UNSW Associate Professor Mark Humphery-Jenner recently noted that, after growing to become the 16th-largest bank in the United States, the Silicon Valley Bank (SVB) collapsed within a 48-hour period, shortly after announcing a $1.75 billion capital raising.

In detailing exactly how the “banking sector disaster” unfolded, he wrote that, after having a steady increase in withdrawals, and as the bank “put all its eggs in one basket”, focusing exclusively on start-ups, venture capital funds, and the broader Silicon Valley ecosystem, post-pandemic, SVB started to decline.

This, Mr Humphery-Jenner said, came after many clients of the bank increasingly needed cash, triggering steadily more withdrawals and fewer bank deposits.

“This caused Silicon Valley Bank’s cost of capital to increase. With money leaving deposit accounts, Silicon Valley Bank must now pay depositors higher rates to retain them, or rely on higher cost external sources of funding,” he explained.

This resulted in an “immediate liquidity issue” — and after attempting a $2.25 billion capital raise, which the market responded badly to, the bank ultimately had $42 billion withdrawn within 24 hours and subsequently collapsed.

Although happening in the US market, lawyers in the Australian market have said this serves as a timely reminder to consider the implications of a non-performing or insolvent finance party.

A ‘definite impact’ in Australia

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The collapse, Corrs Chambers Westgarth banking and finance partner Simon Reid outlined, has been cause to focus on the provisions in loan documents and the impact for borrowers under those if a lender is insolvent.

“We expect borrowers will now focus even more closely on those provisions given the news that the contagion effect of Silicon Valley Bank has resulted in First Republic Bank shares dropping 60 per cent and Western Alliance Bancorp’s stock being down 47 per cent. Further, Australian borrowers are not limited to loans from Australian lenders only and have exposure to banks globally, including the United States, Europe and across Asia-Pacific,” he explained.

“If loan documents have been negotiated to be sufficiently robust, then dealing with an insolvent lender is a process that can be managed with potential options under syndicated loans, including replacing or repaying the insolvent lender and disenfranchising them so they no longer have voting rights.”

SVB opened its doors four decades ago — and remained the preferred bank of choice for those in the tech ecosystem until the recent collapse. This is something that Hamilton Locke partner and head of finance Zina Edwards said will impact the Australian market, in addition to being “a sad moment for the global innovation community”.  

“A large and sudden collapse like SVB will definitely have an impact on the Australian market — particularly on the already vulnerable tech and start-up industry. In addition to a general impact on market confidence and an increased focus on risk, SVB’s collapse will have a direct impact on some Australian start-ups [that] utilised SVB as their US transactional bank and potentially US lender. For many earlier-stage companies, SVB was often one of the only options for US transactional banking products, and their absence may make it harder for new companies to enter the US market until they reach a greater scale,” she explained.

“Having said this, I am hoping that other banks and funders will step in to fill the gap (assuming there is ultimately no rescue of SVB), and it is great to see that a number of international banks and venture debt funders are stepping in to offer help to companies exposed to SVB here in Australia.” 

Pace of response

However, Ashurst restructuring, special situations and insolvency (RSSG) partner Bernie Walrut said that collapses like these mean that regulators will move quickly to both protect deposit holders and preserve market stability.

“We are in volatile times, and when there are significant and rapid shifts in interest rates, this can create significant strains on the financial system and the banks that are part of the system. Whilst SVB was unusual in that it had significant exposure to technology and growth companies, it does demonstrate that changing conditions can quickly impact bank balance sheets,” he noted.

“However, we are very lucky in Australia that we have an active regulator, APRA, which closely monitors banks in Australia. Given the significant capital adequacy rules imposed in Australia by APRA, we are unlikely to see a similar outcome in this market for a bank operating in Australia.”

This, Maddocks banking and finance partner Ilan Kraus echoed, means that a similar collapse in Australia is unlikely, given that the banking system on this side of the world is “well regulated”.

“The prospect of a large bank collapsing would seem to be fairly remote — we’ve seen recently that the major Australian banks remain extremely profitable. At the same time, the collapse of the Silicon Valley Bank shows that, like in 2008, even very large and well-capitalised financial institutions can buckle under the weight of adverse economic conditions such as rising inflation and sharp movements in interest rates.

“The risk of a borrower defaulting under a finance facility, by becoming insolvent for example, is well-catered for in most finance documents. The collapse of the Silicon Valley Bank serves as a timely reminder to lawyers of a risk that financiers will suffer an insolvency event or not be able to perform their obligations under a loan facility — particularly where a non-Australian bank is a participant in a syndicated loan, or the financier is a non-bank institution without the same regulatory oversight of an Australian bank,” he explained.

“Lawyers representing borrowers should consider the profile of financiers on a transaction and revisit the consequences of a financier default to ensure they are detailed enough to cover a broad range of scenarios occurring in relation to the financier and potentially to its related entities.”

Consequences for tech

The collapse of SVB also means a number of things for the technology sector, both in overseas markets and in Australia. Clients with US operations, for example, have been — and will continue to be — impacted.

DLA Piper corporate partner Joel Cox has seen this firsthand over the last week and predicted that moving forward, it will be more difficult for “Australian start-ups to expand to and operate in the US over the short to medium term”.

“SVB was the bank of choice for almost all our Australian and New Zealand tech sector clients regarding their US operations because of the specific products they created for VC-backed businesses and their ease of doing business for founders.

“SVB’s collapse will increase the difficult trading conditions for start-ups and risk aversion from VC funds globally, which we have already seen as a significant theme over the past six months. We have experienced a significant slowdown by start-up and later-stage tech clients raising capital, and this is impacting tech sector M&A processes as well. It is leading to recapitalisations and pay-to-play terms, to enable the most affected start-ups to raise emergency funds. We are also seeing insolvencies and forced sales for nominal consideration to avoid insolvency,” he outlined.

“At the same time, however, we are seeing private equity-backed companies keen to bolt on deals and ASX-listed companies with large amounts of excess cash, on the lookout for strategic tech acquisitions. We usually see deals four to six months before they get announced to the press, and just last week, I received enquiries on four new significant tech M&A deals. 

“We still expect the second half of 2023 to see a pick-up in tech M&A activity, and the SVB collapse may actually motivate more, by encouraging founders and VC funds to temper valuation expectations and buyers to be opportunistic.”

Too soon to draw conclusions?

Despite this optimism, it remains difficult in these early stages of the collapse to decipher how — and if — the collapse will affect the broader Australian market, Mr Reid emphasised.

“If there was a knock-on effect on the Australian market more generally, then it might result in the RBA holding off on further interest rate increases. If so, this might encourage activity by transactional clients in sectors where things have been quieter more recently because of increasing interest costs.

“The lesson from the SVB collapse is to continue, as lawyers have been doing since the global financial crisis, to focus on regulation and risk management and advising clients on the same — to prevent misconduct and to protect other market participants, consumers, investors and borrowers. Based on reports of the SVB collapse, it is apparent there has been no misconduct, but we expect that from a regulatory perspective, regulators and lawyers will be revisiting financial liquidity requirements in particular,” he explained.

“Further, lawyers will be advising borrower clients to consider their lenders carefully when selecting them — in particular to focus on their liquidity, stability and track record of supporting clients.”

Lastly, Ms Edwards warned that the speed at which the collapse happened was cause for greater concern and advised businesses to diversify their banking relationships, both “in terms of where deposits are held, but also in terms of funding lines”.

“There were a lot of things that went wrong for SVB, but the ‘run’ on the bank was seemingly caused by the almost hive-minded behaviour of SVB’s customers, who happened to largely be in the same tight-knit industry and therefore (at least based on social media and speculation) consulted with and, advised each other to, move funds out of SVB which ultimately sealed the bank’s fate,” she opined.

“I think the interconnected nature of our world and our society, particularly among tight-knit investment circles, is something we all need to be increasingly aware of as this can influence outcomes in both positive and negative ways.”