The first ever securitization of loans backed by Bitcoin might at first glance appear riddled with risk. But look more closely and protections in the structure may be enough to give investors comfort.
Ledn’s $188m deal, lead managed by Jefferies, parcels loans the US specialist lender makes to individuals and private companies against their Bitcoin holdings.
So far, so innovative — but the deal comes at a time when the Bitcoin price is cratering. It fell from $124,000 in October to around $63,000 on February 5. It was at about $67,100 on Wednesday when the Ledn deal was priced.
As GlobalCapital has previously reported, there are no credit checks on borrowers and they do not have to make any interest payments until they pay off the loan.
The issuer lends at a loan-to-value ratio of up to 50% of the Bitcoin staked, with the cryptocurrency held in custody so Ledn can sell it for cash if it needs to.
But with Bitcoin having plunged about 23% since the collateral pool was set at the end of December, LTVs in the portfolio have risen. The LTV of the junior notes in the pool, relative to the underlying Bitcoin, has risen to about 67%.
Some investors told GlobalCapital loans backed by Bitcoin were too risky for them, pointing to the cryptocurrency's volatility and the loans’ limited track record.
Initially, the deal was backed by 5,441 fixed rate 12 month balloon loans totaling $199m, secured on about 4,079 Bitcoin, plus about $1m of cash for Ledn to buy more loans for the deal after it was closed.
That mix will change after pricing because as Bitcoin has fallen in the past six weeks, Ledn has liquidated quite a lot of the loans.
This is the deal's key, and the reason why a securitization of such peculiar collateral is possible.
Borrowers have to put their Bitcoin in custody and grant Ledn the right to sell it, if the loan's LTV ever exceeds 80%.
Ledn notifies borrowers when their LTVs breach 70% and 75%, allowing them to add more Bitcoin collateral if they want to. But if the loan’s LTV hits 80%, Ledn sells the Bitcoin almost instantly and recovers the loan.
The effect of this is already visible in the collateral pool, where the cash portion has risen since New Year from $1m to an estimated $20m to $50m as a result of Bitcoin sales and loan redemptions.
This method provides the main comfort to investors. S&P, which rated the deal's two tranches BBB- and B-, says Ledn has never experienced a loss when liquidating loans for LTV breaches.
From the LTV breach to the sale of the collateral has taken an average of less than 10 seconds, S&P says, across more than 7,000 liquidated loans since 2018.
This contrasts with the collateral for many other kinds of ABS deals — mortgages or car loans, for example, where lengthy court proceedings can be required before collateral is monetised.
Ledn has plenty of other loans to replenish the deal's portfolio if loans are liquidated. About 19,200 of its 24,500 loans are available to roll into the collateral pool.
S&P's ratings, of course, refer to the legal final maturity in 2041.
Both tranches have a three year revolving period and 3.02 year average life, suggesting Ledn will need to find a way to refinance the assets to repay the bonds after three years.
But investors did not expect no risk for spreads of 335bp and 650bp over the I-curve.
Another source of reassurance is that from January 1, 2027, Ledn will ban borrowers from replacing one of its payment-in-kind loans with another at maturity. That kind of refinancing allows interest payments to keep mounting up. From next year, customers will have to pay off one loan before getting another.
Ledn will actively manage the collateral pool to ensure the amount of notes does not exceed 94% of the securitized loan balance, to maintain overcollateralization. If this ratio is breached, Ledn will amortize the notes.
Once the three year revolving period ends, principal will be repaid sequentially. There is also a $9m liquidity reserve account for the first 11 months of the deal.
No one should pretend that loans with no credit checks backed by an unregulated cryptocurrency are plain vanilla assets that can be securitized into triple-A notes.
Plenty of horrible things have happened in the crypto universe, and the deal relies on technological systems to repossess and liquidate collateral fast when Bitcoin falls.
But based on Ledn's multi-year track record of being able to recover loans almost as soon as they breach their 80% LTV thresholds, it is understandable why S&P has been willing to rate the top notes BBB-.
If you want to invest in crypto, Ledn’s deal is a safer way than most.