SVB Financial Group said Tuesday that it expects to report a rise in fourth-quarter credit losses as well as losses in 2009 on a $68.9 million nonperforming loan to a private-equity firm co-founded by the retired football players Harris Barton, and Ronnie Lott.
The $7.5 billion-asset Santa Clara, Calif., company disclosed in a Securities and Exchange Commission filing that it is exploring an arrangement with the players' firm, HRJ Capital Holdings LLC in Woodside, Calif., under which SVB or one of its units would provide management services to a number of HRJ's investment funds.
In return, SVB would use the management fees to repay a portion of the debt owed by HRJ. SVB would also convert a portion of the debt owed by HRJ into limited partnership interests. HRJ would repay the remaining debt in a workout arrangement. The agreement is subject to the approval of certain HRJ limited partners. HRJ's primary loan from SVB is a "warehouse line" used to make investments before the private-equity firm secures commitments from its limited partners. SVB said in the filing that it expects nonperforming loans and chargeoffs to rise in both the fourth quarter and next year as a result of HRJ's problem loan but would not say by how much.
In an e-mail Tuesday, the company wrote, "HRJ's situation is unusual among SVB's clients … ; SVB has only one other warehouse facility in place, in the amount of $30 million. To date, there have been no signs of any issues with that loan, or the management company responsible for it."
Aaron J. Deer, an analyst at Sandler O'Neill & Partners LP in San Francisco, said SVB's credit quality has held up well so far — it reported $6.3 million of net chargeoffs for the third quarter, or 0.52% of average loans — because the company did not make many real estate loans. However, Mr. Deer said SVB's credit costs could grow due to problems with its private-equity borrowers. About 21% of SVB's $5.3 billion loan portfolio is in loans to private-equity firms, though many of these loans are "capital calls," or short-term loans made to firms that have prior commitments from their limited partners.
Boenning & Scattergood Inc. analyst Jason O'Donnell said in a research note Tuesday that SVB's provision for the fourth quarter is likely to be "significant" because of the problem HRJ loan. If half of the loan is charged off, Mr. O'Donnell said, he estimates a $51.3 million provision for the quarter and earnings per share of 72 cents. He forecast a $65.7 million provision for 2009, which could grow after SVB posts fourth-quarter results.