Consensus hallucination stocks and crypto keep giving.
By Wolf Richter to WOLF STREET.
Austin-based bitcoin miner and crypto-hosting platform Core Scientific — one of the largest publicly traded crypto miners with data centers in multiple states, including Texas — has filed for bankruptcy. chapter 11 on December 21, roughly exactly 11 months after going public via merger with a SPAC on January 20, 2022.
On the day the merger with SPAC was finalized on Jan. 20, the stock had a market capitalization of $2.8 billion, already down sharply from the peak of $4.5 billion after the news was announced. the merger but before the completion of the merger. Today, forget it. Shares are pennies (data via Y-Charts):
On November 22, it announced that it had lost $435 million in the third quarter, on $162 million in revenue; and that it had lost $1.7 billion in the first nine months, out of $519 million in revenue. So now Core Scientific is another hero in my pantheon of Imploded stocks have filed for bankruptcy.
Don’t worry, no one will go to jail here. Regulators get through it all. It’s just another act in the stunning hype show that is coming to an end. A restructuring agreement with a group of creditors representing “more than 66%” of $550 million in secured convertible notes has been reached. Shareholders have already said goodbye to their money because they eagerly believed what they were told the moment they bought this thingeagerly participating in what I call consensus hallucination.
There are no victims here, just investors who lost money because they enthusiastically participated in consensus hallucinations. Money printing and the Fed’s crackdown on interest rates have turned investors’ brains to mush. That’s how it goes.
In the bankruptcy filing today, the company is implicated:
- The “prolonged decline in the price of bitcoin”
- Rising electricity costs to power its data centers
- The default of its biggest client, crypto lender Celsius Networks, which filed for bankruptcy in July. The entire crypto space is so interconnected that, as I said, they went to heaven together, and now they’re gonna fuck it up.
- Its own decision to have “significantly overcommitted for construction costs in order to develop additional mining capacity”.
The company has been a prime candidate for bankruptcy as it has over $1 billion in debt in addition to other liabilities.
It defaulted on $275 million in equipment financing. He failed to pay construction contractors $70 million in bills where they claimed mechanic privileges. He’s embroiled in a dispute with a former executive. And then stiffened equipment lenders accelerated the debt owed to them, triggering a “cross default” on the $550 million in secured convertible notes.
In the chart above, last week’s little nipple was when B. Riley Financial Free the company’s new $72 million in funding to keep it from appearing in bankruptcy court. B. Riley had loaned $42 million unsecured to Core Scientific, which he defaulted on in October. B. Riley’s $42 million loan is now among the unsecured creditors in the bankruptcy filing. Well, good luck. Being an unsecured creditor in a bankruptcy like this is no fun.
Before filing for bankruptcy, the company reached an agreement with a group of creditors representing “more than 66%” of the secured convertible notes on which it was in default. This group – it is the playground of distressed debt investors who buy such debt for pennies on the dollar – agreed to provide a debtor-in-possession (DIP) loan of approximately $57 million in the bankruptcy framework to fund the company during bankruptcy proceedings, and he agreed to support another $18 million DIP loan.
Holders of covered convertible bonds will then end up with 97% of the capital of the restructured company when it emerges from bankruptcy, according to their proposal. Existing shareholders could get crumbs and warrants, if any. If the proposal passes through the procedures, it will reduce the company’s debt by hundreds of millions of dollars and reduce its interest costs.
But cutting interest expense isn’t going to help much: in the third quarter, when it lost $435 million, only $25 million was interest expense. So maybe the secured noteholders will try to sell those new shares quickly to the public before the company sinks into bankruptcy a second time?
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