by Wolf Richter, Wolf Street:
Not learned a thing since the Financial Crisis. Relying on ratings, preferred stock holders found themselves bailed in, bondholders got crushed.
Let me just divert your attention for a moment from the collapse of SVB Financial and what it might and might not mean for the financial system or the startup bubble or whatever, to another troubling aspect of SVB Financial that shows that no one has learned anything since the Financial Crisis, least of all the credit rating agencies.
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So you know what is coming: The solid investment-grade rating on a company – SVB Financial – that then collapsed with its investment-grade rating, taking investors down with it.
On Wednesday March 8, Moody’s still had an A3 rating on SVB Financial, owner of the now defunct Silicon Valley Bank, as it was already collapsing for all to see. Four notches into investment grade – a very respectable rating!
In the evening of that day, after SVB disclosed a $1.8 billion loss on the sale of bonds, a planned capital raise, and a slew of liquidity measures, Moody’s downgraded it by just one itty-bitty notch, to Baa1, still three notches into investment grade.
Then on March 10, after Silicon Valley Bank was shut down and put into receivership, Moody’s downgraded SVB by 13 notches in one fell-swoop, all the way across junk territory, to its lowest rating, to C, which is Moody’s rating for default. And it said that it will withdraw the rating.
That’s how worthless these credit ratings are if you rely on them for your bond holdings. But they’re good for your amusement, apparently. Here is my cheat sheet for corporate bond credit ratings by rating agency.
Similar with S&P Global Ratings: On March 9, a day behind Moody’s, it downgraded SVB Financial by one notch to BBB-, which is still investment grade.
Then on March 10, after SVB Financial collapsed and was taken over by the FDIC, S&P slashed its rating by 10 notches all the way through junk territory to D, for default, its lowest rating.
Holders of its bonds and preferred stock (like bonds, a liability on the bank’s balance sheet) got the rug pulled out from under them.
For example, based on bond data from Finra-Morningstar, the $1 billion of 4.25% perpetual preferred stock, which will get bailed in along with shareholders, collapsed in two days from 70 cents on the dollar to 3 cents on the dollar at the close on Friday.
There are five issuances of this type on its balance sheet that got wiped out, combined $3.7 billion. All of them were issued during the Free Money era in 2021.
The good part for uninsured depositors is that this type of debt is designed as a buffer and will get bailed in, thereby removing a liability from the defunct bank’s balance sheet, and leaving more funds for unsecured depositors. So those preferreds are doing their job.
But for investors, it would have been nice to get prior warning from the credit rating agencies that this stuff is maybe not investment grade after all, but junk that needs to come with high yields, before getting thrown off the cliff.
In terms of bonds, for example, the $650 million 1.8% senior unsecured notes, issued in October 2021, also during the Free Money era, plunged from 86 cents on the dollar on Wednesday to 37 cents on the dollar at the close on Friday. Investors who’d relied on the credit rating agencies to protect them from this fiasco got creamed:
Companies obviously go ratings-shopping when they need to raise funds by issuing bonds, because a lower credit rating will cause the bond to have a higher coupon interest, and higher yield, meaning more interest expense for the company. And so there is huge pressure on analysts to come up with a high rating, or the other side of the rating agency will lose this business to a rating agency that will rate those bonds higher. We truly have learned nothing, not even bondholders, who should simply ignore those ratings and do their own homework.
