Thinking about Voyager Digital (2/2)
... turns out that depositors will get some of their money back
Hi all,
Welcome to part 2 of my thoughts about Voyager Digital and its bankruptcy process.
You can read the first part here to bring yourself up to speed.
tl;dr
Voyager Digital is was a publically listed crypto exchange with c.3m users. Users deposit crypto onto its platform in order to receive interest payments from Voyager. Following an ill-conceived loan to 3AC, Voyager cannot pay back its depositors and has therefore filed for bankruptcy.
In this post, I think about Voyager’s restructuring plan, its financials and finally, come to a conclusion on the % recovery that users will receive on their deposited funds.
Let’s dive in…
Waterfall - Liquidations
In a full-scale bankruptcy, companies can go through a full-on liquidation of all assets or a restructuring plan. Let’s think about a liquidation scenario.
Let us say company R (for restructuring) has $80m in assets but $90m debt + $10m equity. The balance sheet does not balance hence, it must restructure.
In a liquidation of assets, the $80m on the assets side must be split across debt/equity holders. This is typically paid out in the following order (imagine a waterfall with water falling down into buckets):
We can split the $80m as follows:
(Assume the company has $20m in RCF, $30m senior debt and $50m debt)
(1) The RCF (RCFs are explained in the previous blog post) is paid down first. Here, the RCF can be completely repaid ($60m in assets left)
(2) Secondly, the senior debt can be completely repaid too. ($30m in assets left).
(3) The remaining $30m must be split between the remaining debt holders. As there are $30m in assets left and $50m in debt left. We can say:
$30m/$50m = $0.6 received for every $1 owed
Hence the debt holders receive a 60% recovery.
The equity holders get zero! The waterfall ran out of *water*/cash at the debt level.
NB: This has been simplified a lot :).
Restructuring Plan
As in the case of Voyager, they believe that the company is salvageable and hence have issued a restructuring plan.
NB: Before Voyager filed for bankruptcy (filing here), its bankers spoke to 6o parties trying to either (i) sell itself or (b) raise capital from a third party in return for equity. While 22 parties were initially interested these processes failed.
Here’s the plan - bankruptcy filings:
Hence, users will get back:
A % of their original crypto tokens
Newly issued equity in Voyager (subject to dilution from a new management incentive plan)
An allocation of VGX tokens (lol)
Part of anything they can recover from 3AC (good luck)
Holders can choose to change the weightings of the above
While this is subject to change, I’ll assume it to be true for the recovery calculations.
In case interesting, other interesting points in their plan:
Alameda loses their $75m drawn so far (from the RCF)
Equity goes to zero
Voyager will continue to solicit proposals for a plan sponsor while establishing a structure to repay creditors if it cannot find a buyer.
++++
Voyager Financials
Now for the fun part! Let’s look into the financials of Voyager.
First I calculate how much cash/crypto Voyager currently holds (some of this was previously owned by customers). We can focus on the Jun-22 column. Mar-22 was their last official filings; Jun-22 is from me pulling scraps from their filings and press releases
Assets available for use to pay back depositors
Outstanding Loans:
Let’s take a step back. 3AC represents 58% of all loans owed to Voyager! Tough times indeed. I note that this may have been lower previously, this is an awful position to be in.
By the way, Voyager had a $75mm private placement to raise cash back in Oct-21 but, even still, its total cash and cash equivalents for the period (last quarter) were down by c.$145mm.
How much is owed to users?
Alameda Research – a cryptocurrency trader – was Voyager‘s largest single creditor, with unsecured loans of $75m (from the RCF). In addition to this, Voyager owes $1m+ to 41 users. 5 users are owed >$3m and one party is owed c.$8m!
% Recovery
From the data above, we can simply say:
Hence I expect, again not advice nor the opinion of my employer, Voyager’s users to receive only 69% of their money back.
Point of Interest
Before I close, I want to labour the point of how even over-collateralised loans are an issue - even for defi-platforms! In a typical over-collateralised loan, person A deposits $10m of $ABC onto the platform. They then take out a loan for $5m of stablecoins. Hence over-collateralised right?
But what if person A’s fund blows up as the market is getting hammered? Their $10m deposit of $ABC is now approaching a price of $5m. At $5m (or slightly above in some cases), their deposits will begin to get liquidated (sold) by the platform.
Person A can see that they’re about to lose their collateral but they’re faced with a question.
“Is the reputational risk palatable enough that I can allow my collateral to get liquidated?”
This is an appropriate question as why would person A from Fund “REKT” give back the $5m in dollars?
Let me play that out for you.
Person A pays back the $1m
They take back their $ABC coin
They then want to market dump their $ABC coin
They go to Uniswap or 1Inch and see there is horrendous slippage (definition)
In other words, they would end up taking a larger loss vs if they had just not paid back
Indeed, there are other ways to sell down this position but for a party willing to take a reputational hit or simply does not have the money to pay down, it’s a real issue for market participants to be conscious of.
Conclusion
All in all, this is a sad case of risk management gone wrong!
It’s super interesting as such proceedings will bring the nuances of crypto net interest gains (wrote about this here) and “institutional” risk management to the fore (I hope they didn’t just use debank like Celsius (allegedly)!
Most importantly, I hope that I am wrong and the depositors get back S100%. I believe that depositors should always be the most senior in the waterfall and get paid out first before creditors and equity holders.
Thanks for reading!
God Bless,
Joseph - 17th July 2022