After Silicon Valley Bank and New York's Signature Bank entered FDIC receivership March 10, loan market participants were biting their nails until the Federal Reserve's unprecedented move on Sunday to ensure all banks it could provide them sufficient funding to meet depositors' needs. The two large regional banks' rapid collapse and the ongoing uncertainty has left lenders with plenty to consider, and managers of collateralized loan obligations (CLOs) with positive talking points as they seek to replenish investors in their AAA bonds.
SVB had just a few hundred active institutional loans, some syndicated, so it wasn't a major player in the institutional loan market. Neither was it insignificant, noted Elliot Ganz, head of advocacy and co-head of public policy at the Loan Syndication Trading Association (LSTA).
"It could have been a bit of a mess, and everyone was scrambling to figure what to do," Ganz said in an interview.
In fact, some market participants were likely biting their nails through the weekend, concerned that in receivership—the regulator's version of bankruptcy—SVB could walk away from its contracts and put the fate of its assets and liabilities in doubt.
On Monday, easing some market professional's fears, the FDIC transferred both banks' assets to new "bridge" banks and tapped experienced financial-institution executives to head them until the banks are finally sold. Bridge banks were introduced after the Lehman Brothers debacle in 2008 with the intent of retaining the value of the institutions.
"It's business as usual until the bank gets sold or resolved in a different way," Ganz said.
Nevertheless, the syndicated loan industry clearly still harbored concerns on Tuesday, when the LSTA's webcast on the issue drew more than 2000 participants, the most ever, Ganz said. SVB's demise alone was never likely to cause more than a ripple in the institutional loan market, even if the bank had gone into receivership. However, some lenders would have had to clean up the mess, figuring out what to do with the missing syndicate member's commitment fee, voting rights and other contractual provisions.
Daniel Wohlberg, a director at Eagle Point Credit Management, noted that a few corporate borrowers have revolving credits offered by a loan syndicate including SVB, but the impact on the institutional loan market has been minimal. However, concerns around contagion were fanned Wednesday by news about more troubled banks, including Credit Suisse, a major player in loan syndications, and how that impacts interest rates and the credit markets remains to be seen, he said.
He added that it's likely to heighten CLO managers' attentiveness to banks' balance sheets, to ensure they don't face an asset-liability trap like the one that set off SVB's fall: holding excessive fixed-rate bonds when rates are rising and a lack of hedges. Banks that are managed well, Wohlberg said, are likely to benefit, as will CLOs.
"If these banks holding long-dated fixed income invested more in floating-rate AAA CLOs, they would be in better shape," he said.
He noted that in 2022, CLO AAAs had positive total returns compared to five-year U.S. Treasury and investment-grade corporate bonds, whose total returns, respectively, were -9.3% and -15.8%. He added that CLOs borrow at maturities longer than those at which they lend, instead of borrowing short term and lending long, like most banks.
"So CLOs are 'better banks' and never face the issue that led to the run on SVB," he said.
