Coinbas
PIECE OF MONEY
The company has been hit hard by the crypto winter, with its stocks down 75% and bonds trading at just 67 cents on the dollar, with yields of 10% and more. This compares to less than 6% for other BB-rated bonds, a sign that investors believe Coinbase securities are due for downgrades or possibly even default. Its two vanilla bonds and a class of convertibles were issued at par last year.
While the crypto market crash may justify the punishment for the stock, analysts say bonds have a bad rap.
“My interpretation is that Coinbase is doing much better than the market perceives,” says DA Davidson analyst Christopher Brendler, although “it’s certainly not as rosy as it used to be. Bond investors tend to be more worried than equity investors.
Despite a reported decline in revenue as trading volume declined, Coinbase entered the second quarter with over $6 billion in cash. Analysts expect the company’s earnings report, to be released on August 9, to show heavy losses, but Coinbase appears to have the cash to weather the crypto winter.
“Coinbase’s savings are important from a ratings perspective because it gives them enough liquidity to run their operations without having to worry about day-to-day crypto price volatility,” said Moody’s analyst Fadi Masseh. , which issued a report downgrading Coinbase’s rating. non-convertible bonds from Ba1 to Ba2 in June and left them on watch for further downgrade. Still, “from a cash flow perspective, the cash burn is not too high. Even in the first quarter, there was no significant drop in Coinbase’s strong level of liquidity. Standard & Poor’s rates bonds BB+, one level above Moody’s.
An apparent vote of confidence from BlackRock
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Coinbase propelled a booming crypto market to new heights in 2021, ending the year reporting $2.5 billion in fourth-quarter revenue (25% above its forecast) and continuing a surge of hires in a year that has seen its staff nearly triple. As crypto markets crashed, Coinbase suffered. The exchange laid off more than 1,000 employees in June and posted first-quarter sales of just $1.17 billion as trading slowed and its commission revenue associated with processing trades dwindled.
From stablecoin TerraUSD
UST
LUNA
Compounding Coinbase’s problems, the U.S. Securities and Exchange Commission filed a civil lawsuit against a former Coinbase employee and two associates, claiming the exchange allowed users to trade nine tokens the agency identified as unrecorded titles. This could disrupt trading volume on any exchange subject to US regulation.
Yet, despite the company being “caught off guard on the cost side, it entered this crypto downturn with a very strong balance sheet,” says Morningstar equity analyst Michael Miller.
In part, Coinbase has the SEC to thank. The exchange canceled the launch of Coinbase’s Lend feature, which would have allowed users to earn interest by staking certain coins, last fall after regulators threatened legal action. This has left Coinbase with relatively little debt other than that it owes bondholders, which won’t mature for at least four years.
The $1.4 billion in convertibles that pay 0.5% interest per year are scheduled to mature in June 2026 and the option to exchange them for shares would only be valid if the stock reaches $370.45 . This is followed by $1 billion in 3.375% bonds due October 2028, followed by $1 billion in 3.625% debt in October 2031. Convertibles trade at a yield of around 12.2%, while the 2028s are at 10.8% and the 2031s at 10%.
While Coinbase bonds appear to be a low-risk, high-return bet for institutional traders, retail investors will find it difficult to get their hands on the assets. The securities were issued under SEC Rule 144A, which limits trading to qualified institutional buyers for six months after issuance. The bonds have exceeded this limit, but brokers are reluctant to offer them to retail investors – the only exception being some wealthy buyers who might be able to buy the convertibles wholesale. For now, the value seems to be reserved for large funds, endowments and other institutions.