SILICON VALLEY BANK - “The biggest financial failure since 2008 will potentially leave thousands of UK tech firms on the brink of collapse”
The Bank of England sought a Court Order late on Friday night to place SVB’s UK arm into insolvency. Many hundreds of UK tech firms now fear they could go under if the Government doesn’t step in with some form of support.
I spoke with our tech consultant, Thish De Zoysa this morning on the potential consequences for UK start-ups and early stage tech ventures. With often little or no revenues, many early stage businesses rely on cash raised from investors. These funds are now frozen within SVB’s London operation as a consequence of the recent events in the US.
So why did SVB in the US collapse so quickly?
- Between 2019 and 2022 the Bank’s assets tripled to $198bn as clients benefited from a pandemic fuelled investment boom;
- In an effort to seek a return on these funds within an environment of low interest rates, SVB began to take out unhedged bets on long-term US government bonds. This worked well in the short term but as the Federal Reserve and Bank of England ramped up interest rates over the past year, these bets turned sour and resulted in losses of $1.8bn. Furthermore, the tech recession has resulted in companies shedding more than 290,000 jobs since the start of 2022;
- On Wednesday, SVB stunned Wall Street by asking investors to support a $2.25billion fund-raise to shore up its balance sheet. This caused a collapse in its share price and caused the CEO to telephone customers to reassure them their money was safe - panic quickly set in, with customers withdrawing a reported $43billion within a matter of days – possibly the largest bank run in history;
- It’s worth bearing in mind that SVB had very few individual clients and fewer than 38,000 corporate accounts within the relatively tight-knit tech community. There is no doubt this contributed to rumours spreading quickly as VC funds and other depositors began to withdraw their funds. The US regulators then had to move quickly to shut down SVB and take control of its deposits.
So what happens next?
The Bank of England is expected to place the UK arm of SVB into a bank insolvency procedure later this evening, Sunday 12 March.
In the short term, the Bank has suspended operations by stopping making payments or accepting deposits. This means customers of the Bank are unlikely to be able to access their funds in the short term. Pending some announcement of government support, the only recourse at this stage would be the deposit protection scheme, which is capped at £85,000. Customers will automatically get cheques within 7 days but many businesses say they will be unable to survive if they have to wait for funds above that level to be paid out.
What should companies do?
Waiting for government support is not an option - CEO’s and CFO’s will need to move quickly to assess cash resources as well as their short term cashflow forecast and cash burn.
Communication with key stakeholders will be paramount – including staff - alongside some degree of forbearance until the position on cash deposits becomes clearer.
Seek professional advice early and consider all options before embarking on a short-term strategy. Thish and the team at Moorfields have considerable expertise in the sector and are on hand to lend support via our confidential helpline – 020 7186 1144.
Author: Andy Pear
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