Coinbase Junk Bonds Tank Amid Market Disruption And Creditor Fears

The price of Coinbase’s junk bonds is falling on a disappointing Q1 performance and fears of what could happen in the event of bankruptcy.

According to bond trading data from Trace Bonds, both Coinbase junk bond offerings are down about 17% and 5.2% since the Q1 report on May 10 to stand at $63 and $62.31 at the time of writing. Overall, they are down 20% and 19% since the beginning of this month.

Junk bonds are a form of corporate debt issued by companies that do not have an investment grade credit rating. Companies borrow a certain amount through the junk bond offering and set a maturity (date of return) and an interest rate that they will pay on top of the borrowed capital.

Because junk bonds have a lower credit rating, they have a higher yield than investment grade corporate bonds. In Coinbase’s case, it raised about $2 billion in September across two evenly spaced offerings of 3.375% over seven years and 3.625% over 10 years.

Notably, both junk bond offerings launched at $100 each and have been steadily pointing downward ever since. However, the sharper-than-usual decline this month suggests investors may lose faith in Coinbase going forward.

The price of Coinbase stock (COIN) has also fallen 20% since the date of the Q1 report, although investor sentiment has been bearish beforehand, with the price dropping a hefty 50% since early May.

Disclosure of bankruptcy proceedings

The major crypto exchange posted Q1 losses of $430 million, in addition to a 27% drop in revenue compared to the first quarter of 2021.

Shortly after the report was released, concerns were raised about a disclosure in the Q1 report regarding the fate of the user’s assets if the company were “subject to bankruptcy proceedings”.

The disclosure noted that if the company were to go bankrupt, the user’s digital assets held on the platform could be “the subject of bankruptcy proceedings” and could be treated as “unsecured creditors”.

This seemed to trigger fear on both sides of the spectrum as users feared that they might not be able to get their assets back if Coinbase were shut down. But bond hodlers seemed concerned about the idea that users may still have some claim to Coinbase’s assets, expecting to be ahead of them in line.

However, Coinbase CEO Brian Armstrong tried to allay the fears after he noted Twitter that “we have no risk of bankruptcy, but we have included a new risk factor based on an SEC requirement called SAB 121.”

Related: Crypto-Associated Stocks Hammered as COIN and HOOD Drop to Record Lows

Earlier today, Armstrong also shared a note on the events of the past week.

The CEO called for calm, though admitted how “it can be scary to see our stock price plummet with associated negative headlines” as he suggested the company can handle the current market downturn:

“In times like these we need to step back and zoom out. Nothing has changed on Coinbase this week, we are the same company as yesterday, or a year ago. In any case, given our balance sheet, we are in an even stronger position.”

“This latest bull cycle has generated huge gains and cash that enhance our resilience, and we have built an incredible team with some of the best talent in the world,” he added.