Credit Crunch: An Update for Borrowers

The collapse of Silicon Valley Bank and Signature Bank on March 10 and 12, 2023, respectively, sent shockwaves through the venture capital, entrepreneur, technology innovation, and life sciences communities, as well as those companies that regularly rely on bank credit commitments to fund operations and working capital. Businesses with deposits at those institutions spent the weekend scrambling to secure cash to make payroll that was already earned by workers, and to address contingency planning to pay workers or reduce workforce.

Borrowers from these institutions did not know if the loan commitments would be honored and whether their deposits would be given dollar-for-dollar credit against loans already incurred. Wise borrowers are continuing to evaluate sources of liquidity, and their loan documents, to best position themselves in the credit market. 

We have some answers, although this is continually developing:

• On March 13, 2023, the Federal Deposit Insurance Corporation (FDIC) announced that substantially all of the assets of Silicon Valley Bank and Signature Bank have been transferred to “bridge banks,” which are newly chartered banks operated by boards appointed by the FDIC. The transfers included loans to borrowers and the related loan commitments. Following such transfer, borrowers automatically became customers of the bridge bank. A link to the related release from the FDIC is here.
• All obligations of the bridge banks are backed by the FDIC and the full faith and credit of the U.S. government. This means that, unless there is a subsequent development, all loan commitments made by Silicon Valley Bank and Signature Bank to borrowers will be honored by the bridge banks. A link to the FDIC’s Financial Institution Letter is here. 
• Similarly, borrowers are required to perform their obligations on loan agreements, including making payments on their loans in accordance with the terms of their loan documents.
• If borrowers currently have a loan in progress with Silicon Valley Bank, they can continue to contact their current loan officer directly. For additional information, see the FDIC’s Frequently Asked Questions.

Companies, whether or not a customer of Silicon Valley Bank or Signature Bank, should consider taking action now to assess their liquidity sources and needs, and to develop or refine their contingency plans. Borrowers should also consider reviewing and updating their loan documents to ensure that they are as protective as possible.

Additional considerations:

• Delinquent lenders: What happens if a lender in the syndicate or bilateral lender is in receivership?
• Lender kick out: When can a lender be forced to assign its loan?
• Bank accounts: Must all cash be at one depository? What about custodial accounts? What about payroll accounts? What if the business removed cash from the institution in violation of a bank covenant? What is the status of a letter of credit that was placed in support of an office lease or other contract?
• Sources of Liquidity: The credit market has restricted significantly since the historic low rate environment of recent years. Companies should evaluate what funding may be available and whether outstanding debt should or must be refinanced. Alternate sources of liquidity, in addition to bank debt, can be explored. Do you know what alternatives sources of liquidity may be in the market for extending credit? Are the terms workable?

We will continue to provide updates as additional information becomes available, including a frequently asked questions and responses for borrowers at failed FDIC-insured institutions.

Please reach out to members of the Bank Receivership Task Force or to your Foley relationship partner if we can provide assistance.