March 9 (Reuters) - SVB Financial Group (SIVB.O) shares slumped 42% on Thursday, a day after the lender launched a $1.75 billion share sale to shore up its balance sheet and navigate declining deposits from startups struggling for funds amid increased spending.
The shares were on track for their biggest loss in 25 years as the bank said venture capital funding could remain constrained in the near term, while Chief Executive Greg Becker said cash burn by clients increased in February.
A crucial lender for early-stage businesses, SVB is the banking partner for nearly half of U.S. venture-backed technology and healthcare companies that listed on stock markets in 2022.
"While VC (venture capital) deployment has tracked our expectations, client cash burn has remained elevated and increased further in February, resulting in lower deposits than forecasted," Becker said in a letter to investors.
The funding winter is a fallout of a relentless increase in borrowing costs by the Federal Reserve over the last year as well as elevated inflation.
VC investors are also more hesitant to sign big checks due to a rout in the stock market, particularly in the shares of high-flying technology firms.
In a separate deal, SVB said private equity firm General Atlantic will buy $500 million worth of its shares.
Meanwhile, ratings agency Moody's downgraded the bank's long-term local currency bank deposit.
Natalie Trevithick, head of investment grade credit strategy at investment adviser Payden & Rygel, said the bank's bonds were not doing as poorly as the equity.
"Future performance is going to be news dependent but I don't expect them to properly recover in the near term. It's not quite cheap enough for a lot of buy-the-dip people to come back in," Trevithick said.
California-based SVB has sold $21 billion of its securities portfolio, which would result in an after-tax loss of $1.8 billion in the first quarter.
Funds raised from the sale will be re-invested in shorter-term debt and the bank will double its term borrowing to $30 billion.
"We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients," Becker said.
"When we see a return to balance between venture investment and cash burn – we will be well positioned to accelerate growth and profitability," he said, noting SVB is "well capitalized".
The bank also forecast a "mid-thirties" percentage decline in net interest income this year, larger than the "high teens" drop it forecast seven weeks earlier.
