Claims of customers with assets stuck on FTX following its bankruptcy have started drawing the biggest names in distressed investing.
During a bankruptcy, customers with frozen assets often face a lengthy, uncertain process in trying to reclaim them. Rather than wait for a resolution, many often sell their claims on the assets at a discount to distressed investors.
In the case of FTX, these now include firms like hedge fund Baupost Group and asset manager Oaktree Capital Management. Meanwhile, Citigroup Inc., Cowen Inc., Seaport Global Holdings LLC, and Jefferies Financial Group Inc. hope to act as intermediaries. “Many of the major participants in the distressed debt market are focused on this,” said Jefferies global head of distressed and special situations Joe Femenia.
Issues with FTX
FTX is distinct among crypto bankruptcies so far, in that its claims have been large enough to attract traditional distressed investors. The top 50 claims alone retain a face value of $20 million. Yet the case also presents some unique challenges that could end up setting some new precedents in crypto bankruptcies. For instance, it is still unclear whether the value of the claims on the crypto assets will be fixed at the time of the bankruptcy or continue to fluctuate.
The case of FTX faces another issue in terms of valuation. The company’s new leadership managed to procure $1 billion of digital assets and $1.2 billion of cash, while liability estimates round up to $10 billion. However, chief executive John Ray III remarked that the absence of any “trustworthy financial information” makes it very unclear how much creditors could possibly recoup. “There are a lot of uncertainties around recovery right now because you don’t know what you can trust from FTX’s balance sheets,” said Femenia at Jefferies.
Other recent acquisitions
In addition to distressed investors’ interest in customers’ claims, other crypto companies have taken an interest in acquiring FTX assets. Tron founder Justin Sun confirmed that several associates had been investigating assets belonging to FTX. Just prior to the bankruptcy declaration, Ripple CEO Brad Garlinghouse expressed an interest in buying FTX stakes’ in other companies. However, both have said that the bankruptcy process could complicate their intentions.
Meanwhile, Binance was able to achieve what Garlinghouse had hoped to do in acquiring FTX claims on other companies. The US arm of the world’s largest cryptocurrency exchange successfully bid for the assets of bankrupt crypto lender Voyager Digital. FTX had won a previous auction for the assets, which Voyager terminated following the exchange’s bankruptcy.
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