Sam Wants Your Coins - Alameda / Voyager Update
Level 2 - Value Investor
Welcome Avatar! Today we have an update on the Voyager bankruptcy. We wanted to cover this update in particular because it illustrates that there is far more than meets the eye to public commentary in negotiations.
To recap: on July 5, Voyager filed a 56 page Plan of Reorganization that seeks to return to customers all of their cash and as much of the cryptocurrency they placed on Voyager’s platform as possible.
Specifically, account holders would receive a Pro Rata share of:
the Coin Allocation
the Claims Equity Allocation
the Voyager Token Allocation; and
the 3AC Recovery Allocation
Importantly, account holders could choose between receiving equity in the new Voyager entity or their coins back. Those who elect for equity will increase the amount of coins available to pay out to remaining account holders.
Interested Buyers
Prior to the bankruptcy, Voyager proposed to engage Moelis & Company to solicit interest from prospective investors for either a sale of the whole business or a capital infusion. According to court documents, as at July 21 over 37 potential counterparties have entered into confidentiality agreements (a prelude to data room access and formal due diligence). These firms include domestic and international cryptocurrency-related businesses, private equity, and “other investment firms.”
The main goal is to set a floor against which potential transactions can be measured. In furtherance of this goal, Voyager sought court approval to impose formal Bidding Procedures with a view to a potential auction.
An auction would be a great outcome for account holders and other creditors because it involves a competitive bidding process that would achieve a fair price rather than give all the power to a single party.
The deadline for bids is August 26, and an auction (if one is needed) would take place on August 29. Then the Court would approve the sale no later than September 7.
This all seems to us like a routine way to settle the bankruptcy estate to maximize value for creditors, and it seems efforts have been made to do this as quickly as possible due to the nature of crypto. There is nothing that leads us to believe creditors are being treated unfairly from a process perspective in Voyager’s proposal.
Alameda/FTX Proposal
Under Voyager’s proposal, customers would receive repayment of some of their digital token balances.
But. Alameda’s loan facility claims would be wiped out in full (loss of $75m).
Last week Alamada/FTX US made a *public* proposal via their lawyers to acquire Voyager’s business and return the *USD value* of the cryptocurrency held by Voyager to account holders. This would be an opt-in process, affected customers would need to be approved to open an FTX account to receive their payment.
Alameda’s lawyers argue that customers who held digital assets are not entitled to their coins/property, but only (as a matter of law) to the US dollar value of the coins as at the Petition Date (July 5).
This means that if cryptocurrency prices rise, customers lose out because they only have a claim for a fixed amount in USD; and if cryptocurrency prices fall, customers lose because when the property is sold for USD it will fetch a lower value.
Alameda’s proposal is supposed to mitigate this “lose-lose” situation for customers.
However, Voyager’s proposal allows customers to receive some of their crypto back, pro rata to the crypto held by Voyager, with no cap linked to the USD value at the Petition Date.
As part of the proposed transaction Alameda would purchase:
all of Voyager’s digital assets (and loans, except to 3AC) at fair value in USD
all customer information and exclusive referral rights for $15 million
all legal claims (except 3AC), all Voyager IP / brand assets
Proceeds from the purchase of digital assets and loans would be paid to a USD escrow account. Only customers who sign up for (and are approved for) an FTX account are eligible to receive a proportional share of the USD escrow funds, which would be paid to their FTX account and available for immediate trading or withdrawal.
No customers would receive any cryptocurrency in this deal!
Timing: The proposal, dated July 22, demands an initial response by July 26 and for the documents for the proposed transaction to be in final form ready for execution by July 30. The official deadline for confidential competitive bids is August 26 (one month away). We don’t believe liquidators can adequately satisfy their duties to creditors without having the opportunity to consider competitive bids. Furthermore, the speed at which SBF is pushing to close the deal as well as the public plea to “customers” to choose (per his tweet below) feels a little bit like someone trying to jam a deal through quickly without letting other bidders have a shot.
Alameda’s Free Option: the rules for selling the digital assets require that Alameda make an offer for each digital token based on FTX/Alameda’s estimate of fair market value, which Voyager could either accept or reject. If rejected, Alameda has no obligation to buy the tokens at all. This means that Alameda could avoid buying any token it did not want by making a low-ball bid which Voyager would not accept.
SBF weighs in with a point about conflicts of interest - the bankruptcy administrators have a vested interest in getting paid to do work, necessarily at the expense of creditors.
This is something of a jury point. Professional advisors are also responsible for maximizing the value of the business for the benefit of creditors. Their role is to choose the best rescue deal, including deciding how much weight to give to early liquidity for affected customers. Companies routinely choose to hire investment banks like Moelis to obtain the best price when selling their business. And. The timescale is short, with bids due in one month and final Court approval sought by September 7.
Voyager’s Response
Predictably, Voyager don’t favor Alameda’s proposal and have responded:
The Proposal requires converting customer cryptocurrency claims into U.S. dollars based on prices as of July 5, 2022 and paying cryptocurrency claims in U.S. dollars, with customers bearing the tax consequences associated with dollarizing and liquidating their claims.
Voyager makes some allegations of disingenuineness as follows:
Alameda/FTX are trying to garner support for the proposal by offering to “write off” a $75m loan to help customers, but Voyager’s team believes that the loan is structurally subordinate to customer funds and does not rank pari passu - in other words the loan is already irrecoverable in bankruptcy so Alameda really aren’t offering anything of value in this respect.
Alameda/FTX value the Voyager business at zero but want to acquire it for free
Alameda/FTX have circumvented the (proposed) confidential bidding process with the possible effect of deterring other bidders
DeFi Team Analysis
Frankly we think concern for the tax position of customers is a red herring.
Alameda states their proposal is opt-in but it’s not clear to us how that would be implemented in a bankruptcy process (if you’re a bankruptcy lawyer let us know your thoughts in the comments!). If this is possible, customers can take independent advice on their tax position, and if they do not wish early liquidity then they can maintain their rights in the bankruptcy process instead.
Furthermore, FTX would stand to lose their entire $75m loan if Voyager’s proposal is approved, so “writing off” the loan is not exactly a concession. FTX isn’t giving up anything of value in offering to waive this as part of a deal where they get all the Voyager customers, IP rights, and the *option* to buy out computer coins based on their estimate of fair value.
What’s happening here is a case of “smart business.” SBF is using his clout and reach to win favor from Voyager customers and apply pressure to force through a deal that gives him a leg up in negotiations. By positioning it from the perspective of benefiting customers, he also gets good publicity. Customers may in fact benefit from this outcome, and it may even resemble the eventual outcome after the process is complete.
However, the key takeaway from us is that SBF is not the only interested buyer and it’s hard for us to believe that a deal being jammed in on short notice that boxes out other potential bidders is going to achieve a better result than a competitive set of bidders. The argument that bankruptcy advisors just want to milk the most amount of fees has some merit but it’s not a strong enough argument given the size of the enterprise here. Furthermore, firms like Moelis are incentivized to wrap the deal up because most of their fees come from the deal closing (investment bankers are not paid based on hourly rates like lawyers).
And that’s a wrap.
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interesting, sneaky sam strikes again!
I was wondering when y’all were gonna write about this!