The failure of Silicon Valley Bank (SVB) has sent capital markets reeling and raised concerns about longer-term impacts to the banking sector and overall economy — and adds one more unwelcome variable to the skilled nursing financing outlook.
“It’s not like we were in a market where money was flowing from the banks like it was three years ago; we were already in a somewhat tight credit market,” Walker & Dunlop Managing Director Mark Myers told Skilled Nursing News. “ … It’s not going to be helpful, that’s for sure.”
After SVB, a large lender to technology startups, announced it would sell $2.25 billion in new shares to bolster its finances, customers panicked and withdrew their funds in large amounts – causing the bank’s stock to plummet by 60% last Thursday.
On Friday, California regulators intervened and placed the bank in receivership under the Federal Deposit Insurance Corporation (FDIC). On Sunday, Signature Bank in New York, a popular funding source for cryptocurrency companies, was shuttered over so-called“contagion” fears related to SVB.
By the end of the day on Sunday, the nation’s top bank regulators announced the FDIC and Federal Reserve would fully cover deposits at both failed banks and rely on Wall Street and large financial institutions to cover the bill.
“All customers who had deposits in these banks can rest assured they will be protected and they’ll have access to the money as of today,” President Joe Biden said in a speech on Monday.
Although the situation seems to be under control for the short-term, industry stakeholders fear it could have long-term consequences for the economy and the nursing home sector.
Rising interest rates, coupled with current market challenges such as staffing shortages and inflation, have led to more distressed properties coming up for sale – and operators having a harder time closing deals as capital has become more expensive and less accessible.
Beth Mace, chief economist at the National Investment Center for Seniors Housing & Care, said that since the Fed started increasing interest rates a year ago, banks have been more cautious in their underwriting and it has become more expensive to borrow.
“The Fed is in an awkward position because it is working to combat inflation and the one tool it has is to increase interest rates in an indirect way —slowing the overall economy — with the idea that it’s going to slow demand, which should reduce price pressures and inflation,” she said.
To absorb the impact of the closures, she said, the Fed will likely continue its path of rising interest rates, but the central bank may not raise rates as much as initially planned.
“There had been talk that the next rate increase would be a 50 basis point increase,” she said. “I kind of doubt that now. I’m imagining a pullback of like 25 basis point chunks.”
Mace predicted that if a recession does occur, it will be late this year or early next year. If it does, it will exacerbate the impact already felt by the nursing home industry from inflation, and the rise in the cost of goods, insurance, and wage rates.
“The impact has already been felt because of the difficult challenge of trying to borrow money for construction or for even just daily operations business,” she said.
Although lending activity had begun to pick up after the impact of the pandemic, there are still big banks that are unwilling to lend to the nursing home sector, Myers said. The SVB situation will only make it more likely that banks will seek to increase their reserves and further tighten lending, he believes.
“We have a smaller consortium of lenders to begin with, and then some of them have some troubles, it lessens the options that were already somewhat limited,” he said.
But he too noted the potential silver lining of a possible slowdown in the Fed’s interest rate increases. The SVB situation calls attention to the plight of banks that are holding significant bond portfolios, the value of which have been “severely hurt” by interest rate expansion, Myers noted.
“I think a positive that could come out of it is if the Fed saw this happen and decided to back off on these interest rate increases which are hurting us as a whole,” he said.
Given how important SVB was to the tech startup community based in Silicon Valley, the bank’s failure could most directly affect the technology and venture capital landscape, including health care-focused innovators.
Katie Schmitz, director of Ziegler’s Principal Investments & Fund Management team, said that from a long-term perspective, the impact is probably going to be felt most strongly in the venture debt landscape – not necessarily real estate lenders – which may compound a broader equity shift away from tech startups.
“Either other banks are going to step up to the plate to begin providing that type of financing, or companies are going to likely have to shift capital raising to additional equity and equity-like financing options,” she said.
