Bitcoin-related companies are raising money in the convertible bond market predicated on maintaining volatility in perpetuity.
Last week saw three bitcoin miners fund in the US CB market – one that recently emerged from bankruptcy protection, another that is highly unprofitable, and the third from a former SPAC unfamiliar to most investors.
Formerly bankrupt Core Scientific secured US$400m from the upsized sale of a five-year CB paying just a 3% coupon and with a 30% conversion premium, the best end for the issuer of 3%–3.5% and 25%–30% guidance.
Shares fell 10.7% as the CB was sold on Tuesday to US$8.46 but recovered to close on Thursday at US$9.26.
“We saw long-only convert buyers and existing shareholders step up in size,” said one banker involved in the offering. “That was in addition to demand from hedge funds.”
JP Morgan, as sole bookrunner, guided accounts towards credit and implied vol assumptions of SOFR plus 850bp and 45 in marketing what launched as a US$350m offering.
“Historically, investors will never pay over 40 vol on a new issue,” said the banker. “On the bitcoin CBs they are paying 45 vol, and we have seen bonds richen to 50 implied vol in the aftermarket.”
J Wood Capital advised Core Scientific.
Once one of the largest bitcoin miners globally, Core declared bankruptcy in late 2022 following a steep selloff in the cryptocurrency, high energy prices, and the default of a major client.
Core is using money from the CB to fully repay US$211.2m of high-cost debt taken on as part of its emergence from bankruptcy in January 2024. A rally in its shares after coming out of bankruptcy allowed it to exchange US$233.6m of convertible debt for 40.1m shares.
The additional shares issued from the CB exchange ensured there was stock borrow for hedge funds purchasing the new CB, said the banker.
From a fundamental perspective, Core has been assisted tremendously by a transition from bitcoin miner to data-centre operator that leases computing power to other companies for AI generative models and other high-performance computing needs.
Core rejected an unsolicited takeover offer in June from Nvidia-backed HPC provider CoreWeave, but instead signed a 12-year contract to provide 200MW of infrastructure to host CoreWeave’s services.
“Core really benefited from the contract with CoreWeave,” said the banker. “Investors, particularly the long-onlys, were able to model cashflows from that contract.”
Cash for crypto
Marathon Digital used the US$300m raised from its CB to acquire bitcoin, hastening its transition away from miner to crypto owner and also infrastructure provider for HPC.
Barclays, as sole books, priced the new seven-year CB on Tuesday at a 2.125% coupon and 25% conversion premium, towards the investor-friendly ends of 1.75%–2.25% and 25%–30% talk. The bank exercised a US$50m greenshoe provision later in the week to increase the offering size from US$250m.
“Marathon management believes bitcoin is undervalued,” said a banker close to the company. “For investors, the convert offers them a way to play bitcoin. This is a very volatile stock, and investors are willing to pay to access that volatility.”
In marketing the CB, Barclays guided investors towards a credit spread of 750bp and 45 implied vol.
There was certainly room for investors to quibble with the credit assumption. Marathon had just reported second-quarter negative adjusted Ebitda of US$85.1m despite growing revenue by 78% to US$145.1m, as high power costs and electric transmission outage crippled its core bitcoin mining business.
Regardless, CB investors embraced the transition to crypto hoarder.
Marathon purchased 4,144 bitcoins at an average price of US$59,500 with proceeds from the CB, adding to the 20,000 already in reserve. Those bitcoin holdings are valued at US$1.4bn, versus a US$4.6bn current market cap – so even if bitcoin prices collapse, CB investors would have a good chance of getting their money back.
If all of this sounds familiar, it is.
Bitcoin kingpin Michael Saylor’s MicroStrategy has raised US$2.2bn this year alone with the CB-to-bitcoin hoarder strategy, most recently raising US$800m from a 2.25% CB in June, which followed a US$800m 0.625% CB and US$603.75m 0.875% CB both issued in March.
MicroStrategy, which pioneered the CB to crypto-hoarder strategy in 2019, held 226,500 bitcoins as of August 1, worth some US$13.5bn.
Bitcoin traded on Friday at US$58,000, up 38.5% for the year but down 10.9% over the past three months, rallying recently on the prospects of a Fed rate cut in September.
Bitcoin mining isn’t entirely passe. Bitdeer Technologies on Thursday raised US$150m from the sale of a five-year CB priced at an 8.5% coupon and 35% conversion premium.
Bitdeer, which went public through a SPAC merger in late 2021, is using the money to expand operations in the US, Bhutan and Norway. In a second quarter that saw it mine 628 bitcoins, the company generated adjusted Ebitda of US$24.9m on revenue of US$992m.
BTIG was sole bookrunner on the Bitdeer CB.