Speaker 1 00:00:12 Welcome to the Lending Lowdown. I'm Maria DEOs, head of Global Loans contributions at Refinitiv. We're excited to bring you our 10th podcast in the series. Thank you everyone for tuning in. Um, 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, um, adjunct professor at Fisher College of Business at Ohio State University, and a recently retired managing director and head of large market asset-based loan originations at a major money center bike. His curriculum this semester is particularly timely given that he is teaching a course on corporate restructurings and bankruptcy. So, Peter, welcome.
Speaker 2 00:01:08 Thank you very much, Maria. I'm excited to be here and, uh, and talking with you and, uh, and indeed these are very interesting times.
Speaker 1 00:01:15 Yeah, yeah. After a 30 plus year, um, uh, 30 plus years in banking, um, now you're in a completely different position, different role, and, and it kind of gives you a different vantage point. Let's start with that kind of given what's happening. Yeah.
Speaker 2 00:01:33 It's, it's, it's certainly very interesting. I had had a great career, uh, in structuring debt and, um, and, uh, and working for liquidity solutions for clients, um, you know, domestically and internationally. Uh, and, uh, and, and now it's just time for me to do some other things in my career. And, you know, I had a great relationship with my alma mater, Ohio State, um, and had lectured there for years and, uh, was able to, to come on to the faculty on a part-time basis. And as you mentioned, I am teaching corporate restructuring and bankruptcy. Literally had my first class two less than two weeks ago, uh, for our, uh, for our second session of the semester to students. And, and I emphasized, you know, the lessons that I've learned, uh, 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, uh, in this, in this financial crisis within banking, uh, a little bit, is that principle is very precious.
Speaker 2 00:02:28 Uh, principle is, uh, is important. You should, uh, you should, you know, get, uh, the right returns on your capital. Uh, you know, capital is important and, and very precious maturity is also significantly important. You have to make sure you align maturities of debt, uh, 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, the last 30 years that get, you know, maturity aligned with liquidity and understanding that they, they do well, and those that don't, don't do well. And I think we certainly saw with, uh, with Silicon Valley Bank that they were unable to match their maturities of their investments, uh, 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, uh, but you know, many banks did and, and obviously they didn't. So th that was sort of right at the front end of me starting, uh, lecturing to students was talking about these concepts, and we're seeing them play out live before our eyes.
Speaker 1 00:03:32 Sure. Yeah, absolutely. So, so let's dig into, um, Silicon Valley Bank and, and the situation with Signature Bank as well. Um, and, and the collapse of both in 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 in Lehman. How does the current situation, in your view, differ from what the market observed in 2008?
Speaker 2 00:04:17 Yeah, well, um, a number of things are different for sure. I think you, you've highlighted, uh, in conversations with me that, you know, and, and certainly is true in 2008, um, this was an asset side problem where banks had, you know, uh, had loans and exposure that, uh, you know, created losses. And so the time that those losses, uh, come to maturity or come to, uh, you know, to recognition is longer. Right? It's, uh, it's a, you know, it's, it's a much different type of problem, um, that manifests itself. So it does take a bit more time than this time is more of a liquidity problem. Um, and so, you know, the liquidity issue really came upon, um, upon, uh, S V B, uh, very, very quickly. Um, I think there's also a rapid, uh, you know, uh, amplification of information in the marketplace. Uh, yep.
Speaker 2 00:05:13 You know, Twitter didn't exist in 2007. Uh, you know, we didn't have, you know, the, the access to information where everybody knows what everybody knows very quickly from, you know, the large, uh, you know, from the large media companies that report on financial data to, you know, to just all the, the, the Twitter sphere that can, uh, pass information around rapidly. And so that also has a, a big, uh, big, uh, difference in sort of amplifying some problems. But I think the, the core is the difference between assets, uh, before that were, that were deteriorating, and then trying to align those asset deteriorations with, with capital and, uh, you know, the balance sheet strength versus this time I think it's more of a liquidity problem.
Speaker 1 00:06:01 Right. Right. Right, right. And, and as you said, um, you and I talked a a little bit about this and, and just the fact that in 2008, as, 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, the crisis seems to have been originated Yeah. On the liability side of Silicon Valley. Yeah. Banks balance sheets and, and the quality
Speaker 2 00:06:30 Of those assets had a, had a, uh, had a follow on effect and maybe an unintended consequence on lots of other markets. And so, you know, you might have, you might have a problem in the value of assets in, uh, in, in, uh, 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, a consequence on lots of other markets, um, because they were scrambling to get, you know, to get liquidity and to approve, you know, their, uh, you know, their loan values.
Speaker 1 00:07:03 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?
Speaker 2 00:07:31 Well, it's certainly getting a awful lot of attention this week. There have been a number of sources, uh, that have written about it. I know JP Morgan Asset Management and Jeffries and, 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 awful lot of attention. Um, I, I, I'd be surprised if the regulators weren't also taking a look at that and thinking of a, you know, of a, of a way to monitor or structure something that they feel is safe and sound around that evaluation. But it's not just the regulators that are gonna play a role here. I think the, the auditors, uh, you know, and the public accounting firms are gonna play a bit of a role as well. And then the rating agencies are gonna evaluate that and come up with some criteria. So I think what we're gonna see is, you know, we're gonna see a combination of regulatory, uh, you know, the, the accounting firms and the rating agencies that are gonna, 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.
Speaker 1 00:08:32 Going back to kind of our sweet spot, which is the broadly syndicated loan market. Yeah. What, what does this all mean for the, um, BSL market, you know, and, and, 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 does this all kind of lead to?
Speaker 2 00:09:00 Yeah, har 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, uh, you know, that it's, it's experiencing, uh, and that's pretty normal that we would see in, in sectors. Retail is currently, uh, 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, uh, you know, over the years, you know, there, 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, um, you know, taking out a major tech lender, uh, and mm-hmm. <affirmative> and, and a couple of potential tech lenders that, you know, would provide the financing that understand the space and can, uh, and can work through that.
Speaker 2 00:09:48 So that's, that's definitely gonna be a challenge. Uh, you know, who's gonna pick up from that? Uh, the major banks will probably pick up some of it, but they're regulated. Okay. Generally pretty conservative. Uh, you know, they don't really want to do early stage lending or take flyers. They'll pick the winners and, and I think all the big banks, uh, and the big regulated banks are trying to, you know, and we're trying to compete with, with SVB 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, uh, or the, the disruptive space. And so all the lenders are trying to do that, but there's a lot of 'em that, that aren't banked through, through the regulated banking market. And I think private credit will probably evaluate that and, uh, and, and play a big role.
Speaker 2 00:10:36 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 gonna be more expensive for the tech companies. Um, you know, the, the, the models in terms of returns. So, you know, the, I think there will be financing available. It'll probably be, you know, primarily, uh, for the, the majority of the sector through a, a private credit funds and, uh, and will 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 mm-hmm. <affirmative>, there needs to be some reevaluation of risk-based pricing against the risk-free rate of, you know, fed funds, uh, tenure, treasury, you know, that spread needs to be reevaluated in terms of where those, where those, uh, those, uh, costs are anyway, or where those pricing points are anyway.
Speaker 1 00:11:31 Great. Thank you. With all of this working itself out, how concerned are you or the market about possible contagion? We saw h s BBC bought, uh, 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 you expect to see more of it or do you feel like it's gonna be fairly contained?
Speaker 2 00:12:05 Well, I, you know, um, I, I think that you're gonna see a lot of communication from the large banks about the quality and health of their, of their, uh, their balance sheets, uh, and managing their, their liabilities. There have been some good charts. I, I did see something from JP Morgan Asset Management that showed the unrealized impact of security losses on capital ratios. And, you know, you, you look at the top 20 banks and, you know, there is some impact from that. And, and there's been a lot said about, oh gosh, maybe these unrealized losses are between, uh, held for, uh, held to maturity and, uh, 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?
Speaker 2 00:12:54 It says to me that management from, you know, a lot of the regulated large banks, uh, are pretty sober around their risks. Um, and, and their view of, of, uh, you know, trying to avoid a terminal event. You know, obviously Silicon Valley Bank could not avoid a terminal event, you know, so they, they didn't have the same types of, you know, I I, 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 gonna see is a lot of communication from the large banks about what is the actual range of effect and how do they manage that. Uh, that doesn't mean that it's, it's not going to to capture others that haven't been there. But, you know, I think by and large, it, it, it feels to me like some of the top banks are, uh, you know, are not significantly at risk of being under capitalized.
Speaker 2 00:13:43 And then the, the second part to that will be, you know, how are they managing liquidity, um, if, you know, if there's a run on the bank or can they manage that liquidity? Well, um, I think what we're seeing over the last couple of days is, you know, a flight to the regulated banks of a lot of capital know a lot of mm-hmm. <affirmative> are moving there. Uh, and, you know, knowing, you know, now everybody's very much aware, well, they have to keep that in a, in a much more liquid form and can't necessarily have it in, in longer term or intermediate level term, um, investments cuz 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 a sober view on, uh, and a conservative view on, uh, on managing these liabilities, uh, that doesn't mean that there won't be, you know, other banks that are gonna have trouble or, or can't necessarily write themselves. Um, but, you know, I, I don't know that we, that I necessarily see we're going, 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.
Speaker 1 00:14:47 Okay. Okay. And Peter, just to wrap up really quickly, what are you gonna keep an eye on over the next few days?
Speaker 2 00:14:56 Well, I think everybody's got their eye on, on what the Fed is gonna do, um, next week. Mm-hmm. <affirmative>, and, uh, and so that's really important. Um, you know, I come back to kind of a core, uh, uh, view that, that I've, that I've thought for about a decade, which is, you know, I think with quantitative easing and, 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, uh, or equity investments. So hard to, hard to actually get the right risk based pricing. Uh, you know, I think you can get pricing, but are you, you know, are you being priced fairly for the risk that you're taking? So, um, I think the Fed gets that.
Speaker 2 00:15:41 I think the Fed is also, you know, is also very focused on, uh, on inflation. Inflation is still 6%. I maybe that feels like it's better than 9%, so people are feeling positive and, and rallying in the markets a little bit. But at, at the end of the day, it's still 6%. Um, you know, I think I've seen that it, it, it takes five to seven years to, to get inflation back into, into, uh, into check, uh, after it reaches past seven 8%. So, you know, this is a long game. I think the, the, the big thing that, that I'm watching is, is the Fed committed to, uh, getting inflation in check and reestablishing risk-based pricing across the whole spectrum of assets. Uh, 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.
Speaker 2 00:16:33 We're not sure what's gonna pop up next. The lava's gonna come out somewhere, <laugh>, you know, this, this, this time it came up svb and it sort of showed where, where some weaknesses are in managing right, the liability side of a bank. But, you know, I'm not necessarily sure where we're gonna 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, the Fed is gonna continue to, you know, have their hand on the lever on the break, uh, and continue to raise interest rates, uh, because of, as I said, risk-based pricing, uh, you know, uh, normalcy and, uh, and, and inflation control, or are they gonna capitulate, uh, and uh, and sort of try to avoid other problems that may bubble up. Uh, you know, and so I'm, I'm very curious about that.
Speaker 2 00:17:19 And it's not just this meeting, but it's also the course of the next three to six months. Uh, and, and, and much like the 2008, it's gonna 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, I guess. Thank you. I guess the final thing that I would say is, you know, uh, I'm not surprised that the Fed and the F D I C and the Treasury came out with the, uh, the bank term funding program on Sunday. I think maybe some people were pretty surprised by that. Um, I'm not surprised by that at all because, uh, in 2014, I think, uh, Mario Draghi made some comments about, we're gonna do whatever it takes to shore up the E C B when you were talking about, uh, bond buying.
Speaker 2 00:18:09 And, uh, Janet Yellen, uh, was very clear in June of 2017 mentioning that, uh, you know, the tools that were put in place for the, for the, the Fed, uh, and the treasury back in 2008 and nine, uh, 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, and, and the federal government treasury's gonna use their resources to solve problems doesn't surprise me after I reflect upon those types of comments from policy makers. Uh, and so expect more of that type of reaction. Uh, 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, uh, and, and try to establish, uh, you know, control of inflation, but then has tools available to solve problems where they bubble up. And so I, I guess I'll, I'll leave you with that.
Speaker 1 00:19:12 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
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