Bitcoin-Backed Bonds Undergo Challenges Following Bitcoin Price Drop, According to S&P
The initial foray of Wall Street into public bond offerings secured by bitcoin loans has encountered difficulties as a significant downturn in bitcoin’s value led to forced liquidations.
Bankers from Jefferies have been engaging institutional investors for several months regarding a $188 million asset-backed bond initiative linked to numerous loans provided by the cryptocurrency lender Ledn, as reported by the Wall Street Journal.
This financial structure aims to consolidate one-year loans granted to individuals who use bitcoin as collateral. The funds raised from this bond issuance are intended to furnish Ledn with additional resources for extending new credit lines.
However, the deal faced scrutiny after bitcoin experienced a decline of approximately 27% since mid-January, resulting in margin calls across the loan portfolio. As per WSJ, Ledn had no choice but to liquidate around 25% of the loans that were meant to support this transaction.
This situation indicates that the credit product backed by bitcoin underwent an early stress test due to price fluctuations triggering margin calls throughout its loan book.
The bonds issued by Ledn are projected to yield returns between 3 and 6 percentage points above standard benchmark rates.
Jefferies has been broadening its footprint in structured finance and is increasingly offering more intricate and less conventional asset-backed products.
The bank has also intensified its involvement in cryptocurrency transactions, including advising trading platform NinjaTrade on its $1.5 billion acquisition by exchange Kraken last year.
Initially, Jefferies indicated that these Ledn bonds would be underwritten with $199 million worth of bitcoin-secured loans along with $1 million in cash. However, following recent liquidations, this composition has altered significantly; now about $150 million comprises loans while roughly $50 million consists of cash backing the collateral pool according to reports from WSJ.
This shift suggests that what was initially marketed as a bond primarily supported through interest-generating loans is now considerably reliant on cash reserves—highlighting structural vulnerabilities during periods of steep market declines.
S&P’s Ratings on Bitcoin Bonds
Despite these challenges, S&P Global Ratings confirms that the bond offering remains set for closure on February 18th. In light of recent events, Ledn must reinvest liquidation proceeds into new lending opportunities necessary for generating interest income required for fulfilling obligations towards bondholders.
S&P’s evaluation outlined both structural elements and potential risks associated with Ledn Issuer Trust 2026-1. The agency noted that at year-end December 31st, there were initially about 5,441 fixed-rate balloon loans distributed among approximately 2,914 borrowers amounting collectively up to around $199.1 million in principal balance.
The secured assets included roughly:
- ∼∞ 4 ∼∞
- ∼∞ 356 ∼∞
. .
The report highlighted how Bitcoin’s rapid depreciation earlier this month compelled Ledn into selling off “a substantial portion” of their planned loan package.
S&P stated all sales occurred below an LTV threshold (Loan-to-Value) ratio exceeding an alarming figure which shifted portfolio dynamics towards reduced loan numbers alongside increased liquidity available within funding accounts while maintaining total collateral at around two hundred millions dollars.
S&P focused analysis upon borrower default patterns recovery rates during liquidation scenarios plus concentration risk factors involved.
<S&P emphasized defaults driven mainly via margins represent acute stress situations since such sell-offs transpire when cryptocurrencies drop sharply possibly entering thin or volatile markets where execution slippage proves crucially impactful.
Because underwriting practices predominantly hinge upon utilizing crypto-collateral rather than assessing individual borrower's creditworthiness traditional consumer metrics yield limited insights according S&Ps assessment.
At ‘A’ level stresses assumptions applied included conservative expectations leading up toward full defaults alongside modeled scenarios projecting high default ratios versus recoverable amounts specifically targeting BBB-rated tranches.
Additionally pointed out mitigating structures involve overcollateralization provisions early amortization triggers liquidity reserves funded proportionately against note balances plus leveraging automated liquidation mechanisms yielding successful outcomes over years without incurring principal losses despite noted weaknesses encompassing historical volatility regulatory uncertainties conflicts stemming past practices related rolling unpaid interests capitalizing onto existing debts thus impacting future performance metrics.
Starting next year onwards led plans introduce mandatory cash payments covering renewals reducing long-term liquidity pressures effectively helping maintain solvency through timeframes predicted based forecasts suggesting adjustments made accordingly especially if market conditions worsen further affecting valuations overall leading necessitating borrowers meet additional requirements once collateral values drop beyond stipulated thresholds forcing compliance actions promptly executed henceforth ensuring ongoing stability achieved within frameworks established thereby enhancing investor confidence moving forward amidst uncertain environments ahead!
This article titled "Bitcoin-Backed Bonds Facing Stress Test After Bitcoin Selloff," first appeared on Bitcoin Magazine authored by Micah Zimmerman.