Maria DIkeos: Welcome to the Lending Lowdown. I'm Maria Dikeos, Head of Global loans contributions at LSEG. We're excited to bring you our 10th podcast in the series. Thank you everyone for tuning in. Today we're talking about what is on everyone's mind this week, namely the collapse of Silicon Valley Bank and Signature Bank, in what has been an unprecedented March. I'm joined today by Peter York, adjunct professor at Fisher College of Business at Ohio State University, and recently retired Managing Director and Head of large market asset based loan originations at a major money center bank, his curriculum, the semester is particularly timely given that he is teaching a course on corporate restructurings and bankruptcy. So Peter, welcome.
Peter York: Thank you very much, Maria. I'm excited to be here and talking with you. And indeed, these are very interesting times.
Maria DIkeos: Yeah, yeah. After a 30 plus year 30 plus years in banking. Now, you're in a slightly different position, different role, and it kind of gives you a different vantage point. Let's start with that kind of given what's happening.
Peter York: Yeah, it's certainly very interesting guy had a great career in structuring debt. And, and, and working for liquidity solutions for clients, you know, domestically and internationally. And, and now it's just time for me to do some other things in my career. And I had a great relationship with my alma mater, Ohio State, and had lectured there for years, and was able to come on to the faculty and a part time basis. And as you mentioned, I am teaching corporate restructuring and bankruptcy literally had my first class to less than two weeks ago, for our, for our second session of the semester to students. And I emphasized, you know, the lessons that I've learned in through bankruptcy and prior to bankruptcy for companies is that, you know, three main things that sort of stick out to me, and I think they're relevant for what we're seeing today in this in this in this financial crisis within banking a little bit is that principle is very precious principle is important, you should, you should, you know, get the right returns on your capital, your capital is important and very precious maturity is also significantly important, you have to make sure you align maturities of debt and maturities in your in your capital structure appropriately. And then finally, liquidity is key. And for the companies that I've seen over the last 30 years, they get, you know, maturity aligned with liquidity and understanding that they do well, and those that don't don't do well. And I think we certainly saw with with Silicon Valley Bank, that they were unable to match their maturities of their investments properly to their liquidity needs. Now, you could argue that they, you know, they didn't necessarily anticipate the kind of liquidity demands that they that they had. But, you know, many banks did, and obviously, they didn't. So, that was sort of right at the front end of me starting lecturing to students was talking about these concepts. And we're seeing them play out live for our eyes.
Maria DIkeos: Sure. Yeah. Absolutely. So So let's dig into Silicon Valley Bank and the situation with Signature Bank as well, and the collapse of both institutions. You know, it's been less than two weeks, there have been an additional six banks that have been put on watch lists for possible ratings downgrades. And all of this happened over, you know, three or four days, rather than sort of the protracted bank crisis that we observed in 2008. With Bear Stearns and Lehman, how does the current situation in your view differ from what the market observed in 2008?
Peter York: Yeah, well, a number of things are different for sure. I think you you've highlighted in conversations with me that, you know, it certainly is true in 2008. This was an asset side problem, where banks had, you know, had loans and exposure that, you know, created losses. And so the time that those losses, come to maturity or come to, you know, to recognition is longer, right, it's, it's, you know, it's a much different type of problem that manifests itself so it does take a bit more time then this time is more of a liquidity problem. And so, you know, the liquidity issue really came upon upon SVB. Very, very quickly. I think there's also a rapid, you know, amplification of information in the marketplace. Twitter didn't exist in 2007. You know, we didn't have, you know, the access to information where everybody knows what everybody knows, very quickly, from, you know, the large, you know, from the large media companies that report on financial data to, you know, to just all the Twittersphere that can pass information around rapidly. And so that also has a big, big difference in sort of amplifying some problems. But I think the the core is the difference between assets before that were that were deteriorating, and then trying to align those assets deteriorations with with capital, and, you know, the balance sheet strength versus this time, I think it's more of a liquidity problem.
Maria DIkeos: Right, right. Right. Right. And as you said, you and I talked a little bit about this. And just the fact that, in 2008, as you've sort of touched on, the credit crisis was driven by largely the quality of the assets on the bank balance sheets, whereas this time around, the crisis seems to have been originated on the liability side of Silicon Valley, banks balance sheets,
Peter York: Of those assets had a had a had a follow on effect, and maybe an unintended consequence on lots of other markets. And so you might have, you might have a problem in the value of assets in, in, in home mortgages, that then created a problem in CLOs and CDOs, because they needed to sell, you know, what they perceived as better assets. And so that had a consequence on lots of other markets. Because they were scrambling to get, you know, to get liquidity and to improve, you know, their, you know, their loan values.
Maria DIkeos: Sure, sure. But in the in the wake of the 2008 crisis, we saw increasing regulatory oversight on the bank balance sheets, and like on the asset side, do you sort of vaguely anticipate that we might see a step up on the regulatory front that focuses on bank liabilities, once we kind of work through the immediate crisis?
Peter York: Well, it's certainly getting a lot a lot of attention this week, there have been a number of sources that have written about it. I know JP Morgan, asset management, and Jeffries and Zero Hedge and others put out a lot of really good information around bank liabilities, and what that is, so yeah, it's getting a lot, a lot of attention. I'd be surprised if the regulator's weren't also taking a look at that and thinking of a, you know, a way to monitor or structure something that they feel as safe and sound around that evaluation. But it's not just the regulators that are going to play a role here. I think the the auditors, you know, in the public accounting firms are going to play a bit of a role as well. And then the rating agencies are going to evaluate that and come up with some criteria. So I think what we're going to see is, you know, we're going to see a combination of regulatory, you know, the, the accounting firms and the rating agencies that are going to, you know, provide more transparency or more information around this. And I think people will be able to make a judgment and a value on the health of institutions.
Maria DIkeos: Going back to kind of our sweet spot, which is the broadly syndicated loan market, what what does this all mean for the BSL market? You know, and probably also for for the tech sector, in particular, in general, we're hearing about all of the losers, quote, unquote, are there any winners in this space? Like, what is this all kind of lead to?
Peter York: Yeah, hard to say? Like, who the winners are? Now? I mean, obviously, there are some fundamentals that are happening within the tech sector itself, that, you know, that it's it's experiencing, and that's pretty normal that we would see in in sectors retail is currently experiencing a lot of difficulty as well. You know, we've had trouble we've had trouble in the past with the metal space, the chemical space, the tier one auto suppliers, you know, over the years, you know, there's, you know, each industry has its issues, and they go through that, so that that generally is just happening in tech, I think what compounds that is now, you know, taking out a major tech lender, and a couple of potential tech lenders that, you know, would provide the financing that understand this face and can and can work through that. So that's, that's definitely going to be a challenge. You know, who's going to pick up from that? The major banks will probably pick up some of it, but they're regulating generally pretty conservative. You know, They don't really want to do early stage lending or take fliers, they'll pick the winners. And I think all the big banks and the big regulated banks are trying to, you know, we're trying to compete with with SVP and others by trying to find the early stage winners as they would describe them. And you know, that's in what I think is broadly thought of as tech and disruptive commerce, or the disruptive space. And so all the lenders are trying to do that, but there's a lot of them that aren't banked through through the regulated banking market. And I think private credit will probably evaluate that and, and play a big role, I think you're seeing some of the private credit players looking to buy the assets of Silicon Valley Bank, so I would not be surprised to see an expansion through there, that's probably going to be more expensive for the tech companies, you know, the the models in terms of return. So, you know, there, I think there will be financing available, it'll probably be, you know, primarily for the majority of the sector through a private credit funds. And we'll probably be on the margin more expensive. But you could argue that, you know, lending writ large has been pretty cheap with low interest rates for over a decade. And there be some reevaluation, of risk based pricing against the risk free rate of, you know, Fed Funds. 10 year treasury, you know, that spread needs to be reevaluated in terms of where those where those those costs are anyway, or where those pricing points are anyway.
Maria DIkeos: Great. Thank you. With all of this working itself out, how concerned are you or the market about possible contagion? We saw HSBC bought Silicon Valley Banks UK arm for the symbolic one pound in part to kind of allay fears about any possible risk to the technology industry in the UK? You know, do you do expect to see more of it? Or do you feel like it's going to be fairly contained?
Peter York: Well, I, you know, I think that you're going to see a lot of communication from the large banks about the quality and health of their, of their, their balance sheets, in managing their, their liabilities. There have been some good charts, I did see something from JP Morgan asset management that showed the unrealized impact of security losses on capital ratios. And, you know, you look at the top 20 banks, and, you know, there is some impact from that. And there's been a lot said about, oh, gosh, maybe these unrealized losses are between the held for held to maturity and held for sale books, around $600 billion or so, when you when you look at what the effect is on, on tier one capital, some of the large banks are actually in really, really good shape. And so what does that say to me, it says to me that management from, you know, a lot of the regulated large banks are pretty sobering around their risks. And, and their view of, of, you know, trying to avoid a terminal event, you know, obviously, Silicon Valley Bank could not avoid a terminal event, you know, so they didn't have the same types of, you know, I don't know anybody there personally, but they didn't have the same risk management practices, because obviously, a terminal event came and got them. And I think what we're going to see is a lot of communication from the large banks about what is the actual range of effect? And how do they manage that? That doesn't mean that it's, it's not going to capture others that haven't been there. But, you know, I think by and large, it feels to me, like some of the top banks are not significantly at risk of being undercapitalized. And then the second part to that will be, you know, how are they managing liquidity? If, you know, if there's a run on the bank, or can they manage that liquidity? Well, I think what we're seeing over the last couple of days is, you know, a flight to the regulated banks have a lot of capital, they a lot of are moving there. And, you know, knowing, you know, now everybody's very much aware, well, they have to keep that in a much more liquid form and can't necessarily have it in, in longer term or intermediate level term investments, because they need to manage that liquidity properly. So I think you're gonna see, you know, at least from some of the large regulated banks, you know, a sober view on and a conservative view on on managing these liabilities. That doesn't mean that there won't be, you know, other banks that are going to have trouble or can't necessarily write themselves. But, you know, I don't know that we that I necessarily seen, we're gonna that we'd see like 10 or, or more banks collapse because of the same things that happened to Silicon Valley that that would be surprising.
Maria DIkeos: Okay, okay. And Peter, just to wrap up really quickly, what are you going to keep an eye on over the next few days?
Peter York: Well, I think everybody's got their eye on on what the Fed is going due next week. And and so that's really important. You know, I come back to kind of a core view that I've that I've thought for about a decade, which is, you know, I think with quantitative easing and low interest for so long, we've got a little bit of a distortion in the risk based pricing of assets across the spectrum of, you know, of debt assets, which is where I've played for years, and even equity assets, or equity investments, so hard to hard to actually get the right risk based pricing, you know, I think you get pricing, but are you are you being priced fairly for the risk that you're taking. So I think the Fed gets that I think the Fed is also, you know, is also very focused on on inflation, inflation is still 6%. And maybe that feels like it's better than 9%. So people are feeling positive, and rallying in the markets a little bit. But at the end of the day, it's still 6%. You know, I think I've seen that it takes five to seven years to get inflation back into, into into check after it reaches past seven 8%. So, you know, it's, this is a long game, I think the big thing that that I'm watching is, is the Fed committed to getting inflation in check, and reestablishing risk based pricing across the whole spectrum of assets. And, and, you know, the consequences of that, as people say, Well, you know, keep raising until you break something, the consequences of that are, we've got, you know, like, the, like lava under the ground, we're not sure what's going to pop up next, the lava is going to come out somewhere. This this time, it came up SVB. And it sort of showed where some weaknesses are in managing the liability side of a bank. But, you know, I'm not necessarily sure where we're going to see something else in the next number of months. And so what is really critical or be will be very interesting is to see whether the Fed is going to continue to, you know, have their hand on the lever on the brake, and continue to raise interest rates, because of, as I said, risk based pricing, you know, normalcy and, and inflation control, or are they going to capitulate, and and sort of try to avoid other problems that may bubble up? You know, and so I'm very curious about that. And it's not just this meeting, but it's also the course of the next three to six months. And much like the 2008, it's going to take, you know, it could take six months to a year before these other things happen. But the speed of information is very quick. So when it happens, it'll be very, very rapid. These things will probably happen, you know, over the course of days, I think I think we should expect that.
Maria DIkeos: I guess, too.
Peter York: I guess the final thing that I would say is, you know, I'm not surprised that the Fed and the FDIC and the Treasury came out with the bank term funding program on Sunday, I think maybe some people were pretty surprised by that. I'm not surprised by that at all. Because in 2014, I think Mario Draghi made some comments about we're going to do whatever it takes to shore up the ECB when you're talking about bond buying. And Janet Yellen was very clear in June of 2017, mentioning that, you know, the tools that were put in place for the for the Fed, and the Treasury back in 2008, nine, give a lot of options to the government to be able to solve problems. And her quote was, you know, we're, we're done seeing crisis financial crisis in our lifetimes. And so, you know, knowing that the Fed is in the federal government treasury is going to use their resources to solve problems doesn't surprise me after I reflect upon those types of comments from policymakers. And so expect more of that type of reaction. You know, people call it the bazooka, you pull out the bazooka, you know, expect more of that type of reaction to wherever something bubbles up. So I can see a world where the Fed continues to raise and try to establish, you know, control of inflation, but then has tools available to solve problems where they bubble up. And so I guess I'll leave you with that.
Maria DIkeos: Thank you. Thank you so much. The Insight has been tremendous. We appreciate your time. And thank you everyone for listening. Check out our ongoing coverage of this story at loanconnector.com And follow us on Twitter at LPC loans. Also important follow the Lending Lowdown podcast at Spotify, Apple or wherever you stream your podcasts. Thank you.
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