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Coinbase debt was ‘canary in the coal mine’ for crypto meltdown

by News Desk
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Following the epic meltdown of Sam Bankman-Fried’s crypto empire, many investors are looking for early warning signs that could have predicted the epidemic that was about to unfold. one possibility? Junk bonds of Coinbase Global Inc.

Bond prices on America’s largest digital asset trading platform have plunged this year. In early January, the price of the most active banknote was around 92 cents. It then fell to about 77 cents in April before falling to 63 cents in May’s Terra Luna market crash. In early Wednesday trading in New York, the bond traded at about 53 cents on the dollar, according to Trace bond trading data.

The decline is largely due to the so-called crypto winter, which has leveled the digital currency market this year. But for some industry insiders, the plunge portended the carnage to unleash soon.

Bloomberg Intelligence credit analyst David Havens said in a phone interview that cryptocurrency exchange debt can be described as a “canary in a coal mine.” In particular, “what really caught our attention” in May was Coinbase’s remark that clients could be treated as general unsecured creditors if the company went bankrupt.

According to Havens, this surprised many people and raised some questions. It was what they saw, heard and felt that compelled the lawyers to include that statement at the time,” he said. And secondly, “Clients. Wait, what? Aren’t we supposed to be on par with bondholders instead of being segregated like normal exchanges are?”

At the time, Coinbase CEO Brian Armstrong said the company added risk disclosures due to new accounting requirements from the U.S. Securities and Exchange Commission.

It contributed to bond declines and proved to be one of the indicators going forward.

Coinbase bonds currently yield around 13-15%. “We believe this perfectly reflects the ongoing crypto uncertainty and negative technicals, with few buyers willing to intervene in what remains of 2022,” Havens said on Monday. wrote in the memo of

“Kizuna reflects the animal spirit that is happening right now,” he said in a phone interview.

But the recovery in debt could be an early signal that the market is starting to unravel, Havens said. “But so far it’s been a painful road,” he said. “We are kind of at an inflection point.”

Is debt collection coming soon?

According to Havens, Coinbase bonds may have a path to positive returns. He has $5.4 billion in liquidity on cryptocurrency exchanges and is actively involved with regulators, including Bankman-Fried’s FTX and He Changpeng “CZ” Zhao’s Binance. It points out that it draws a line with exchanges.

“Coinbase needs to buy back all bonds it can at this time to demonstrate a reasonable balance sheet commitment,” said John McClane, high yield portfolio manager at Brandywine Global Investment Management. There is,” he added. “Leverage is destroying many of our competitors and we have a unique opportunity to reduce leverage that is very attractive.”

Longtime high-yield analyst Marty Fridson also shares a more upbeat outlook on the slump in bonds. Fridson, chief investment officer at Lehman Livian Fridson Advisors LLC, said his BB-rated bonds, including Coinbase, are more likely to fare better in the rating tier than they are at current prices, according to a Nov. 15 Pitchbook analysis. I think I can explain it properly.

He said Coinbase’s debt traded at tight levels while holding one of the highest speculative-grade ratings. Moody’s Investors Service reports that his one-year default rate for his Ba issuers from 1970 to 2021 was just 0.79%, his analysis shows.

“By contrast, we estimate an average one-year default rate for distressed issuers over the period 1997 to 2021 of 38%, suggesting a significant mismatch between BB ratings and distressed valuations. I do,” he wrote.

Currently, Coinbase bond yields are much higher than the average yield of 7.1% for similarly rated bonds trading. This, too, suggests a disconnect between the price the market is setting for debt and how solid credit raters think it is.

Admittedly, the market remains fragile. The fallout from the FTX meltdown is already causing a wave of bankruptcies. It’s too early to say which players will still be here when the chaos subsides.

Hunter Hayes, portfolio manager of Intrepid Income Fund at Intrepid Capital Management, said that with the exception of crypto companies with hard assets such as mining rigs and other infrastructure He says it’s hard to accept things.

“It has no intrinsic value,” he explained. “It’s like Tinker Bell. If people don’t believe in the usefulness of cryptocurrencies, they will disappear.”

buy dip

Bullish stock managers are already jumping into the fall. Kathy Wood’s Ark Investment Management Fund has bought over 1.3 million shares of Coinbase since the beginning of November when FTX began to go bankrupt. Debt, meanwhile, has recovered from the lowest level recorded earlier this month.

Year-to-date, stocks are down more than 80% and bitcoin is down about 65%. As of Tuesday’s close, it’s estimated that the stock will need a staggering 782% rise to hit its 12-month average price target from early 2022.

Elsewhere in the credit market:

Americas

  • General Electric Co. announced that as part of a recent buyback offer, approximately $9.3 billion of dollar-denominated bonds were validly auctioned and not withdrawn before the early participation date.
  • After proposing to buy as much as US$200 million in 7.5% senior secured bonds with maturity in 2025, Rite Aid said about 33% of eligible bonds had been auctioned by early deadlines.
  • T. Rowe Price Group, a $1.3 trillion global asset manager, is wary of U.S. corporate bonds as it is exposed to overly hawkish Federal Reserve policies.
  • It was a quiet day for the bond market front end, but the three-month interbank offer rate for the dollar in London rose to its highest level since the financial crisis.

EMEA

  • Borrowers flooding the European bond market are selling bonds with the lowest average maturities in four years. The average maturity of common currency bonds issued this month by investment grade issuers is about 6.3 years, the lowest since December 2018.
  • Among Wednesday’s issuers were sterling marketer Severn Trent, while Continental AG, GSK Capital and Liberty Mutual Group presented euro-denominated deals.
  • Foreign companies seeking funding from the niche German bond market could face a lukewarm response from potential lenders plagued by the scandal of French nursing home operator Orpea SA.
  • An index that tracks the cost of insurance against European corporate defaults has made good progress toward its lowest level since June.

Asia

  • Yield premiums on investment-grade bonds in Asia outside Japan widened for the third day in a row on Tuesday, according to data compiled by Bloomberg.
  • Chinese developers are issuing more bonds under government guarantee programs, suggesting increased government support to ease liquidity problems in the sector is bearing some fruit.
  • Disclosure as China’s green bond market has grown to over US$300 billion and Bloomberg’s analysis makes it almost impossible to know how the funds are being used and have the intended impact. It has become clear that there are significant gaps in transparency and transparency.

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