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Crypto is tanking, and so is debt that is connected to it. Coinbase’s inaugural high yield bond dropped below 60 cents on the dollar this week, while the notes that MicroStrategy issued last June to fund the purchase of Bitcoin fell below 80.
The moves come amid a brutal selloff not just in the flagship cryptocurrency, but in other major coins as well. Both Bitcoin and Ethereum are down by more than 50% from their November highs, while so-called stablecoin TerraUSD has lost more than 75% of its value.
For credit investors, it’s yet another sign that the market is dialing back on some of the exuberance it displayed last year.
Nowhere was that enthusiasm more on display than in MicroStrategy’s issuance of $500m 6.125% SSNs due 2028, which it used to add to its already substantial Bitcoin holdings (the deal is also partly collateralized by Bitcoin and other crypto acquired after the deal was priced).
“We were not a fan of issuing debt to buy Bitcoin,” said a portfolio manager. “This confirms my initial fears about the strategy.”
The Ba3/B- notes fell as low as 71.93 today, for a 12.92% yield to maturity. That’s a significantly wider yield than average for that ratings category, and wider even than the 12.58% average yield for bonds rated triple-C and below.
“People had raised eyebrows when [MicroStrategy] brought the deal,” said another portfolio manager. “It's certainly one of the standout structures in the high yield bond market.”
Ouch
This year, MicroStrategy followed up with a $205m term loan arranged by Silvergate Bank, which is collateralized by Bitcoin and has a margin-call structure based on the cryptocurrency’s price.
Now, with Bitcoin plummeting, the value of that collateral threatens to drop below the required LTV ratios laid out in the credit agreement.
Phong Le, MicroStrategy’s CFO, said during the company’s earnings call this week that the threshold to add more collateral hits when Bitcoin falls below $21,000. The cryptocurrency is bucking up against those levels, having already hit lows of $25,845 this week.
The company is putting on a brave face. Its CEO, Michael Saylor, took to Twitter to note that the company could stump up some of the 115,105 Bitcoin it has not yet pledged as collateral before having to draw on other forms of collateral.
HODL onto your hats
Whereas many see MicroStrategy as a big bet on Bitcoin itself (the stock often seems to track the whims of the cryptocurrency), Coinbase has more diversification and more liquidity to deal with these bouts of volatility, sources told 9fin.
Indeed, Coinbase has some $7.12bn of cash and cash equivalents on its balance sheet. However, it also reported just $1.2bn of revenue in the latest quarter, significantly below estimates. (For full financials clients can click here).
Furthermore, the company stated that in a prolonged downturn for crypto, its 2022 adjusted EBITDA would fall to negative $500m.
Coinbase is rated Ba2/BB+. It has two outstanding bonds, both of which are trading significantly wide of the average 6% yield for that ratings category.
To be fair, the sell-off in low-coupon, long-duration bonds is not unique to Coinbase, and many investors remain optimistic about its credit story. Some told 9fin that non-trading revenue and a reduced marketing spend could help offset some of the company’s losses.
And even as the stock price has fallen as low as $40.83 per share — well below its initial trading price of $328.28 — the company stated on its earnings call that it would not use its cash on hand for buybacks or dividends.
“From a bondholder’s perspective that’s positive, because the biggest question we have is what do they do with that $7bn of cash,” said the second portfolio manager. “We’re sitting in a company that has cash massively in excessive of debt, so there is a cushion there.”
