This week, Judge David Jones from the Southern District of Texas gave the go-ahead to a $70 million loan from B. Riley Commercial Capital approved for bitcoin miner Core Scientific. This comes as the company is undergoing bankruptcy proceedings in the hopes of reviving itself after the crypto market downturn of 2020 and the energy price hikes that followed.
The new loan has replaced an interim order, with the provision of paying fees for court proceedings and advisers. It also has ‘super priority’ over any administrative expenses and unsecured claims—except for certain fees known as the ‘carve-out’. The loan has an annual rate of interest of 10%.
The approval of this loan has raised the issue of properly protecting the interests of equity holders. A group of them had asked the court to form an official committee to make sure their interests would be properly represented in the case. Core Scientific promptly agreed to form the committee and set a budget of $4.75 million, sourced from the secured assets, for the committee’s services. Judge Jones then cut back the budget to $2.2 million.
BlockFi had objected to the DIP but had withdrawn their objections prior to the Wednesday hearing. Equipment lenders like BlockFi often had assets that are inadequately secured; for instance, the company had $90 million in assets which were undersecured.
The equity group then accused Core Scientific of not adequately shopping around for financing options. The group argued that the company had chosen B. Riley’s financing at the expense of the Equity Holders. Part of the loan includes a $6 million termination fee, said to have an internal rate of return of 500%. Core Scientific had denied this claim and said that it had spoken to 20 possible lenders for its original financing. The equity holders represent 69 million shares of common stock.
The biggest concern of the equity holders is whether Core Scientific was acting in a manner to protect their fiduciary responsibility. If the judge finds that their interests were inadequately protected by the committee, he reserves the right to reduce the committee’s budget to zero. This would mean that the equity holders would fight with the unsecured debt holders for a mere 3% of the reorganized company.
The $70 million loan from B. Riley Commercial Capital approved by Judge Jones will be immensely helpful in helping Core Scientific get back on its feet, but it has raised questions on the responsibility and intention of the company as well as its fiduciary duty towards the equity holders. It remains to be seen whether the loan can bring in the much needed sanity to Core Scientific and the chaotic crypto market downturn.
