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Navigating the Business Landscape After Silicon Valley Bank and Signature Bank

NOTE: The information contained in the following alert is up-to-date as of March 15, 2023. News and events are evolving, so check the websites for the FDIC and the applicable banks for updates and announcements.

Start-up, emerging, middle market and other companies and their founders, executives, and investors, are facing heightened demands in the wake of recent developments involving Silicon Valley Bank (SVB) and Signature Bank. You can navigate the situation and be well-positioned for continued growth and success by considering the suggestions below.

We banked with Silicon Valley Bank or Signature Bank. How can we get our funds?

  • All funds, including those above Federal Deposit Insurance Corporation (FDIC) insurance limits, were transferred to Silicon Valley Bridge Bank, N.A. and Signature Bridge Bank, N.A., respectively, and depositors have full access to their money beginning March 13, 2023

  • You may continue to use the same online banking access, checks and/or ATM/debit cards to access your funds

What are the applicable FDIC insurance limits generally?

  • The FDIC exercised its authority under the systemic risk exception to cover uninsured deposits at Silicon Valley Bank and Signature Bank, but has not otherwise modified the FDIC insurance thresholds

  • Deposits are insured up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category

  • Legal entities with independent operations are generally entitled to $250,000 in FDIC-insurance per FDIC-insured bank

  • Bank customers do not need to purchase deposit insurance; it is automatic for any deposit account opened at an FDIC-insured bank

  • Funds swept into money market funds on an overnight basis are not treated as deposits of the bank, are not subject to FDIC insurance, and the FDIC will honor the banks obligation to convert the money market funds back into cash the next day

  • Banks may also offer a multibank sweep vehicle, often via IntraFi’s ICS or CDARS program, which allows balances in excess of the $250,000 amount to be transferred to other banks to take advantage of each bank’s $250,000 FDIC insurance limit

  • FDIC Link to Are My Deposit Accounts Insured by the FDIC

  • FDIC’s Electronic Deposit Insurance Estimator

We have venture debt or another form of loan from Silicon Valley Bank or Signature Bank. Do we need to continue to make payments? Are the terms of the facility or any security interest modified? Can we continue to draw on a line of credit? Is a letter of credit issued by one of those banks still valid?

  • Payment obligations continue, and the terms of any arrangements are unchanged

  • The FDIC can repudiate contracts under certain circumstances, and so it may not honor advances or letters of credit

  • The FDIC’s general policy is that its role as receiver generally precludes continuing the lending operations of a failed bank

  • The FDIC will consider advancing funds if it determines that the advance is in the best interest of the receivership

  • Upon receiving a funding request, the FDIC may: make all or a portion of the requested loan advance, undertake discussions to reach a mutually satisfactory agreement to restructure the loan, or exercise its statutory right as receiver to repudiate its funding obligations with respect to the loan

  • Accordingly, letter of credit counterparties may  not view Silicon Valley Bank-issued or Signature Bank-issued letters of credit as creditworthy in the current circumstances, and it may be beneficial to take proactive steps to make alternate arrangements where possible

  • However, Silicon Valley Bridge Bank has indicated that it will honor all commitments to advance under existing credit agreements

  • As receiver, the FDIC is looking to maximize recovery and will likely sell the assets of the banks in receivership, either individually or collectively to a successor institution.

What about any warrants issued to such institutions?

  • Warrants issued to a bank in receivership should remain valid and outstanding with no change impacting the cap table

  • As receiver, the FDIC is looking to maximize recovery and will likely sell the assets of the banks in receivership, either individually or collectively to a successor institution.

Can we leave our current bank or at least diversify our deposits across financial institutions?

  • Examine banking relationships and review loan agreements and lines of credit for restrictions and covenants that may require you to maintain primary banking relationship or certain deposit accounts (e.g., your receivables) at the lender

  • Look into ICS or CDARS programs at network banks, which provide FDIC insurance coverage for certain business deposits of $250,000 or more

  • New bank relationships require “Know Your Customer” processing, which requires lead time that could be even more protracted in the current climate

  • An international company considering cash repatriation will want to consider tax implications

Payroll is coming due. Can we delay payments to employees? What should our company do if it is tight on cash?

Labor and wage payment laws and regulations impose requirements on when employers must pay employees

  • Under the Federal Fair Labor Standards Act, employers must pay non-exempt employees for hours worked and exempt employees for their regularly weekly rate of pay on regularly scheduled pay days for the covered pay period

  • Where state law imposes higher standards regarding unpaid wages, minimum wage, and other wage payment obligations, consider furloughs or changes for future wages to avoid violations

  • Failure to pay wages when due can subject U.S. employers to, among other things, fines and liquidated damages including double or treble damages, attorney fees (for litigation) and individual personal civil and, in some cases, criminal liability on owners and executives

  • Employers remain obligated to deduct and remit payroll taxes from wages even when under stress caused by the insolvency of its bank

  • If company has employees or independent contractors outside the United States, consult local lawyer(s)

Assess payroll, legal and contractual requirements and alternatives

  • Identify other available funds to ensure that payroll requirements can be met and, if not, explore alternative sources of funding

  • Request company owners, senior executives and board to consider pay cuts

  • Consider measures ranging from furloughs of nonexempt employees to pay cuts and/or reductions in hours in compliance with labor and employment laws, and clearly communicate changes to employees

  • Consider use of retention/stay bonuses

  • If an employee decides to leave or a decision is made to let an employee go, consider separation agreement issues and limits on use of non-compete, non-solicitation, non-disclosure, non-disparagement and appropriate release terms in specific context, including in light of existing employee agreements

  • Confirm and comply with prior employee documentation, including employment agreements, offer letters, employee handbooks and policies, IP assignment terms, confidentiality terms, and option or other equity terms

  • Consider governance and contractual requirements with respect to changes in compensation, bonus plans, etc.

  • Take control and communicate with employees as appropriate, to manage the situation and help allay fears and risk of departures and to enhance productivity

What are our options for payments owed to lenders, landlords, suppliers, vendors and other creditors?

  • Consider contacting creditors to negotiate short-term credit and payment extensions in light of cash flow needs and credit risk issues

  • Consider drawing existing and available lines of credit to shore up working capital position

  • Consider strategically stretching out payments to certain other non-critical trade creditors

  • Consider reaching out to investors for short-term liquidity or equity infusions

How can we identify and secure alternative sources of funding?

  • Focus on maintaining current payments to lifeblood sources

  • Consider reaching out to investors for short-term liquidity or equity infusions

  • Consider straight loan or promissory note if the company is in a position to pay a fixed sum or interest, and evaluate valuation, dilution and cap table impacts if considering SAFE, convertible note, warrant, preferred or other equity

  • Consider governance issues including necessary board and investor approvals, creditor consents, intercreditor and tax issues

  • Consider selling non-core assets

How do we obtain a line of credit in this environment?

  • New bank relationships require “Know Your Customer” processing, which require lead time that could be even more protracted in the current climate

  • New lines of credit require lead time for underwriting, credit approval and documentation and, if you have other debt facilities in place already, potential consent from existing lenders

  • Consider expanding existing banking relationships to shorten potential lead times,

What else should we take into account if we are considering bridge financing or other funding from our investors?

  • In addition to above, consider SAFE, convertible note or a preferred stock round and extending any repayment terms

  • Obtain interested party transaction approvals and addition to typical governance requirements such as board and investor approvals

What are my company’s reporting or disclosure obligations? What information should we share internally?

  • Your obligations depend in part on whether the company is public or private, accounting standards, securities laws, exchange rules, state corporate law, and your governance documents

  • For a private company, managing the situation through open and informal communications with stakeholders may provide insight and useful information for financial and operational issues and reporting to the Board

  • A public company affected by a bank shutdown or experiencing a liquidity challenge may have SEC disclosure obligations, and communications with stakeholders will be governed by securities laws

What should I keep in mind about board decision-making

  • Maintain acute awareness of the possibility of self-dealing or even the appearance of self-dealing, and obtain appropriate approvals for any insider transactions, such as disinterested director or stockholder approval

We are focused on conserving and managing cash. What should we be doing?

  • Engage or hire experienced financial and accounting advisors (whether an outside consulting or other firm, or a fractional or full-time experienced finance employee or independent contractor)

  • Track financial position and obligations closely, with an eye on foot faults that could arise in the near, medium, and long-term horizon

  • Challenge assumptions: long-term risks might suddenly become near-term ones.

  • Focus on liquidity issues (cash position, cash flow and burn rate) and forecast for several months to meet obligations to creditors, considering limits on access to significant deposits or credit lines if a banking partner has closed and potential changes in the credit market more broadly

  • Assess availability of alternative funding sources

  • Update financial statements, plans and projections and underlying assumptions, and consult with board, advisors and key investors about appropriate adjustments

  • Consult with advisors and partners on appropriate cash management, financial institution diversification and risk management strategies for your situation

How do we know if our business insurance is the right kind and amount to cover the risks our company and its directors and officers may face?

  • Determine whether losses from a bank closure are covered by business interruption or other insurance

  • Review current D&O insurance coverage, including the applicable limits and periods of coverage

Our company’s insurance premium payment is coming due. Can we delay or defer payment if we are tight on cash?

  • Insurance premiums should be paid when due, as failing to pay an insurance premium could cause the policy to lapse leaving it without coverage

  • Consider contacting the insurance company to clarify any grace period or adjust any deductible

  • Consult with an insurance broker and the board to evaluate whether there is a more affordable option. Review governance terms to see whether changes to insurance may require investor approval

Article By Lori Anne Czepiel, Robert Klingler, James W. Bartling, Mitch Boyarsky, Jason L. Watkins, Paul Z. Rothstein, Joe Daniels, Jackson Hwu, Neil Grayson, Benjamin Barnhill, J. Brennan Ryan, Dowse Bradwell Rustin IV, Richard Levin, and Craig Nazarro of Nelson Mullins.

For more financial and banking legal news, click here to visit the National Law Review.

Copyright ©2023 Nelson Mullins Riley & Scarborough LLP

Information for Borrowers with Loans from Silicon Valley Bank or Signature Bank

This alert provides information for borrowers with loans from Silicon Valley Bank (“SVB”) or Signature Bank (“Signature”) based on information available from the FDIC and our clients’ experiences over the last few days. We have also included information regarding the FDIC’s general policies and procedures when selling and administering loans of failed banks. We will update this alert as additional information becomes available.

Borrowers with loans from SVB or Signature continue to wait for information from the FDIC, and the new bridge banks it formed, with respect to their loans, including any information regarding the sale of their loans, new bank contact information and updates to borrowing procedures and payoff logistics. At present, we understand that the bridge banks are attempting to operate in the same manner with respect to their borrowers (and depositors) that SVB and Signature operated prior to their failures, including through use of the existing relationship managers/bank contacts and online platforms and consistent borrowing and payment mechanics.

Systemic Risk Exception

As widely reported, on Sunday, March 12, the Federal Reserve, the FDIC and the Treasury Secretary announced a systemic risk exception and created Silicon Valley Bridge Bank, N.A. and Signature Bridge Bank, N.A. (together, the “Bridge Banks”). The systemic risk exception is an attempt to avoid a widespread bank run and to ensure that all of SVB and Signature Bank’s depositors would be made whole after the failures of the two banks. The systemic risk exception is an exception to federal law that otherwise would require the FDIC to resolve a bank failure at the lowest cost to the Government’s deposit insurance fund.  See Crisis and Response: An FDIC History, 2008-2013, p. 36. Otherwise, the FDIC would not have been in a position to backstop uninsured deposits beyond the $250,000 insured limit per depositor per ownership category. For more information about FDIC deposit insurance limits please see our prior alert: SVB Receivership – What You Need to Know.

Prior to Sunday, the only uses of the systemic risk exception occurred in 2008 and 2009.  Id., pp. 35-36. The systemic risk exception has never before been used to create bridge banks at which loans at failed institutions would then be sold or administered by the FDIC.

Sale of SVB and Signature Loans

The general expectation after a bank failure is that the failed bank’s loans will be sold to a new lender as expeditiously as possible. The FDIC conducted an auction for the assets of SVB (including its loan portfolio) on Sunday, March 12. The Wall Street Journal reported on Monday, March 13 that, while none of the largest U.S. Banks bid on SVB at the initial auction, there was at least one offer which was declined by the FDIC. The WSJ is also reporting that regulators are planning to hold another auction of SVB’s assets. We also anticipate an auction of Signature’s assets. The timing of these auctions remains unclear.

In the event that either or both of these auctions produce buyers of the Bridge Banks’ respective assets in bulk, those buyers will become the lenders under the failed banks’ loans. In that case, the applicable successor lender will advise its new borrowers of their new bank contacts and provide relevant loan administration information including loan payment procedures.

If either or both of the auctions fail to produce a buyer for all of the bank’s assets, a bank’s loan portfolio may be split up and sold piecemeal. In this event it may take longer before borrowers know the identity of their new lender. If some or all of the loans are not purchased, they will continue to be administered by the respective Bridge Banks or the FDIC. As noted above, the intent of the FDIC is to continue to operate the Bridge Banks pending substantial completion of the sale process.

Borrowing Under an SVB or Signature Line of Credit

In general, when the FDIC is appointed receiver, it immediately begins analyzing loans that require special attention, such as unfunded and partially funded lines of credit, and construction and development loans. Typically speaking, the role of receiver generally precludes the FDIC from continuing the lending operations of a failed bank; however, the FDIC will consider advancing funds if it determines an advance is in the best interest of the receivership, such as to protect or enhance collateral, or to ensure maximum recovery to the receivership. See A Borrowers Guide to an FDIC Insured Bank Failure.

When the FDIC is operating as receiver, its general procedures provide that if a borrower submits a request for additional funding, the FDIC will conduct a thorough analysis to determine the best course of action for the receivership. The FDIC uses information contained in the failed bank’s loan files to the extent available and considered reliable. Because the files of failed banks are often incomplete or poorly documented, the FDIC may require additional financial information to perform its analysis and make decisions.

In the current circumstances, with the Bridge Banks operating under the systemic risk exception, these general FDIC rules appear to have been relaxed, at least for the time being and our clients are reporting that borrowing (and deposit) operations are generally functioning in the ordinary course. We have not yet heard from any clients that additional information has been required in connection with advances from the Bridge Banks.

SVB Contact Information

The FDIC is currently directing SVB borrowers with questions about drawing on lines of credit to contact their existing relationship manager/bank representative at SVB. SVB also has a call center at 800-774-7390 open from 5:00 AM to 5:30 PM (Pacific) with representatives that can assist borrowers.

Signature Contact Information

The FDIC is currently directing Signature borrowers with questions about drawing on lines of credit to contact their existing relationship manager/bank representative at Signature Bank. Signature Bank also has a 24-hour call center at 866-744-5463 with representatives that can assist borrowers.

On Monday, March 13, our clients had mixed results contacting their existing bank relationship managers and drawing on lines of credit. Some clients requested online draws but have not been successful as a result of system malfunctions (and we heard the same reports with respect to some attempts to access and move deposits). On the other hand, we heard reports from our clients that automatic draws and account sweeps have continued to function (and many borrowers successfully accessed their accounts). Today (March 14), clients appear to be having more success in accessing their lines of credit. We will continue to gather information about borrowers’ ability to access their lines as it becomes available.

Loan Payoff/Lien Release Information

Many clients have inquired about the mechanics for arranging a loan payoff/refinancing of their SVB loan or Signature loan. In the event that the loan is sold, the borrower can coordinate payoff with the new lender that purchased the loan. In the meantime, borrowers should reach out to their relationship managers or otherwise contact the bank using the means provided above to arrange any payoff and/or lien release. Further information regarding lien releases may also be found on the FDIC lien release website. In the event that borrowers’ loans are not sold quickly by the FDIC to a new lender, we expect that those borrowers will be strongly encouraged by the FDIC to arrange for a refinancing. See A Borrowers Guide to an FDIC Insured Bank Failure.

Continue Performing Obligations under Loan Documents

Notwithstanding the failures of SVB and Signature, their borrowers should continue to abide by their loan documents, including submitting payments as required by their loan documents at the same addresses and complying with all other covenants and agreements. Borrowers will be advised by the FDIC, the Bridge Banks or a subsequent purchaser of their loan if there are any updates to payment mechanics or bank contact information.

Article By Timothy John Carter, Jonathan C. Hayden, Trevor Hoffmann, Muryum Khalid, Kevin Renna, Douglas B. Rosner, Andrew Rothstein, Jesse Rubinstein, and Jesse Scott of Goulston & Storrs.

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