Harmonic Hallucination stocks and cryptocurrencies keep giving.
By Wolf Richter for WOLF STREET.
Core Scientific, the Austin-based Bitcoin miner and crypto hosting platform — one of the largest publicly traded cryptocurrency mining companies with data centers in several states, including Texas — filed for Chapter 11 bankruptcy on December 21, after nearly 11 months. Exactly from being offered to the public through the merger with SPAC on January 20, 2022.
On the day the merger with SPAC was completed on January 20, the market value of the stock was $2.8 billion, already sharply down from the peak of $4.5 billion after the merger was announced but before the merger was completed. Today, forget it. Stocks by a few cents (data via YCharts):
On November 22, it reported a loss of $435 million in the third quarter, on revenue of $162 million. It lost $1.7 billion in the first nine months on revenues of $519 million. So now Core Scientific is one of the other champions that has filed for bankruptcy.
Don’t worry, no one will be jailed here. The organizers sleep through all of this. This is just another act in the wonderful hype show coming to an end. A restructuring deal has been approved with a group of creditors representing “more than 66%” of the $550 million secured convertible notes. Shareholders have already kissed their money goodbye because they eagerly believed what they were told at the time they bought these things, eagerly participating in what I call a harmonic hallucination.
There are no victims here, just investors who lost their money because they so eagerly participated in the harmonic hallucinations. Money printing and the suppression of interest rates by the Federal Reserve have turned investors’ minds to mush. That’s how it goes.
In filing for bankruptcy today, the company blamed:
- The prolonged decline in the price of Bitcoin
- Increasing electricity costs to operate their data centers
- The default is on the part of its largest client, crypto lender Celsius Networks, which filed for bankruptcy in July. The entire crypto space is very interconnected, like you said, they went to heaven together, and now they’re going to scan together.
- Its own decision “has significantly overcommitted construction costs to build additional mining capacity.”
The company was a great candidate for bankruptcy because it had more than $1 billion in debt and other liabilities.
It defaulted on $275 million in equipment financing. It failed to pay building contractors $70 million in invoices at which they asserted mechanic’s liens. He is involved in a lawsuit with a former executive. Then, hardened equipment lenders accelerated debts they owed resulting in a “cross default” on $550 million of the secured convertible notes.
In the chart above, it was a nipple last week when B. Riley Financial offered the company $72 million in new financing to keep it out of bankruptcy court. P. Reilly had made an unsecured $42 million loan to Core Scientific, which it defaulted on in October. B. Riley’s $42 million loan is now listed among the unsecured creditors in the bankruptcy filing. If so good luck. Being an unsecured creditor in bankruptcy like this is not fun.
Before filing for bankruptcy, the company struck a deal with a group of creditors representing “more than 66%” of the secured convertible notes that it defaulted on. This group — this is the playground of distressed debt investors who buy such debt for cents on the dollar — has agreed to provide a debtor-in-possession (DIP) loan of approximately $57 million as part of the bankruptcy to fund the company during bankruptcy, and has agreed to support another DIP loan of $18 million dollar.
The secured and convertible bondholders would then end up with 97% of the equity of the restructured company when it emerges from bankruptcy, according to their proposal. Existing shareholders may receive some crumbs and notes, if any. If the proposal passes the proceedings, it would reduce the company’s debt by hundreds of millions of dollars and lower interest expense.
But reducing interest expense won’t help much: In the third quarter, when it lost $435 million, only $25 million was interest expense. So maybe the secured bondholders will try to quickly sell these new shares to the public before the company sinks into bankruptcy a second time?
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