Stocks From Silvergate Are Not All The Same. How To Play Distressed Crypto Banks.

Since the cryptocurrency-focused bank warned last week that a financial crisis is threatening its viability, Silvergate Capital SI -2.22% stock has all but plummeted. Yet, not all of the company's shares are created equally, and this may present a chance.

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Wall Street had previously hailed Silvergate (ticker: SI) as a well-regulated means to participate in the formerly burgeoning digital asset market, but things have suddenly changed. The Federal Reserve-member bank has lost and over 90% of its capitalisation in the last six months due to cascading crypto prices, regulatory constraints, and a string of bankruptcy proceedings throughout the sector.

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Last week, everything to a head. The bank said it may be "less than well-capitalized" as a result of asset sales to maintain liquidity during a bank run late last year, that it is assessing its ability to stay in business, and that it is "in the process of reviewing its businesses and strategies." The lender also mentioned regulatory scrutiny. Really bad.

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As if things couldn't get any worse, prominent clients including stablecoin issuer Circle Internet Finance and broker Coinbase Global COIN -0.67% (COIN) have left the organization, while Silvergate said last Friday that it was ending SEN, its flagship offering for fast interbank transfers.

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Wedbush analysts David J. Chiaverin and Brian Violino referred to the action as "a worrisome omen" in a note they published on Monday. "We think the SEN's termination could be an indication that Silvergate may be thinking about winding down its activities," they declared.

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Taking into account "the time value of money and an elongated timeframe to settle Silvergate's affairs," Wedbush's $4 price target on Silvergate's common stock symbolizes the shares trading at 80% of the approximate liquidation value per share, which is $5. The broker estimates that, in the case of the bank's failure, it could take one to 2 years for stockholders to see a nickle from liquidation.

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Silvergate appears to be in danger. In line with the majority of Wall Street analysts who haven't completely stopped covering the company, Chiaverin and Violino assess the bank as Underperform. For investors, this is a risky name to handle.

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Wedbush, though, suggests that there might be a "capital structure arbitrage opportunity" at work.

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This is due to the fact that Silvergate also trades series A preferred shares under the ticker SI.PRA in addition to its less popularly held common shares. Holders of Silvergate's preferred stock are eligible for assets before common shareholders in the event that the company's operations are liquidated, dissolved, or wound up.

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Chiaverin and Violino stated that despite having a liquidation preference that is senior to the common equity, Silvergate's preferred stock is only worth 20 cents on the dollar. "In our opinion, this could be a worthwhile capital structure arbitrage opportunity. Considering the results of our research of Silvergate's balance sheet under a liquidation scenario, either the common stock should trade at a lower price or the preferreds should trade at a higher price.