Small California banker Silvergate Capital Corp (SI) will be selling a new issue of preferred stock. SI has no other outstanding issues of publicly traded preferred stock. This is a small bank with assets of $7 billion.
The terms will be standard banking terms–non-cumulative and qualified. The shares will be optionally redeemable in August, 2026.
The permanent ticker will be SI-A–the OTC grey market ticker is not yet known.
The preliminary prospectus can be read here.
I think it is SIVCV for now.
Well I can’t believe it, but this is another one of the few names I know pretty well. Real quick synopsis, yes Crypto is their customers’ business, but in the end it’s just a bank. They run a separate network that Institutional clients can use called the SEN Network. It allows customers to send Fiat 24/7 around the world. The key is in order for clients to use the network, they have to keep deposits with the bank. The growth of their Crypto customers deposits has lowered their Cost of Funds to 0%. They then invest in extremely high quality low yield short-term securities. Hence, the risk to equity/preferred investors is a lot less than the Crypto market itself. Unfortunately my first article at SA is behind the Pro site paywall, but I did right a couple of follow ups that are regular site if interested. The Equity is very expensive given its growth, so I’ll be interested in the coupon. Basically this is about adding cheaper capital to meet Fed requirements due to the rapid growth in deposits. I.e., a quality problem to have. All the best. –NCSI
I’m just trying to understand the basics of their balance sheet. Are their deposits (liabilities) in crypto and their assets in fiat? It sounds like that from your description but I’m assuming that’s not true as the rapid rise in the value of crypto has seemed to benefit them rather than bankrupt them.
Their balance sheet is all fiat. No Crypto. The Crypto risk comes from their clients exposure as down markets with lower volatility has lead to decreased deposits at SI. Now they have started a program called SEN Leverage since I started following the company, in which SI is lending using Crypto as collateral to their clients. In this manner we can say that they we are starting to take more direct exposure to Crypto. I’d just point out though that these are institutional clients vs say a BitMex risking on a bunch of retail levered traders. I’d also argue though that overall their balance sheet is more conservative than any Investment Grade bank out there. They have a tiny amount of real loan exposure which is why there’s such a small provision and it often doesn’t change from Q-to-Q. Hence, I think the book value is fairly secure, so even if Crypto imploded completely to zero, SI should still be standing at the end. Thus, I like this preferred, but admit I was hoping for a higher coupon. All the best. –NCSI
Agreed, I think the common is too expensive on this one, so interested in the preferred. Need the capital due to deposit growth, regulatory capital ratios far exceed minimum thresholds.
Am I correct that you publish at SA as Non-Correlating Stock Ideas?
Quite a chart on the equity. I can understand from the SI perspective why they don’t want to issue common at this time. Let those yield hungry “dumb money” guys give us some cheap capital. Question I ask myself is whether 5.375% is adequate compensation for the risk of the business.
My shallow dive says it may not be. Still, I won’t be surprised to see it trade at 26 before long.
The presence of so many heavy hitters in the syndicate notwithstanding the relatively small size of the issue speaks to syndicate members long term interest in raising capital and doing other deals with the company.
Yes you’ve got my handle correctly at SA. I was hoping for a 6% coupon, but considering the low 4’s were seeing in Bank offerings these days, I guess this coupon reflects some increased risk. I’ll be in there, but not as much as I liked that METCL baby bond offering.
@NCSI
At what price METCL is worth purchasing?
I like this one – crypto payments network that has benefit of operating as a regulated bank (very difficult to obtain regulatory approval for this type of business model).
From 10-K –>
Regulatory Complexity as a Barrier to Entry: Providing infrastructure solutions and services to the digital currency industry would require specialized compliance capabilities and a management team with a deep understanding of both the digital currency and the financial services industries.
Network enables zero cost demand deposits that are invested primarily in agency securities. While the margin on that trade is very low, scale helps and the bank earns fees on the exchange transactions.
Crypto aspect may drive higher coupon, which will be nice for a change. Lower risk given that SI is a payments network and deposits from network are invested in liquid securities.
In my mind, this is way to play and benefit from crypto WITHOUT paying absurd forward multiples of COIN or incurring the volatility of the underlying crypto currency. Regulatory compliance and supervision a benefit, along with network payment aspect.
Yes, what Josh in DFW said. –NCSI
This is not your typical bank. They are a player in the crypto market but the risks are hard to understand…at least for me. Unless the coupon is generous, not sure if it is worth the risk.
I am a technical person. I work for ISP/telecom. I was involved with bitcoin/litecoin, I ran a litecoin mining pool, I used to have multiple rigs with video cards mining away, I was involved with bitcointalk.org years ago, I have discussed crypto to death several years ago, etc.. and etc…
Even I don’t understand what they are up to and I am right there with you with a complete lack of understanding of their risks. This is all new to everyone and I feel the wonder crypto kids will make the same mistakes the banks did in the past. Underestimate risk in their models and some tiny 2% chance of something bad happening will happen.
Not even considering all the computing power that’s gonna be needed to mine any exponential growth in crypto. That’s gonna take a helluva lotta windmill and solar farms, ain’t it?
Nevermind all those gerbils we’ll have pedaling like mad on tiny bicycles, sparks flying off their little wheels.
JMO
5.625% will be the neighborhood according to EarlyBird
Low investment grade rating so that seems pretty good if it actually holds.
Heard Silvergate priced 5.375%