Last Tuesday, investors in Morgan Creek Digital’s venture capital funds met to discuss the risks stemming from one of the firm's largest and most high-profile investments, crypto lending firm BlockFi.
As reported by CoinDesk over the weekend, a leaked recording from the call revealed that Morgan Creek was attempting to rapidly assemble $250 million in cash to purchase a majority stake in BlockFi. Morgan Creek led BlockFi's $50 million series C fundraising round, which closed in August of 2020.
BlockFi entered crisis mode last week when the news of a large loan made to Three Arrows Capital (3AC) went public, leading to a rapid withdrawal of customer funds from the platform. According to the call, the firm received multiple offers for capital injections last week but ultimately signed a term sheet with FTX that would provide BlockFi with a $250 million revolving credit facility.
Morgan Creek’s offer would be a direct counter to the FTX deal, which would provide FTX the option to buy BlockFi “at essentially zero price,” Morgan Creek’s managing partner Mark Yusko said during the call.
Yusko told investors on the call that if FTX were to exercise its option it would effectively clear all of their existing equity from BlockFi’s cap table.
But these weren’t the only interesting details mentioned during the call. Here are four additional takeaways.
BlockFi is currently being valued at less than $500 million.
Not mentioned in the initial coverage of the call was the fact that the proposed funding round would value BlockFi at less than $500 million.
As Morgan Creek Digital’s managing partner Mark Yusko explained on the call, a $250 million equity offer would buy the investor syndicate 51% ownership, which would reduce the existing equity holders to 49% ownership. This is significant because last fall BlockFi was reportedly raising funds at a $5 billion valuation. That means this equity deal would represent a 90% decrease in value.
For weeks leading up to the 3AC liquidity crunch, BlockFi had been struggling to raise money despite a steep discount on its valuation. As The Block reported on June 6, BlockFi was attempting to raise $100 million at the time, at a valuation of $1 billion.
Representatives from Morgan Creek and FTX declined to comment on the details of the valuation. A spokesperson from BlockFi stated that “it would be inappropriate to suggest any claims made outside of official BlockFi or FTX channels as anything more than pure speculation.”
Morgan Creek Digital says BlockFi's loan to 3AC was $1 billion, and the collateral on 3AC's loan was two-thirds bitcoin and one-third GBTC.
On June 16, BlockFi CEO Zac Prince confirmed on Twitter that the firm had liquidated an overcollateralized loan from a large client and that it had hedged all associated collateral. While reporting from the Financial Times confirmed that this loan was made to Three Arrows Capital, Mark Yusko revealed on the call that the loan had been for $1 billion.
During the call, Yusko claimed that the $1 billion loan was overcollateralized by 30 percent, meaning that 3AC had put forward roughly $1.33 billion in assets. Later, Morgan Creek co-founder Anthony Pompliano claimed that two-thirds of that was bitcoin, which was immediately seized and liquidated and the remaining third were shares of GBTC. That would be worth roughly $430 million.
“All of this has been reported from them to us,” Pompliano said, referring to BlockFi.
GBTC, or Grayscale Bitcoin Trust, is a crypto investment product that allows investors to purchase shares in a trust account that holds a large bundle of bitcoin. Some investors choose to buy into the trust, rather than buying bitcoin on the open market, because it works like a traditional financial product in the way that it simplifies taxation, reporting, and trading.
Although the product is meant to be pegged to the market value of Bitcoin, shares of GBTC typically trade for a discount, known as the “Grayscale discount,” which, since 2021, has oscillated between 6% and 38%.
According to the call, BlockFi was able to easily liquidate its position in Bitcoin but ran into problems with the GBTC because the discount had reached lows last week of nearly 34%. As BlockFi attempted to liquidate its GBTC position, Pompliano explained, the price went down.
Representatives from Morgan Creek and FTX declined to comment on the details of the collateral. A spokesperson from BlockFi stated that “BlockFi does not comment on market rumors," adding that “it would be inappropriate to suggest any claims made outside of official BlockFi or FTX channels as anything more than pure speculation.”
The FTX deal may give the firm the option to buy BlockFi.
When asked during the call what event might trigger FTX’s option, Mark Yusko explained that “there’s no trigger, they just have an option.”
While this option may be tied to certain conditions, such as valuations or the time it takes to repay a loan, Yusko did not mention any conditions on the call.
This appears to mean that the credit facility offered by FTX may allow the firm to convert loans made to BlockFi into equity without restriction.
Representatives from Morgan Creek and FTX declined to comment on the specifics of the credit facility. A spokesperson from BlockFi stated that all the claims made on the Morgan Creek call are “highly speculative,” and that “BlockFi does not comment on market rumors.”
More layoffs may be in the works at BlockFi.
Like other crypto firms, on June 13 BlockFi CEO Zac Prince announced on Twitter that the firm would be reducing its headcount by “roughly 20%”
But Yusko seemed to suggest that more layoffs may be in the works, offering a number that has been the subject of recent speculation on social media.
During the call, he took a question in the live chat asking what situation would trigger FTX’s option to buy BlockFi. In a meandering answer, he raised the subject of layoffs. "They’ve already imposed draconian measures,” Yusko said, “80 percent layoffs — actually higher than that, 85 percent layoffs.”
While it is likely that this number refers to upcoming layoffs at BlockFi, the exact meaning of the statement is unclear. Specifically, it is unclear who is imposing the “draconian measures” — and under what circumstances they may go into effect.
Representatives from Morgan Creek and FTX declined to comment on the figure. A spokesperson from BlockFi stated only that “BlockFi’s people are the company’s superpower and essential to our business remaining fully operational during current market conditions.”
A day after the publication of this report, Yusko sought to walk back his layoff-related comments in a statement: “We regret that an internal, confidential, conversation between Morgan Creek and our private investors was shared outside its intended audience. Comments regarding BlockFi's employee base were conjecture based on my past experience with similar deal structures. Those comments were based on the information available at the time of the call and were not confirmed by either BlockFi or FTX, but were rather an opinion offered in response to a question about possible future paths for the company.”
Correction: A previous version of this article stated that it was Anthony Pompliano who said that BlockFi's loan to 3AC was overcollateralized. It was Mark Yusko who made that assertion.
Disclaimer: The former CEO and majority shareholder of The Block has disclosed a series of loans from former FTX and Alameda founder Sam Bankman-Fried.
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