Business
SVB Loses Billions On $21 Billion Bond Portfolio After Rising Interest Rates
(CTN News) – SVB Financial’s stock price plunged up to 47% on Thursday after it sold off its bond portfolio for $21 billion, resulting in a $1.8 billion loss in the company’s bond portfolio, prompting the company to raise more capital from investors as it plans for its future.
The company is a parent company of Silicon Valley Bank.Â
In order to cover the losses related to the sale of bonds, the bank said it would raise $2.3 billion from investors by selling stock, which effectively dilutes shareholders’ equity.
Since the company had bought US Treasury holdings at a time when interest rates were still relatively low when the company bought them, the big losses experienced by the bank are directly related to the surge in interest rates over the past year. As yields rise, bond prices will fall as well.
A new investor deck released by SVB Financial shows that the company has a bond portfolio worth $21 billion that yields 1.79% with a duration of 3.6 years, and according to the deck, the bonds have a yield rate of 1.79%.
Presently, the yield on the US Treasury 3-Year note is around 4.7%, which is a far cry from the levels at which the bank purchased the Treasury notes before the year 2022, when the yield was 3.8%.
A further factor hurting SVB Financial is the fact that it primarily lends to venture capitalists and private tech companies that frequently issue IPOs so that they can cash in their equity stakes and raise cash that is often held at the bank, helping boost its deposits at the same time.
SVB Financial, however, has seen a continuing decline in deposits due to the fact that the IPO market is essentially closed over the past year.
SVB Financial stated, “We are taking these steps because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients.”
By investing in short-term US Treasury bonds that offer much higher interest rates than its previous bond portfolio, the bank intends to restructure its available-for-sale securities portfolio.
Additionally, the bank stated that it would use floating swaps as a hedge for its portfolio.
It is expected that this move will allow the bank to partially lock in funding costs as a means of better protecting its net interest income as well as preventing declines in its net interest income if the slow fundraising climate and elevated cash burn trends for its client base continue to persist.
Moody’s cut SVB’s credit rating to Baa1 and downgraded the bank’s credit outlook to negative because of “the potential negative implications if venture capital investment activity declines and cash burn continues to rise.”.
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