UK Venture Debt client briefing on impact of SVB UK
13 March 2023 | Applicable law: England and Wales | 5 minute read
Silicon Valley Bank (UK) Ltd (SVB UK) has been acquired in a £1 share acquisition by HSBC, one of the world's largest banking and financial services institutions.
The Bank of England (BoE) has advised that "This action has been taken to stabilise SVB UK, ensuring the continuity of banking services, minimising disruption to the UK technology sector and supporting confidence in the financial system." HSBC has now become the sole shareholder of SVB UK and taken over remaining liabilities. BoE and His Majesty's Treasury have confirmed that all depositors' money is safe and that SVB UK's business will continue to be operated normally by the bank including any facility arrangements entered into with it.
This is a significant step forward both for deposit and borrower positions, however, undoubtedly there is still likely to be an impact on access and movement of funds, permitted bank accounts and future access to undrawn previously available funding. With the challenges ahead, what does this actually mean in practical terms for SVB UK's Venture Debt borrowers?
All indications suggest start-up borrowers will have continued access to their venture debt loan and deposit accounts with transactions proceeding as usual but in practical terms it will be important to check movement on and accessibility to these accounts.
The BoE statement indicates that customers can continue to contact SVB UK through the usual channels and that borrowers should continue to make any loan repayments to SVB UK as normal.
HSBC could elect to transfer your facility with SVB UK to another lender at some point in the future but this would likely be no different to your original position because transfers of the loan by the lender are generally always permitted by the terms of venture debt facilities and lenders are usually required to provide you with advance written notice of any transfer.
Whilst it is understandable that protective measures were taken by many companies in recent days to provide short-term funding to businesses, including moving funds out of SVB UK accounts to non SVB UK bank accounts, it is important to review these actions as soon as possible in terms of compliance from a legal perspective with the terms of the venture debt facility agreement and to consider HSBC's position here, the potential consequences and any remedial action required by the borrower.
Venture debt facilities generally contain strict terms regarding third party bank accounts. If this is the case with regard to your facility with SVB UK, non-SVB UK accounts of the borrower would likely only be allowed on a disclosed and expressly permitted basis at the time of entering into the facility with an additional requirement to be secured under the debenture by way of a specific fixed charge (which would also include notice process to the third party bank). Such permitted accounts are also often subject to balance caps and cash sweep mechanics to move the funds back to an account operated by the lender. On this basis, any new third party accounts will not be permitted once the facility exists unless express prior consent is obtained from the lender and such accounts are brought into the security net.
If funds were transferred to a third party bank account which is already a 'permitted account' under the venture debt facility, you may not need to take any immediate action, but you should check if transfers to this account are restricted or subject to any balance cap and move funds back if necessary.
If a new third party bank account was opened and funds were transferred to such account on a non- permitted or no consent basis (which we assume will be the case for most borrowers placed in such a unique and time critical situation), these actions would technically be breaches by the borrower of the terms of the venture debt facility agreement.
Whilst we do not have visibility on how breaches will be treated in these exceptional circumstances, it is important to highlight the following:
- any breach of the venture debt facility agreement could be treated as an event of default
- a waiver could be sought but is not guaranteed
- consent could be obtained retrospectively
- in relation to opening the new account, but bear in mind any consent will be at SVB UK's discretion and may be conditional on items requiring immediate action, for example transferring funds back to a secured SVB UK account and entering into documents to bring the new account into the security net, agreeing to cash sweep obligations tec
- some events of default can be remedied but most are within lender discretion/subject to specific grace periods
- an event of default entitles the lender to accelerate the loan, demand immediate repayment and if necessary, enforce the security to recover the repayment obligations
We can assist with navigating any potential breaches here and help you decide what is the best course of action in terms of timeline and communications with SVB UK/HSBC.
With such a huge impact on so many businesses, it is likely that many borrowers will want to push back on the current position in their venture debt facility on bank account exclusivity and cumbersome restrictions on opening new accounts. This may create leverage for borrowers to seek to renegotiate covenants with SVB UK on third party bank accounts and exclusivity banking requirements for trading and operating cash accounts. However, lenders may find flexibility requests difficult to marry with the current English laws and caselaw precedents relating to fixed charges over accounts and receivables and the level of control a lender needs to demonstrate in order to have a valid fixed charge on those assets.
Consider approaching SVB UK as soon as possible to obtain consent if you want to open new third party bank accounts. Bear in mind that any new bank account will likely be required to become subject to the fixed charge under the debenture given by the company in support of the venture debt facility (a process which will involve entering into a supplemental debenture and notifying the new account bank(s) of SVB UK's security interest in that account). In addition, you may want to try and negotiate that any new account is not subject to an ongoing cap on balances at any time (or at least not a low one) or cash sweep obligations moving funds back to an SVB UK account to spread the risk.
Consider current loan exposure and sources/options of available cash to the business to underwrite this debt. Could you pay the loan back if the facility is cancelled/declared repayable early?
If payments to suppliers and other third parties were to be made through a SVB UK bank facility over recent days, you should urgently be checking the status of any such payments with SVB UK and/or any suppliers/third parties. Although we anticipate that suppliers/third parties will be understanding of any delayed payments, we find that proactivity can avoid undue misunderstandings.
Similarly for incoming payments due, this process will also ensure that any delayed payments owing to the company are recovered as soon as possible to boost cashflow.
Although we don't have a confirmed position from HSBC/SVB UK on this yet, the ability to drawdown additional undrawn funds for example, under later tranches or funds which were subject to financial milestones being met, could be impacted. Confirmation on this should be sought as soon as possible so that plans for additional bridge/ runway financing can be considered.
We think it is important to remain vigilant and prepared in terms of short-term funding requirements and monthly burn rate.
It is likely that you have done so already but we would still recommend speaking to your investors and shareholders to discuss short term bridge funding/emergency funding round/cash injection/convertible funding.
However, bear in mind that some or all of such funding may be restricted or subject to consent and subordination requirements under the terms of the venture debt facility.
We can provide advice on and assist with the preparation of all documents needed for any short term loan, convertible loan or bridge finance arrangements.
Although the sale announcement is immensely helpful to SVB UK's customers in navigating any immediate liquidity concerns they faced, a number of issues still require clarity and the events should act as a reminder to directors and boards that they must remain vigilant of their duties, particularly during difficult market conditions.
From a Corporate governance perspective, directors are unlikely to face personal liability where short term liquidity crisis has been caused by unforeseeable external shock such as this week's events.However, during times of financial liquidity turbulence, a board and its directors should always be careful to balance their duties to promote the success of the company on the one hand, with any duties to creditors on the other. In certain circumstances, trading company which cannot pay its debts as they fall due may also give rise to personal liability for directors, for example for 'wrongful trading'.
Last year, we summarised the UK Supreme Court's seminal decision on director's duties in insolvency, and set out some practical guidance for directors following the welcome clarification of their duties. Directors and boards should be engaging actively to ensure they understand the impact of the SVB UK rescue on their business, including seeking external advice where necessary.
You should also take care to keep detailed and accurate records of their meetings and decision making as events unfold.
Shop around for replacement debt facilities for the most competitive terms as lenders compete to win new business but also capitalise on an increased demand for venture debt facilities when negotiating terms. Lots of venture debt providers are already offering their services including, short- term financing or venture debt refinancing options.
Be prepared for new lender/investor due diligence by ensuring you have up to date and organised information on your business and accounting analysis including monthly burn rate, key customers and forecasts.
Bear in mind there will be prepayment fees/penalties due on the existing venture debt facility on any refinancing and some may only allow prepayment in full so any new loan will need to cover the existing exposure.
Consider approaching other lenders for additional funding such as working capital, trade/revenue/invoice financing facilities, which are being more widely available to early stage revenue based businesses. However, note that if such facilities are to operate alongside your venture debt facility, you will need SVB UK's consent and likely a subordination arrangement in relation to such facilities.
If you would like to discuss any of the issues raised above, contact one of the lawyers listed below, or email us on the link below.