Extending the time frame further for potential buyers to bid on Silicon Valley Bridge Bank NA's assets would help the Federal Deposit Insurance Corp. secure a larger return on the sale process, sources close to the auction process say.
The FDIC announced March 20 that it was extending the bidding deadline for Silicon Valley Bridge Bank to 8 p.m. ET on March 24. The agency will also be seeking bids for Silicon Valley Private Bank, a subsidiary of the bridge bank, by 8 p.m. ET on March 22.
The regulator is aiming to sell the most assets at the highest possible price, while bidders are demanding the highest possible amount of government guarantee to cover potential shortfalls of loans. The less time the FDIC gives bidders for due diligence, the more bargaining power bidders would have to ask for a credit enhancement, in which the government would guarantee a certain amount of loan repayments should borrowers default.
A quicker sale, then, would mean accepting a lower price from buyers who have not had as much time to evaluate the bank's assets, according to two former banking regulators who have spoken with market participants.
"I just get the feeling this rushed process may be somewhat inhibiting better prospects for more recovery to the Deposit Insurance Fund," Keith Noreika, chairman of the banking supervision and regulation group at consulting firm Patomak Global Partners and a former acting comptroller of the currency, said in an interview.
The FDIC declined to comment.
Speed vs. guarantees
The regulator's sale process is relatively short,
First Citizens BancShares Inc. has submitted a bid to buy the entire bridge bank, according to press reports. A First Citizens spokesperson declined to comment.
The ongoing volatility in the banking sector raises questions about whether the FDIC and bidders are able to finalize deal terms within the expected timeframe, Noreika said.
To gain more leverage in negotiations and maximize recovery, the FDIC will have to extend the bidding again, said Eugene Ludwig, co-managing partner of Canapi Ventures and former US comptroller of the currency.
"They want to move along with it, because they get more value creation that way, on the one hand, and also it will help quell the crisis atmosphere that exists," Ludwig said. "But they will have to extend further."
A truncated due diligence period is likely to lead to more of a demand for guarantees because buyers may not get thorough details about the assets they are bidding for, Ludwig said.
The FDIC would likely be reluctant to issue a guarantee if it does not have to, however, in order to protect its Deposit Insurance Fund. Still, an FDIC guarantee does not necessarily mean the regulator would take a loss in the fund because the guarantee to cover loan losses may never take effect if the loans perform under the new owner, Ludwig said.
"That's only a potential area of loss," he said.
Interest from nonbanks
The FDIC said March 20 that it is now accepting bids from banks in alliance with nonbank partners. The shift to include nonbank partners, which Noreika described as "somewhat of a concession," appears to be aimed at finding a middle ground between nonbank interest and the FDIC's preference for bank bidders.
Interest from nonbanks stems from the former Silicon Valley Bank's relationships with the technology industry.
"SVB is a bank that has very much banked technology companies, and you could imagine a number of private sector interests — individuals, highly wealthy individuals from the technology area, or their funds, or other funds that are sophisticated in this area — wanting to bid along with a traditional bank," Ludwig said.