Debt Investors Circling Remains of Crypto Lending Platforms

Bankruptcy filings often give rise to bargain deals that hedge funds and debt investors promptly take advantage of. The recent Chapter 11 bankruptcy filings by certain crypto firms have given rise to the availability of bargain crypto claims. Investors who have claims on lending platforms BlockFi, Celsius Network, and Voyager Digital – these three firms filed for bankruptcy in 2022 – have been selling their claims.

Reports reveal that a growing number of creditors of these bankrupt crypto firms have put up their debt for sale. In an interview with WSJ, Matt Sedigh, the founder of bankruptcy claims trading marketplace Xclaim, said that the firm has received a slew of phone calls from creditors of these bankrupt crypto firms, from various parts of the world.

Hedge funds and debt investors have been scooping up these debt offerings. Contrarian Capital and Invictus Global are said to be taking the lead in the acquisition of these claims. The investors selling their claims are incurring losses upfront while discarding the need to go through the seemingly long and uncertain bankruptcy process. Debt buyers (the individuals and firms purchasing these claims) are getting these claims at hugely discounted prices while assuming the risk of not being able to collect on them.

What is Debt Buying?

Debt buying refers to the practice of purchasing outstanding debt from creditors or debt collectors to collect on that debt. Debt buying is a way for companies to generate income by collecting on delinquent or defaulted debt. Buying and selling of claims are generally allowed in Chapter 11 bankruptcies.

Some ways in which debt buying can occur are:

• Creditors sell their outstanding debt to debt buyers when they cannot collect on it themselves. This can be a way for creditors to recoup some of their losses and avoid the time and expense (typical of bankruptcy proceedings) of trying to collect on the debt.
• Debt buyers purchase debt from creditors and attempt to collect on it themselves. This is a way for debt buyers to generate revenue and profit by successfully collecting on the debt.
• Debt buyers purchase debt that is sold at a public auction, such as a bankruptcy sale, as a way to generate income by collecting on the debt.

Who is a Debt Buyer?

Debt buyers are typically companies that specialize in acquiring and collecting on delinquent or defaulted debt. A debt buyer as a company or individual purchases debts from creditors at a discounted price of the value of the debt. The debt buyer then becomes the new creditor and is responsible for collecting the full amount of the debt from the debtor.

Debt buyers often purchase debts that are in default or close to default, and they may use aggressive collection tactics to try to collect the full amount of the debt from the debtor.

Why Buy Debt?

Companies or individuals buy debt for various reasons, including:

• To make a profit: Debt buyers purchase debts at discounted prices, with the hope of making a profit by collecting the full amount of the debt from the debtor. If the debt buyer is successful in collecting the full amount of the debt, they can make a significant profit on the purchase.
• To speculate: Some investors buy debt with the hope of selling it at a higher price in the future. For example, when significant progress has been made in a bankruptcy proceeding, the price of debts related to the bankruptcy filing may increase in value.
• To diversify portfolio: As debts are typically offered at a fraction of their original value, it allows individual and firms to diversify their portfolio. Investors who would typically not pay a premium for the original value of an asset might consider it less risky to purchase it as a debt at a hugely discounted price.

Why Do Creditors Sell Debt?

Creditors choose to sell debt for several reasons, including:

• To raise money and reduce risk: A creditor may need to sell their debt to raise money for other purposes. If a creditor believes that the debtor is at a high risk of default, they could decide to sell to mitigate their losses.
• To take advantage of market conditions: A creditor may sell their debt if they believe that the market conditions are favorable and they can get a good price for the debt.
• Portfolio simplification: A creditor may choose to sell their debt if they want to simplify their portfolio and reduce the number of assets they are holding.
• To improve the possibility of debt collection: Creditors may sell debts that they are having difficulty collecting on to debt buyers, who may have better success and experience in collecting on debts.

In a related report, Celsius, one of the bankrupt crypto lending firms, announced plans to file a motion to extend the bar date (deadline for creditors to file proof of claim) from January 3, 2023, to early February 2023. Celsius says its goal is “to provide account holders with additional time to file any proof of claim.” Most creditors have, however, criticized Celsius’ proof of claim deadline extension, calling it a form of delay tactic.