Is the Proposed DCG-Genesis Deal Actually Good for the Creditors?
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On Tuesday, the influential cryptocurrency investment firm Digital Currency Group (DCG) reached a preliminary agreement to settle its debt obligations. It is not yet legally binding as an in-principle agreement, but it shows the path to closure.
Crypto lender Genesis declared bankruptcy in January 2023, owing over 100,000 creditors between $1 billion and $10 billion in liabilities. At the time, the DCG subdivision had $150 million left to facilitate restructuring. The bankruptcy affected Gemini the hardest, as Genesis supplied liquidity to the Gemini Earn program.
Under the DCG umbrella, Genesis Global Capital, Grayscale Investments, and CoinDesk took financial hits amid the prolonged crypto winter, dragging from the collapse of Terra, Three Arrows Capital, Celsius, and FTX.
Owners of Gemini, Cameron and Tyler Winklevoss, initially offered to contribute $100 million in cash to make Gemini Earn customers whole, to whom Genesis owes $900 million.
Winklevoss Brothers’ Previous Offers
The relationship between the Winklevoss twins and Barry Silbert, DCG’s CEO, has been strained, to put it mildly. In the first open letter in January, Cameron accused Barry of negotiating in bad faith, postponing restitution to Gemini Earn’s 340,000 customers.
Cameron estimated that DCG owes its Genesis subsidiary $1.675 billion but that Barry used this money for nefarious purposes.
“You took this money – the money of schoolteachers – to fuel greedy share buybacks, illiquid venture investments, and kamikaze Grayscale NAV trades that ballooned the fee-generating AUM of your Trust.”Cameron Winklevoss, Gemini president
In response, Silbert claimed that DCG not only did not borrow $1.675 billion from Genesis but that DCG never missed Genesis interest payments. In the second open letter, in July, Cameron offered his “best and final offer” to Barry, rounded at $1.47 billion that DCG has to pay. The offer included the following stipulations:
- $275 million forbearance payment, as a temporary lender-borrower agreement by which the borrower could temporarily stop making payments but still make interest payments on the principal.
- $355 million debt tranche, requiring the repayment of the principal in 2 years.
- $835 million debt tranche, requiring the repayment of the principal in 5 years.
Moreover, Cameron noted he would “file a lawsuit against DCG and you personally” on July 7 as the final deadline. Silbert filed a motion to dismiss the lawsuit. Cameron then responded, describing the reasoning for dismissal as “ridiculous arguments” and “incredibly revealing.” The official legal response is yet to be filed before September 14th.
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The New Deal Favorable for DCG or Gemini Earn Customers?
Filed in the U.S. bankruptcy court in the Southern District Of New York, the new restructuring plan includes a $630 million payment in unsecured loans due on May 9-11th, 2023. Cameron had previously described this obligation as:
“This loan is the sword of Damocles that hangs over your head. Unlike the fugazi promissory note that’s not due for 10 years, this loan was due in May of this year.”
The forbearance fee at 0.375% is exceedingly favorable to DCG, lower than a typical loan origination fee.
Further, DCG doesn’t have to pay a penalty interest rate from the May maturities. Penalties are usually higher than regular loan interest rates for the apparent reason of discouraging late repayments. In four installments, DCG would pay $275 million after the date of the partial repayment agreement.
The plan’s underpinning is a $1.1 billion unsecured promissory note due in 2032. This would be done in two debt tranches worth ~328.8 million at a 2-year expiry and $830 million at a 7-year expiry.
Via the unsecured promissory note, DCG agreed to repay creditors but without the collateral. This means that if DCG defaults, creditors are out of luck. Moreover, the deal doesn’t include the market-based interest rate proposed in February.
The deal favors DCG heavily due to low fees, no penalties, and below-market-rate repayment. This is why the restitution range for unsecured creditors turned so flexible, between 70% – 90%.
“DCG is pleased to reach an agreement in principle with Genesis and the Unsecured Creditors Committee, which will provide a framework for a comprehensive resolution of the claims in the Genesis Chapter 11 cases and a pathway to significant recovery for creditors,”DCG statement per Reuters
At press time, Cameron Winklevoss has not yet made an official statement on the in-principle agreement. However, a plan that favors DCG is better than continued delay and avoidance.
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