Not all Silvergate shares are created equal. How to play Crypto Bank.
Once touted by Wall Street as a well-regulated way to play the once-booming digital resource space, the fortunes of Silvergate (ticker: SI) have taken an abrupt turn. Cascading crypto prices, regulatory pressure and a string of bankruptcies across the sector have weighed heavily on the Federal Reserve member bank, which has lost more than 90% of its market value in the past six months.
It all came to a head last week. The bank said asset sales to maintain liquidity amid a banking run late last year could leave it “less than well-capitalised”, that it was assessing its ability to continue as a going concern and that it was “in the process of recovery”. -evaluates its businesses and strategies. The lender also noted regulatory scrutiny. Not good.
As if it couldn’t get worse, high-profile clients such as broker Coinbase Global (COIN) and stablecoin issuer Circle Internet Financial have dropped the group, and Silvergate said last Friday it was discontinuing its flagship instant interbank transfer service, SEN.
The move marked “a serious sign,” analysts David J. Chiaverin and Brian Violino of Wedbush said in a Monday note. “We believe that the liquidation of SEN may signal that Silvergate may consider liquidating the business,” they said.
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Wedbush’s $4 price target on Silvergate’s common stock represents the shares trading at 80% of the estimated liquidation value per share — $5 — considering “the time value of money and an extended timeframe to resolve Silvergate’s affairs.” The broker estimates that, in the event of the bank’s failure, it could take one to two years before the shareholders see a penny from liquidation.
Silvergate looks like it’s on the brink. Chiaverin and Violino rate the bank Underperform, as do most other Wall Street analysts who have not withdrawn coverage of the company entirely. This is a risky name for investors to touch.
But there could be what Wedbush calls a “capital structure arbitrage opportunity” at play.
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That’s because Silvergate, in addition to its more common ordinary shares, also has series A preferred shares under the ticker SI.PRA. In the event of liquidation, dissolution or liquidation of the company’s business, holders of Silvergate’s preferred stock are entitled to receive assets before common stockholders.
“Silvergate’s preferred stock trades at 20 cents on the dollar despite having a liquidation preference that is higher than common stock,” Chiaverin and Violino said. “This could represent an interesting opportunity for capital structure arbitrage, in our view. Either the common stock should trade lower, or the preferred should trade higher based on our analysis of Silvergate’s balance sheet in a liquidation scenario.”
Interesting. But investors beware.
Write to Jack Denton at [email protected]
