DCG-Creditor Deal BREAKS DOWN

By Vince • August 30, 2023 12:13 pm • Comments

Digital Currency Group (DCG) was widely reported to have reached a deal with its creditors. …

Despite earlier reports, DCG’s creditors now say that the plan proposed by Digital Currency Group is ‘wholly insufficient’…

The creditors cite shortcomings in both the principal amount owed, as well as sufficient interest for lending the credit in the first place. …

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CoinDesk reports: “Earlier this week, Genesis and DCG announced a tentative deal over how to treat $1 billion+ in loans. Not so fast, say some Genesis creditors.”

 

CEO and Financial advisor Ram Ahluwalia laid out the terms of the proposed DCG-creditor deal:

“- This looks like a great deal for DCG and a bad deal for creditors. No wonder they dropped this the last week of summer…

– DCG is still on the hook to pay $1.1 Bn. But instead of 10 years, payments are made earlier – 7 years. There is no market based interest rate like we saw in the Feb deal

– On the $630 MM May Payments, it looks like there is Principal Forgiveness. I don’t see how the payment plan sums up to the $630 MM. Why is DCG not responsible for paying back what it owes plus a penalty rate of interest?

– DCG pays a Forbearance fee of 0.375%. That’s egregious.

-DCG gets to avoid Ch 11 by paying a nominal fee. That fee is less than a new loan origination fee…

-Why isn’t there a penalty rate of interest? DCG pays a fee and gets to waive principal in excess of the fee – and gets a below market rate of interest?

– DCG is defaulting on a loan obligation, pays a small one-time fee, and gets to refinance its loans at below market rate

– The Term Sheet Proposal from Feb was better. In that deal, creditors had an equity stake in DCG OR could insist on debt repayment.

– The distributions to Genesis creditors do not provide adequate compensation for the Time Value of Money. Getting to a 90% distribution in 7 years with rates at 5% is similar to getting a distribution of 50% when you account for the opportunity cost of capital

– There is no DCG ‘kicker’ contemplated here. This is framed as ‘DCG Contributions’ – it is really a refinancing of DCG. I don’t see what DCG has contributed that is incremental to what they contractually owe.

Disclaimer: I spent all of 5 mins looking at the terms while on holiday. I figured a quick reaction may have some value and enable crowdsourcing to focus.

Here’s what I would ask Moelis and the other bankers to do:

1) Show a side-by-side of the payouts by creditor class comparing this deal and the Feb deal

2) Confirm DCG is not offering any ‘kicker’ such as equity upside in DCG

3) What are the implied interest rates DCG is paying on these loans? Confirm that DCG is not paying 10%+ interest on the $1.1 Bn note (only the maturities were brought in)

Is DCG paying back less than the total amount it borrowed from Genesis?

4) What ‘kicker’ is Gemini Earn contributing above and beyond what’s stated in the proposal?

5) Release the findings of the Cleary Gottlieb internal investigation. It was due in March…

6) Offer a Public Q&A session

I an disappointed that this is the result of endless mediation extensions.

Then they drop this in the last week of Summer to avoid public scrutiny?

I would be pissed as a Genesis creditor…

What am I missing?”

 

CoinDesk initially reported:

To satisfy DCG’s existing liabilities of approximately $630 million in unsecured loans due in May 2023 and $1.1 billion under an unsecured promissory note due in 2032, a new partial repayment agreement was agreed on.

The repayment would be done in two tranches – approximately $328.8 million with a two-year maturity and $830 million with a 7-year maturity.

SMC Report confirmed: “DCG intends to make four installment payments totaling $275M to settle the claims of Genesis creditors.”

 

According to documents, DCG’s creditors slammed the deal on several grounds:

“The Debtors and UCC fail to explain how these amounts approach fair value in a standalone restructuring of the DCG Loans and the promissory note, let alone, simultaneously serving as a settlement of the valuable Estate Claims against DCG and its directors and officers on account of, among other things, (a) preference claims potentially valued in the hundreds of millions of dollars, (b) fraud, (c) alter ego liability for the creditors* claims, and more.”

Coin Telegraph provided this critical update:

The lenders argued that the debtors and UCC are “unwilling to comply with their fiduciary obligations” to maximize creditor recoveries, arguing that they are instead trying to put the base behind them. The filing added:

“The Ad Hoc Group, which includes dozens of creditors for whom these assets are critical, does not have such luxury and cannot support the proposed terms of the plan update which permit DCG to walk away untouched and, in fact, paying less than already committed.”

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