(Bloomberg) — In the wake of the spectacular meltdown of Sam Bankman-Fried’s crypto empire, many investors are looking for early warning signs that may have foretold the contagion that was about to unfold. One possibility? Coinbase Global Inc.’s junk bonds.
Most Read from Bloomberg
Elizabeth Holmes Judge Proposes Texas Prison, Family Visits
Most Fed Officials Seek to Slow Pace of Interest-Rate Hikes Soon
China Covid Cases Jump to Record High, Topping Shanghai Outbreak
From Tom Brady to Shaq, FTX’s Celebrity Promoters May Be On the Hook for Damages
The largest US digital-asset trading platform has seen the price of its bonds plunge this year. In early January, the price for one of its most active notes was at about 92 cents. It then slid to about 77 cents in April before dropping to 63 cents amid the Terra Luna market crash in May. The bonds traded around 53 cents on the dollar — a level typically associated with distressed — in early morning trading in New York Wednesday, according to Trace bond trading data.
The drop is largely attributed to the so-called crypto winter that has leveled digital currency markets this year. But for some industry participants, the plunge was an omen of the carnage that would soon be unleashed.
The crypto exchange’s debt can be described as a “canary in the coal mine,” Bloomberg Intelligence credit analyst David Havens said in a phone interview. In particular, “something that really grabbed attention” back in May was Coinbase’s noting that clients could be treated as general unsecured creditors if the company went bankrupt.
This caught a lot of people by surprise and raised several questions, according to Havens: “Bankruptcy? What were they seeing, hearing, feeling that compelled the lawyers to include that statement at that time,” he said. And secondly: “Clients. Wait, what? We may be pari passu to bondholders, not segregated as we’d be at a regular exchange?”
At the time, Coinbase chief executive officer Brian Armstrong said the firm added the risk disclosure due to a new US Securities and Exchange Commission accounting requirement.
It contributed to the decline in the bonds and proved to be one of the indicators of what was to come.
The yield on Coinbase’s bonds is currently roughly between 13 and 15%. “We think this fully reflects ongoing crypto uncertainty and negative technicals, with few buyers willing to step in with what remains of 2022,” Havens wrote in a note Monday.
“The bonds are reflecting the animal spirits that are going on right now,” he said in the phone interview. “And that is the fear that has engulfed crypto.”
Any recovery in the debt, however, could be an early signal that the market is beginning to thaw, according to Havens. “But so far it’s been a painful ride,” he said. “We are sort of at a tipping point.”
Debt Recovery Near?
There may be a path to positive returns for Coinbase bonds, according to Havens. He points out that the crypto exchange has $5.4 billion of liquidity and is actively engaged with regulators, differentiating it from other exchanges like Bankman-Fried’s FTX and Changpeng “CZ” Zhao’s Binance.
“Coinbase should be buying back every bond they possibly can at the moment to demonstrate their commitment to a reasonable balance sheet,” added John McClain, a high-yield portfolio manager at Brandywine Global Investment Management. “Leverage has destroyed many of their competitors and they have a unique opportunity to very attractively reduce leverage.”
Long-time high-yield bond analyst Marty Fridson also shares a more positive outlook on the beaten-down bonds. Fridson, who is chief investment officer at Lehmann Livian Fridson Advisors LLC, thinks that BB rated notes trading at distressed levels, including Coinbase, can be better described by their ratings tier than their current price, according to a Nov. 15 PitchBook analysis.
He notes that Coinbase’s debt is trading at distressed levels while still holding one of the highest ratings in speculative grade. Moody’s Investors Service reports just a 0.79% one-year default rate for Ba issuers for the period spanning 1970 to 2021, his analysis showed.
“By contrast, I estimate the one-year average default rate on distressed issuers over the period from 1997 to 2021 at 38%, suggesting a massive mismatch between a BB rating and a distressed valuation,” he wrote.
The yield on Coinbase’s bonds is currently much higher than the 7.1% average yield that debt with similar ratings is trading at. That too suggests a dislocation between the price the market is setting for the debt versus how solid a bet credit graders think it is.
To be sure, the market is still fragile. The fallout from FTX’s meltdown has already set off a wave of bankruptcies and it’s likely too soon to say which players will still be here when the dust settles.
Underwriting anything tied to crypto is tough — except maybe crypto firms with hard assets like mining rigs or other infrastructure — said Hunter Hayes, portfolio manager of the Intrepid Income Fund at Intrepid Capital Management.
“There’s no intrinsic value,” he explained. “It’s like Tinkerbell — if people don’t believe in crypto’s utility, it disappears.”
Buy the Dip
Bullish equity managers are already diving in to buy the dip. Cathie Wood’s Ark Investment Management funds have bought more than 1.3 million shares of Coinbase since the start of November, as FTX started to topple. Meanwhile, the debt has rallied off its record low set earlier this month.
Year-to-date, the shares have fallen more than 80%, while Bitcoin is down about 65%. As of Tuesday’s close, it was estimated the shares need a staggering 782% rally if they are to reach their average 12-month price target from the beginning of 2022.
Elsewhere in credit markets:
General Electric Co. announced that about $9.3 billion of dollar-denominated bonds were validly tendered and not withdrawn at or before the early participation date as part of its recent buyback offer.
Rite Aid said about 33% of eligible notes were tendered by an early deadline after proposing to purchase as much as $200 million of its 7.5% senior secured notes due 2025
T. Rowe Price Group Inc., the $1.3 trillion global money manager, is cautious on US corporate debt given its exposure to overly hawkish Federal Reserve policy
The three-month London interbank offered rate for dollars climbed to the highest level since the financial crisis in an otherwise quiet day for the front-end of fixed income markets
For deal updates, click here for the New Issue Monitor
For more, click here for the Credit Daybook Americas
Borrowers piling into Europe’s debt market are selling bonds with the lowest average maturity in four years. Bonds sold this month by investment-grade issuers in the common currency have an average tenor of about 6.3 years, the lowest since December 2018.
Among Wednesday’s issuers were Severn Trent in the sterling market, while Continental AG, GSK Capital and Liberty Mutual Group offered euro-denominated deals
Foreign firms seeking funds from a niche German debt market may face a lukewarm reception from potential lenders stung by French care-home operator Orpea SA’s scandal
Indexes tracking the cost of insurance against defaults by European companies were on track for the lowest close since June
Yield premiums on investment-grade bonds in Asia outside Japan widened for a third straight day Tuesday, according to data compiled by Bloomberg.
Chinese developers are issuing more bonds under a state-guarantee program, suggesting a ramp-up in government support to ease the sector’s liquidity woes are bearing some fruit
China’s green-bond market has grown past $300 billion and a Bloomberg analysis reveals important gaps in disclosure and transparency, as it’s almost impossible to know how the money is being spent and whether it’s having the intended impact
–With assistance from Yueqi Yang.
Most Read from Bloomberg Businessweek
Elon Musk Keeps Quoting Elon Musk About His Genius
Tech Layoffs Send H-1B Visa Holders Scrambling for New Jobs
US Is Focused on Regulating Private Equity Like Never Before
Crypto’s Crash Is Helping a Few Couples Rekindle Their Relationships
Sears Limps Through What Could Be Its Final Holiday Season
©2022 Bloomberg L.P.
Related Quotes
The company tasked with locking down the assets of the failed cryptocurrency exchange FTX says it has managed to recover and secure $740 million in assets so far, a fraction of the potentially billions of dollars likely missing from the company's coffers.
Barry Silbert of DCG disclosed his company owes a US$575 million loan and a US$1.1 billion promissory note to its subsidiary Genesis Global Capital.
Coinbase CEO Brian Armstrong is reassuring users about the financial health of the Nasdaq-listed crypto exchange, following a tweet — since deleted — from CZ of Binance.
Microsoft Corp (NASDAQ: MSFT) agreed to buy a massive amount of clean energy to power a data center in Ireland, Bloomberg reports. Statkraft AS, Europe’s largest generator of renewables, will provide Microsoft with 366 megawatts of wind and solar energy, marking the supplier’s first power-purchase agreement in Ireland. The financial terms of the deal remain undisclosed. The renewable power for Microsoft in Ireland will come from six projects, including three wind and three solar located across t
Investors are worried that liquidity problems for crypto financial-services firm Genesis could spill over to its parent company, Digital Currency Group
(Bloomberg) — Binance Holdings Ltd. is aiming for a roughly $1 billion fund for the potential purchase of distressed assets in the digital-asset sector and will make another bid for bankrupt lender Voyager Digital, its Chief Executive Officer Changpeng Zhao said.Most Read from BloombergElizabeth Holmes Judge Proposes Texas Prison, Family VisitsMost Fed Officials Seek to Slow Pace of Interest-Rate Hikes SoonChina Covid Cases Jump to Record High, Topping Shanghai OutbreakFrom Tom Brady to Shaq, F
Concerns surrounding the growth of big tech do not apply to George Soros. The Federal Reserve's decision to aggressively raise interest rates to fight inflation, which is at a 40-year high, threatens to push the economy into a recession, many analysts say. This inflation, which is particularly impacting consumers, is a huge problem for the technology sector, because tech products and services are the first to suffer from spending cuts.
FTX lawyers say a substantial amount of assets are missing or stolen in latest bankruptcy proceedings; Cathie Wood still sees Bitcoin at $1 million
TikTok is hit or miss for accurate advice on finance topics. Although the "#finance" hashtag has amassed over 989 million views, there is just as much bad advice as there is good. But one user shared a tip that went … Continue reading → The post TikTok Exposed a Major Mistake You May be Making in Your Roth IRA appeared first on SmartAsset Blog.
After at least a decade of expansion, tech companies have been rattled by inflation along with a slowdown in spending from both consumers and advertisers.
Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B) CEO Warren Buffett once explained one of the metrics he watches for a reversal in the housing market is a reduction of housing starts. The Oracle of Omaha said in 2010 that sometimes a “bad number” for housing starts is a good thing for the market — in this case, he was referencing a cool housing market in which supply outstripped demand. The only way to solve that was to create more demand than supply by reducing the number of newly built homes
Income investors love their high-yielding dividends, but they’re not too happy when rough times force real estate investment trusts (REITs) to cut the dividends. Take a look at three REITs currently offering dividends of 10% or more and whether they can maintain these high yields in future quarters. Sabra Health Care REIT Inc. (NASDAQ: SBRA) is an Irvine, California-based healthcare REIT that specializes in skilled nursing, behavioral health and senior housing. Sabra Health Care owns 407 total f
Amazon.com Inc. (NASDAQ: AMZN) founder Jeff Bezos has been making his predictions for the U.S. economy clear. The billionaire told his followers on Twitter to “batten down the hatches” last month in response to a CNBC clip of Goldman Sachs CEO David Solomon predicting there’s a good chance of a recession. Bezos reiterated his predictions earlier this month during an interview with CNN saying, “The probabilities say if we’re not in a recession right now, we’re likely to be in one very soon.” He w
A “substantial majority” of Fed officials suggested earlier this month slowing the pace of rate hikes would soon be appropriate.
Not much is known about Bankman-Fried’s close confidant – the co-founder of both FTX and Alameda Research.
Earlier this month, crypto exchange FTX filed for U.S. bankruptcy protection in the highest-profile crypto blowup to date, after traders pulled billions from the platform in three days and rival exchange Binance abandoned a rescue deal. The collapse of FTX has sparked worries of a contagion effect on other firms already reeling from dampened crypto market this year. On Monday, Genesis had asserted it had no plans to file bankruptcy imminently, days after it suspended customer redemptions citing the collapse of FTX.
(Bloomberg) — A gauge of global stocks headed for a third straight gain on Thursday and the dollar fell after Federal Reserve meeting minutes showed support for tapering interest-rate increases.Most Read from BloombergElizabeth Holmes Judge Proposes Texas Prison, Family VisitsMost Fed Officials Seek to Slow Pace of Interest-Rate Hikes SoonChina Covid Cases Jump to Record High, Topping Shanghai OutbreakFrom Tom Brady to Shaq, FTX’s Celebrity Promoters May Be On the Hook for DamagesEuropean stock
(Bloomberg) — Investors are being sounded out by Warren Buffett’s Berkshire Hathaway Inc. about the sale of a potential multi-part yen bond offering, according to people with direct knowledge of the matter. Most Read from BloombergElizabeth Holmes Judge Proposes Texas Prison, Family VisitsMost Fed Officials Seek to Slow Pace of Interest-Rate Hikes SoonChina Covid Cases Jump to Record High, Topping Shanghai OutbreakFrom Tom Brady to Shaq, FTX’s Celebrity Promoters May Be On the Hook for DamagesT
(Bloomberg) — The world’s biggest stock-market slump is testing the resolve of Vietnam’s investing masses. Most Read from BloombergMalaysia Latest: Muhyiddin Turns Down King on Unity GovernmentElon Musk's 2022 Wealth Loss Exceeds $100 Billion for First TimeHow Bad Will Housing Get? The Chill Gripping a Once-Hot Market Offers a TestCrypto Brokerage Genesis Is Said to Warn of Bankruptcy Without FundingBillionaire Investor Carl Icahn Is Betting Against GameStop SharesA government crackdown on real
Yahoo Finance Live anchors discuss the bullish analyst calls on Tesla stock out from Citi and Morgan Stanley.


Shop Sephari

Leave a Reply