Primer on Timely Replacement of SVB & Signature Bank Letters of Credit for Tenants and Subtenants

Many commercial tenants (and subtenants) previously posted letters of credit (LC) issued by Silicon Valley Bank (SVB) and Signature Bank (SB) to collateralize their (sub)lease obligations. Now that SVB/SB clients have secured their deposits thanks to the efforts of the Fed this weekend, they should next anticipate receiving a notice from their (sub)landlords demanding replacement of the LC from a new bank that meets certain criteria (e.g., solvency, rating, net worth and/or market capitalization thresholds). Many leases provide for a 10 business day timeframe to deliver a replacement LC, so taking prompt action is necessary to ensure they stay in good standing.

Timely replacement of the LC is necessary to avoid a technical default, and of particular importance if a tenant negotiated a right to a reduction, or "burndown," of the collateral after the passage of a certain amount of time. If there is any technical default, the lease will likely void the right to the reduction, which means the tenant company could lose access to that additional operating capital until the entire term ends.

Banks have been working over the weekend to strategize how they can help facilitate requests from commercial tenants to replace SVB/SB LCs. Below is some information about the process I gathered over the weekend that will hopefully help ease and expedite the process:

1. Expect Stringent Underwriting Requirements. The new issuing bank must ensure the new client will be solvent for at least 90 days, since if a company becomes insolvent during the 90 preference period preceding a bankruptcy, the bankruptcy court could void the collateral lien. Prepare to present full financial records, including bank statements, balance sheets/P&Ls, validation of cash burn and records of deposits.
2. Expect More Stringency for Pre-Profit Companies. If the tenant company is pre-profit (PE, VC-backed, or funded by friends & family), the bank may insist on even more comfort, including evidence of solvency for 120-150 days and/or posting of 115-125% collateral for the subject LC funds. Also, if the company cannot satisfy these terms, the bank might expect some personal guaranty, which might be challenging to get from a principal of a venture fund.
3. Package Company Documents - Piggyback Prior Deal. As part of its underwriting process, the new issuing bank must confirm the client is in good standing, there is evidence of approval of the LC according to the company governing documents, and proper authorization of the signatories. The good news is that if a tenant recently obtained the existing SVB/SB LC, they probably already went through the pains of gathering the same formation documents, evidence of good standing and signature authorization (typically in bylaws or operating agreements, meeting minutes, or through officer's certificate). If those are still valid, tenants can efficiently provide these to the new issuing bank. Finally, have company signatories to have their personal identification information (SS#, drivers license) ready to provide to the bank to avoid any delays in processing. To note, all of the above should only be shared via encrypted methods or in person.
4. Expedite Production and Approvals - Piggyback Again. Tenants should send a copy of their existing LC, together with the requirements for an issuing bank from the subject lease to produce a draft replacement LC to provide to the Landlord for review. Landlords will expect the same benefits granted under the SVB/SB forms, including fax presentment, and the right to draw upon presentment of a statement they are the beneficiary (without having to substantiate the subject default). Banks working on accommodating requests for replacement LCs should hopefully be taking this into account. Also, tenants should send the lease terms regarding the LC and any rights to a reduction, to the issuing bank, as these may not be expressly included in the existing LC and may help for underwriting purposes, particularly if a reduction will be available soon and there is not much term length remaining.

Please contact me if you have any questions about this process or your situation. I am actively gathering contacts with bankers to provide introductions to any former SVB/SB clients for this purpose.