours, a sign in part that optimism is growing that regulators will have some success in better protecting SVB customers from losses, people familiar with the matter said.

Representatives for Oaktree, HPS, Ares and KKR declined to comment.

SVB’s reach into the tech, venture capital and private equity worlds is vast. Not only did it hold company deposits, it also lent directly to companies and provided liquidity lines to the private equity and venture capital firms that own startups and later-stage companies. SVB was also a player in the syndicated loan market, arranging or participating in some 190 loans to both private and publicly listed companies, data compiled by Bloomberg show.

Click here for a Bloomberg terminal search of corporate loans in which SVB was an involved party

“In the very near term, we have been partnering with our portfolio companies with funds stuck in SVB to find alternative solutions so that they can make payroll on Wednesday,” Jai Das, president and co-founder of Sapphire Ventures, a venture capital firm overseeing $10 billion and about 100 investments, said in an interview. “Once there is some clarity on Monday from the FDIC, we will start focusing on the short-term working capital needs of the portfolio companies while funds are stuck in receivership.”

It’s unclear how many deals are actually getting done without further clarity on whether regulators will find a buyer for the failed bank. And the cost of lifelines appeared to be a rapidly moving target.

On Saturday, for example, early discussions from funds looking to buy claims on trapped deposits ranged from discounted prices of 60 cents to 75 cents on the dollar, people familiar with the discussions said. By Sunday, offers at the lower end of that range seemed to have dissipated, the people said.

Others lenders are offering liquidity to private equity and venture capital firms whose portfolio companies are unable to access cash at SVB — at a discounted price of around 80 cents on the dollar — in exchange for a guarantee from the fund that owns the companies, according to one of the people.

Larger banks were also fielding inbound calls from clients. A representative for New York-based Jefferies Financial Group Inc. said in an emailed statement that the firm was getting requests from venture capital clients for help in meeting short-term payroll obligations. That support included “helping them monetize or finance their deposits as the receivership process progresses.”

Liquidity Group Chief Executive Officer and co-founder Ron Daniel said in an interview on Sunday that his firm has about $1.2 billion ready in cash to make available in the coming weeks. The group is also in discussions with its funding partners, including Japan’s Mitsubishi UFJ Financial Group Inc. and Apollo Global Management Inc., to offer an additional $2 billion in loans, he said.

The discussions follow the swift collapse of Silicon Valley Bank, once a darling of the California financial system. Its downfall has left companies such as Roku Inc., LendingClub Corp. and Eiger BioPharmaceuticals Inc. unable to access deposits tied up in the bank, while some firms desperately need cash to meet urgent deadlines for business operations such as payroll.

Some of the companies with cash stuck at SVB face a stark choice: Strike a deal at a discount to guarantee they have cash now, or wait out the uncertainty of what they’ll potentially get back down the line.

Read more: FDIC Races to Start Returning Some Uninsured SVB Deposits Monday

In the meantime, Michael Cagney, founder and CEO of Figure Technologies, wrote in an email sent on Saturday to Wall Street firms and seen by Bloomberg, that his company is exploring putting together a marketplace for deposit receipts, and has the capital to do so. The plan is to have something in place ahead of Wednesday’s payroll, according to the email and a post on his LinkedIn profile.

That could potentially be an alternative for companies that are considering deals with hedge funds.

Cagney declined to comment.

–With assistance from Jacqueline Poh, Vinicy Chan, John Sage, Reshmi Basu, Paula Seligson, Michael Tobin, Lisa Lee, Nina Trentmann, Hema Parmar and Erin Hudson.

(Updates to add KKR in the second paragraph.)

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