SVB Financial: Blew Up Even Faster Than I Expected

The Update

In a word: Wow! I was certainly bearish SVB Financial (NASDAQ:SIVB) but I certainly did not expect it to blow up this fast, at least not before they reported first quarter earnings. Where do I start?

The market is flipping out over a massive planned equity raise the company announced after the market close. The company is raising $1.75 billion in two tranches, one a public $1.25 billion raise and the other a $500 million sale of stock to General Atlantic, a well-known VC firm. The $1.75 billion of stock will all price at the same level. The company is also shopping $500 million of a 6-6.5% mandatorily convertible preferred for which it hopes to realize a 20% premium. I think both the interest rate and the premium will be hard to realize.

This $2.25 billion equity raise goes up against a ~$16 billion market cap at the market close. I have no idea where the stock will shake out after this news. I saw it trade as low as the old book value of $200. Either way, this deal is probably at least 15% dilutive and perhaps much more.

Why might such a "strongly positioned" company need to raise such punitive capital you ask? In my first write up on this company "SVB Financial: Blow Up Risk", I discussed that there were two possible ways this company could have major problems. One was losses on the company's investment portfolio. Those losses at the time were about equal to the company's equity. The second was potential losses in the loan portfolio. 21% of the ~$70 billion loan portfolio was to early stage companies. Any losses in just that part of the loan book would hurt equity almost dollar for dollar.

Concurrent with the equity issuance, the company announced that it had sold basically all of its $21 billion available for sale investment portfolio and incurred a $1.8 billion loss, which dented both tier 1 capital and book equity by over 10%. This equity issuance plugs the holes that loss created. That the company felt it had to absorb such a staggering loss suggests two possibilities to me. Either deposits from the company's largely venture backed customers are dropping much faster than the company led on in its first quarter conference call or the company is worried about losses in the loan portfolio. It could also be a mix of the two.

Market Reaction

Moody's immediately downgraded the credit rating to Baa1 negative outlook from A3. To be fair, the Johnny on the spot folks at Moody's were two notches above S&P. The stock is getting destroyed. It's hard to tell how bad it will be tomorrow. In my last write up on the company, "SVB Financial: 30% Downside After Rally That Makes No Sense" I wrote that the company was already showing signs of weakening. The rally after the quarter struck me as a pure short squeeze.

It was not easy to hold on short this company. One had to tolerate a real rip higher even after being fundamentally right. The same thing happened several times with Silvergate (SI) and legions of other bad and overvalued companies like Coinbase (COIN) and MicroStrategy (MSTR). That's the thing about bear markets. They make it as painful if not more so for bears than for bulls. You have to size and structure your trades so you can hold on. You also have to tolerate bulls crowing about your shorts running up in your face.

Conclusion

I do not think this is the end of the bad news for SIVB. I think the quarter is a potential problem and guidance is almost certain to come down a lot. I think the stock should trade at a discount to book value. I just don't know where book value will shake out after this loss and the equity raise. I'm fairly certain it's below $200 per share, though.