SVB Financial Faces Ticking Clock to Save Billions in Tax Assets

SVB Financial Group is under the gun to make critical decisions that would allow it to preserve billions of dollars in tax assets and boost its odds of successfully reorganizing.

The former Silicon Valley Bank parent company, which recently secured approval to sell its securities unit for $100 million, has said it has until the end of the year to form a bankruptcy exit plan that would preserve what could be $11 billion in valuable net operating losses (NOLs).

If the parent company doesn’t have a Chapter 11 plan in place by Dec. 31, “tax attributes and rights potentially worth billions of dollars, which are vital to maximizing the value of the Debtor’s estate, will be at risk,” its lawyers said in a July 3 court filing.

Those NOLs are likely the key to attracting bondholder interest in acquiring the company because they could be used to offset taxable income, bankruptcy experts said.

But before it can firm up a bankruptcy exit plan, SVB Financial must resolve its dispute with the Federal Deposit Insurance Corp. over the right to claim nearly $2 billion in bank deposits. Those funds are “critical” to creating a bankruptcy plan that maximizes the value of the NOLs, the company has said.

SVB Financial is in the early stages of discussing a potential reorganization plan with its creditors, Chief Restructuring Officer William C. Kosturos said during a May creditor meeting.

“Any plan of reorganization that would be filed would definitely consider the substantial tax attributes in the case,” Kosturos said.

Substantial NOLs that can be carried forward to use against future profits and lower tax bills may be a central factor in drumming up interest in SVB Financial, according to Todd Baker, a senior fellow at Columbia University’s Richard Paul Richman Center for Business, Law, and Public Policy.

Interest in acquiring the company could come from SVB Financial’s bondholders, which include Appaloosa Management, Centerbridge Partners, and Silver Point Capital.

“This is frequently the biggest play for bondholders like Appaloosa, who can trade the NOL for a stake in another company down the road,” Baker said.

Since the outset of the bankruptcy, SVB Financial’s creditors have had their eyes on the tax assets.

Tom Lauria of White & Case, a lawyer representing bondholders and shareholders that include Appaloosa and Centerbridge, said during a March bankruptcy court hearing that there’s still a potential “viable and very valuable” ongoing business in SVB Financial.

“We strongly believe that the debtor is going to have substantial tax assets here, and that in fact those tax assets may become the most valuable asset of the estate, provided that there is income that can be utilized to realize that value,” Lauria said at the hearing.

It’s long been a strategy for whoever ends up in control of a bankrupt entity to try to maximize the value of NOLs, Baker said.

Generally, when corporations with NOLs undergo ownership changes, their use can be strictly limited by the Internal Revenue Service, Baker said. But if a bankrupt corporation’s old shareholders and certain qualified creditors end up owning the company and certain rules are met, those tax assets can be freed up for future use, he said.

SVB Financial took steps at the start of its Chapter 11 case in March to monitor for ownership changes that could potentially wipe out the use of the NOLs.

In the past, bankruptcy plans that used such strategies have kept the NOLs with the reorganized company. The new owners—typically senior creditors following a debt-to-equity swap—use the tax losses to offset gains from future, unrelated businesses that are housed in the reorganized entity, according to University of Iowa law professor Diane Lourdes Dick.

“Although this is technically a transfer of the tax assets, the tax laws make an exception for transfers that take place in bankruptcy,” Dick said.

To make the strategy work, it’s likely that a holding company and its creditors will want to retain one operating business to facilitate a future merger with a third party, Baker said. That will allow use of the tax loss carry-forwards remaining after any resolution of tax issues with the FDIC, he said.

SVB Financial has said it’s continuing to evaluate “strategic alternatives” for its venture capital and credit investment arm, SVB Capital, which manages more than $9.5 billion of funds for investors, and still has its sell-side research business, MoffettNathanson LLC.

Washington Mutual Inc. is one of the most notable examples of a debtor saving its tax assets through a reorganization. WaMu took advantage of its NOLs after its subsidiary, Washington Mutual Bank, was taken into receivership by the FDIC in September 2008 and sold to JPMorgan Chase & Co.

The WaMu parent entity filed for Chapter 11 that same month and abandoned its worthless stock so it could take a deduction and realize $6.5 billion in NOLs. To avoid zeroing out those NOLs after an ownership change to mostly equity shareholders and creditors, the reorganized company continued as one of its remaining mortgage reinsurance business.

By 2018, the former WaMu parent company merged with mortgage servicer and originator Nationstar Mortgage Holdings Inc. with about $6 billion in NOLs carry-forwards still in tow. SVB Financial’s chief restructuring officer, Kosturos, also led the restructuring for Washington Mutual Inc.

SVB Financial says it’s racked up federal NOL carryovers worth about $6.4 billion and state NOL carryovers worth about $4.5 billion as of the end of 2022.

The tax assets may be the most tantalizing perk for those considering whether to take a stake in the company in a possible reorganization. But the unknowns are big.

SVB Financial must determine whether it owns the NOLs or if they belong to the former Silicon Valley Bank, which was sold off by an FDIC receiver after a run on the bank.

In addition, a fight over control of nearly $2 billion in bank deposits between SVB Financial and the FDIC may throw a wrench into the works.

The FDIC says it’s entitled to the funds to set off what SVB Financial owes, while SVB Financial says it needs the money to help pay for its hefty bankruptcy costs.

The FDIC is expected to put up an aggressive fight in a test over its power to put bankrupt parent companies on the hook for the costs of their failed banks. The FDIC has estimated the cost of the Silicon Valley Bank failure to its deposit insurance fund to be about $20 billion, and says the nearly $2 billion in bank deposit funds should be used to offset any potential claims.

Even if the $2 billion is found to be SVB Financial’s, litigating the dispute could delay the process of moving forward a Chapter 11 reorganization.

To contact the reporter on this story: James Nani in New York at [email protected]

To contact the editors responsible for this story: Maria Chutchian at [email protected]; Michael Smallberg at [email protected]

AI-powered legal analytics, workflow tools and premium legal & business news.