The company has been hard hit by the crypto winter, with its stock down 75% and its bonds trading at no more than 67 cents on the dollar, with yields of 10% and higher. That compares with less than 6% for other bonds with BB ratings, a sign that investors think the Coinbase securities are due for downgrades or possibly even default. Its two plain-vanilla bonds and a class of convertibles were issued at par last year.
While the collapsing crypto market may justify the punishment for the stock, analysts state the bonds are getting a bad rap.
“My interpretation is that Coinbase is doing a lot better than the market perceives,” says Christopher Brendler, analyst at DA Davidson, though “it’s definitely not as rosy as it once was. Bond investors tend to be more concerned than equity investors are.”
Despite reporting slumping in revenue as trading volume declined, Coinbase entered Q2 with over $6 billion in cash. Analysts expect the firm’s earnings report, which will be issued on Aug. 9, to report heavy losses, but Coinbase appears to have the liquidity to make it through the crypto winter.
“Coinbase’s savings are important from a ratings standpoint because it gives them enough cash to run their operations without having to worry about day-to-day volatility in crypto prices,” said Moody’s analyst Fadi Masseh, who issued a report lowering the rating on Coinbase’s non-convertible bonds to Ba2 from Ba1 in June and left them on review for a further downgrade. Still, “From a cash-flow perspective, the cash burn isnt too high. Even in Q1, there wasn’t a significant decline in Coinbase’s strong level of liquidity.” Standard & Poor’s rates the bonds BB+, one level higher than Moody’s.
An apparent vote of confidence from BlackRock
Coinbase rode a surging crypto market to new heights in 2021, ending the year by reporting $2.5 billion in Q4 revenue (25% above its projections) and going on a yearlong hiring spree that saw its staff nearly triple in size, As crypto markets have collapsed, though, Coinbase has suffered. The exchange laid off over 1,000 employees in June and reported Q1 sales of just $1.17 billion as trading slowed and its associated fee income from processing transactions decreased.
Since stablecoin TerraUSD
Compounding Coinbase’s problems, the US Securities and Exchange Commission leveled a civil complaint against a former Coinbase employee and two associates, claiming that the exchange let users trade nine tokens that the agency has identified as unregistered securities. That could disrupt trading volume on any exchange subject to US regulation.
Still, while the company is “caught out on the costs side, they did go into this crypto downturn with a very strong balance sheet,” says Michael Miller, equity analyst at Morningstar.
In part, Coinbase has the SEC to thank. The exchange canceled the launch of Coinbase’s Lend feature, which would have let users earn interest by staking certain coins, last fall after regulators threatened to sue over it. This has left Coinbase with relatively little debt aside from that which it owes to bondholders, which won’t mature for at least four years.
The $1.4 billion of convertibles paying 0.5% a year in interest are set to mature in June 2026 and the option to exchange them for stock would not be valuable unless the stock rises to $370.45, Next comes $1 billion of 3.375% bond due in October 2028, followed by $1 billion of 3.625% debt in October 2031. The convertibles are trading at a yield of about 12.2%, while the 2028s are at 10.8% and the 2031s 10%.
While Coinbase bonds appear to be a limited-risk, high-yield bet for institutional traders, retail investors will find it difficult to get their hands on the assets. The securities were issued under the SEC’s Rule 144A, which limits trading to qualified institutional buyers for six months after issuance. The bonds have passed that limit, but brokers are reluctant to offer them to retail investors–the only exception is for some wealthy buyers who might be able to buy the convertibles in bulk. For now, the value seems to be reserved for large funds, endowments and other institutions.
Credit: www.forbes.com /