Chinnapong
Both the bulls and the bears knew this was coming, but Silvergate’s (NYSE: SI) market update last Thursday that deposits fell by $8.1 billion, about 70% of its total deposits, was still a shock. It was a heavier pull rate than some During the Great Depression, banks suffered a crisis of confidence. After the explosion of a number of cryptocurrencies last year, managing counterparty risk has become one of the most dominant topics for crypto companies. 2023 started with Gemini, a major cryptocurrency exchange and client of the Silvergate Exchange Network. open letter to the provider of his Earn product after withdrawal has been suspended for more than one month without any renewal.
Silvergate is laying off 200 employees, about 40% of its total workforce, recording a $198 million impairment charge on assets acquired from Diem, Meta’s former Facebook stablecoin project, and a $5.2 billion forced sale is preparing to realize a loss of 718 million dollars. your debt The company still held total debt securities at fair value of $5.6 billion. These are safer US government and agency backed loans.
Silvergate’s 5.375% Non-Cumulative Series A Preferreds are now trading at a 55% discount to redemption value. I think these are the best ways to play up any potential recovery for those still on the rise at the company. Why? They currently yield 12% with a preferred trade of $11.15 against a coupon of $1,344 paid quarterly. In the case of bears for these, an announcement would have been made that all payments included in Thursday’s update had been completely stopped.
Preferred Trades at 45 Cents on the Dollar
Holding the coupon against the best time to announce a cut helped Silvergate stabilize the broader confidence of depositors, shareholders and regulators. In addition, the benefits cost Silvergate just $2.7 million per quarter, a relatively small amount for a business that generated $100 million in cash flow from operations in the third quarter of fiscal 2022. The company also had cash and equivalents of $4.6 million. Thursday update. That outweighs deposits, which fell from $11.9 billion to $3.8 billion. Thus, preferred holders can be permanently safe from suspension of dividends.
Bears would be right to note Moody’s downgrade of long-term deposit rating of its main operating unit, Silvergate Bank, from Baa2 to Ba1. This is essentially a downgrade from investment grade to junk status. The most near-term effect of this discount on the preferreds may be to inhibit the level of institutional participation, but this does not change the overall long-term value potential of the preferreds.
Looking for an Alpha
The play for alpha here is a Series A return of $25 over the next three years amid improving sentiment and the current crisis mode of industry easing. This represents over 100% capital growth with an additional 12% per year from coupon payments. Just to be clear, I think the main job is poised to drop significantly, but I’m leaning toward starting in the preferred positions. The preferreds’ main risk remains their non-cumulative clause, though that still hasn’t prompted Silvergate to stop.
Revenue And Earnings For Certain Declines
With Genesis backed by the Digital Currency Group, Gemini is a bad omen for the spit industry. DCG has often been described as one of the most storied cryptocurrency institutions. While there have been some rumors of Genesis filing for bankruptcy, the current freeze points to a continuing crisis affecting sentiment and the broader pace of Silvergate’s operations.
The situation is not catastrophic. Silvergate Exchange Network averaged $1.3 billion in daily volume in the fourth quarter, up from $1.2 billion in the third quarter. Leveraged liabilities for the network decreased from $1.5 billion to $1.1 billion in the third quarter. Deposits are expected to continue to fall as the broader industry continues to recover from the fourth-quarter disruption. Bank of America expects earnings per share of $0.67 for the full fiscal year 2023, down nearly 90% from 2022. That compares with the consensus that EPS came in at $2.46 before the fourth-quarter disruption.
Overall, revenue and EPS will decline, but the company is still expected to make a profit. This bodes well for the owners of the preferred. The Commons could very well rally once volatility calms down and with broader positive stock market sentiment, but for now it looks like things could get worse in the interim. The favorites are doing a good job here and I will probably be taking over at the end of January.