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The demand for the crypto sector in the traditional markets is so high that cryptocurrency exchange Coinbase has to boost the size of its junk-bond offering to $2 billion from $1.5 billion. In fact, at least $7 billion of orders poured in, according to a Bloomberg report citing a person with knowledge of the matter. “Institutional investors are aggressively buying Coinbase debt,” said Su Zhu, CEO, and co-founder of Three Arrows Capital. “Huge endorsement of supercycle.” Coinbase had announced that it is raising debt just this week, and now it has sold equal amounts of 7-year and 10-year bonds at interest rates of 3.375% and 3.625%, respectively, which is lower than the initially discussed borrowing costs. The new bonds are rated one step below investment grade, and according to Bloomberg bond indexes, a similarly rated debt has a 2.86% yield on average. Before Coinbase (COIN), MicroStrategy (MSTR) sold $500 million of notes in June to fund its Bitcoin purchases. Meanwhile, the crypto exchange is earmarking its proceeds for general corporate purposes, including product development and potential mergers and acquisitions. “The strong demand is clearly a big endorsement by debt investors," said Julie Chariell, an analyst at Bloomberg Intelligence.
Non-Investment Grade Rating
Moody’s Investors Service initiated a debit-issuer rating for Coinbase at non-investment grade or junk, citing an “uncertain regulatory environment and fierce competition” as the reason for not rating the company an investment-grade debt issuer. Moody’s analysts in a report published Tuesday wrote,
“Coinbase’s financial profile suggests investment grade credit strength, but for now the uncertain regulatory environment and fierce competition offset these strengths.”
The credit rating agency assigned a Ba1 rating to Coinbase’s senior guaranteed notes, saying three factors viz. increased regulatory clarity, a big expansion to boost revenue, and prudent cost management during fallow periods could lead to an upgrade of Coinbase’s overall rating. According to Moody, the fact that Coinbase earns “a percentage of the notional value of trades matched on its platform” can be “very lucrative” in an up market, but when prices decline, the firm’s transaction revenue will also decline. And while Coinbase is diversifying its products and expanding its subscription-based revenue to address its reliance on transaction revenue,
“it will take time for this strategy to have a material effect.”
And, of course, regulatory uncertainty is a big risk. Recently, Coinbase said they are getting pushback from the SEC on the launch of its lending product. On Tuesday, SEC Chief Gary Gensler said that crypto lending and staking services fall under securities laws.
“Given the novelty of crypto assets, many questions remain unanswered relating to the future regulatory frameworks of the plethora of tokens, blockchains and products and services that are part of decentralized finance.”