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SVB plummets 60% after higher interest rates spark billions in losses on a $21 billion bond portfolio

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  • SVB Financial plunged 60% on Thursday after it completed a sale of its $21 billion bond portfolio.
  • The firesale of its bond portfolio generated a loss of $1.8 billion and drove the bank to raise capital from investors.
  • Higher interest rates and a slowdown in the IPO market helped spur the big losses for SVB Financial.

Silicon Valley Bank-parent SVB Financial plunged 60% on Thursday after the company completed a $21 billion firesale of its bond portfolio, which led to a loss of $1.8 billion and spurred plans to raise more capital from investors. 

The bank said it would raise $2.3 billion from investors by selling stock, essentially diluting shareholders to cover the losses related to the bond sale. 

The big losses experienced by the bank are directly related to the surge in interest rates over the past year, as the company's US Treasury holdings were bought at a time when interest rates were still relatively low. Bond prices fall as yields rise. 

According to SVB Financial's updated investor deck, the company's $21 billion bond portfolio had a yield of 1.79% and a duration of 3.6 years. Today, the 3-Year US Treasury note yields 4.7%, a far-cry from the levels at which the bank bought the Treasury notes prior to 2022. 

Also hurting SVB Financial is the fact that it mainly lends to venture capital and private tech companies that often rely on the IPO market to cash in their equity stakes and raise money that is often held at the bank, helping boost its deposits.

But with the IPO market essentially closed over the past year, SVB Financial has seen an ongoing decline in deposits. 

"We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses," SVB Financial said.

The bank said it will use the proceeds of its bond portfolio sale to restructure its available-for-sale securities portfolio by investing in short-duration US Treasuries that offer much higher interest rates than its prior bond portfolio had. The bank also said it would hedge its portfolio with floating swaps. 

The move should allow the bank to partially lock in funding costs to better protect its net interest income and protect itself against declines if a slow fundraising environment and elevated cash burn trends persists for its client base. 

Credit rating agency Moody's cut SVB's credit rating to Baa1 and downgraded the bank's credit outlook to negative because of "the potential negative implications for SVB if the declining venture capital investment activity and high cash burn does not subside." 

SVB Financial CEO Greg Becker told investors in a shareholder letter: "SVB is well-capitalized, with a high-quality, liquid balance sheet and peer-leading capital ratios."

The decline in SVB Financial dragged down the entire banking sector on Thursday, sending shock waves through the industry as investors wondered if problems at the bank could be prevalent at other growth-oriented banks.

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