MARA Down 14% as Miner Exchanges $417M in Senior Notes for ~26M Shares

Marathon Digital Holdings (MARA) is taking advantage of its status as the largest publicly traded Bitcoin mining company. On Friday, Marathon announced a private agreement to exchange $417 million convertible senior notes due in 2026 for common shares.

These notes serve as IOUs to investors while they get a piece of the company, 26.2 million new shares, in exchange. The agreement doesn’t result in Marathon receiving a new cash flow. Instead, investors will receive accrued and unpaid interest on the notes.

Marathon can decrease outstanding debt obligations by converting debt into convertible senior notes as prioritized debt security. In turn, this improves the company’s financial picture by reducing its interest payments. 

On the other hand, new stock issuance leads to value dilution. In other words, existing MARA shareholders are poised to own a smaller piece of the company. Expectedly, MARA took a 14% devaluation hit after Friday’s announcement. 

Where is MARA in the Current State of the Crypto Market?

In May, the rise of Bitcoin Ordinals was an unexpected boon for the entire Bitcoin mining industry. Overall, this new asset class generated $1.9 billion in fees, even resulting in network congestion.

Bitcoin transaction fees went up as high as $31, a level not seen since April 2021. This was a welcome respite for Bitcoin miners after the post-FTX crypto winter. Marathon Digital was the primary beneficiary as the largest publicly-listed Bitcoin mining company, now contributing 19.1 EH/s to secure the network and process transactions.

The current crypto market is in a holding mode. Much is expected of upcoming Bitcoin ETF approvals. They are near certainty after the Securities and Exchange Commission (SEC) lost its court battle against Grayscale Investments for barring GBTC conversion into an exchange-traded fund.

On top of that, a new door opened for corporate treasuries to hold digital assets at fair value under the revised Financial Accounting Standards Board (FASB) rule. The new accounting practice will go into effect in 2025. In conjunction with these two bullish drivers, the fourth Bitcoin halving will happen in April 2024, further decreasing BTC scarcity by lowering BTC mining rewards from 6.25 BTC to 3.125 BTC.

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Why Does MARA Need Debt Restructuring?

All Bitcoin mining companies must finesse expansion during bull runs against operating costs. That expansion depends on debt to buy more mining machines and improve technology to be maximally efficient in the long run. 

Going bankrupt, Core Scientific (CORE) failed this delicate task in December 2022, right after FTX thrashed the entire crypto market, exacerbated by previous downswings, courtesy of Terra, Celsius, and Three Arrows Capital (3AC).

The CORE failure showed debt mismanagement, having over $1 billion in obligations in the middle of a black swan event. It also showed a feedback loop into the market as CORE had to sell 9,618 BTC in April to stay afloat. This constitutes a selling pressure against the market which CORE serviced and relied upon.

As of August 8th, Marathon Digital Holdings reported a $21.3 million net loss in Q2 2023, a massive improvement from the net loss of $212.6 million in the same period last year. In earnings per share terms, this is a difference between $0.13 vs. $1.94 per share (diluted).

Higher D/E Ratio than Bankrupted CORE

Marathon’s revenue increased by 228%, from $24.9 million in Q2 ‘22 to $81.8 million in Q3 ‘23. Offset by liabilities, this translates to Marathon’s debt-to-equity (D/E) ratio at 1.24.

For comparison, Core Scientific had a D/E of 0.58 at the time of bankruptcy, nearly double that of Marathon’s. The above 1.0 range means that the company has more debt than equity, but it is still acceptable.

With that said, CORE took the approach of taking on debt without diluting shares. Marathon’s latest issuance of new shares for notes should be viewed as an endurance preparation run. 

The CEO, Fred Thiel, had hinted in April 2022 that he was ready to sell the company at the proper valuation. Regardless of share dilution, if all cards come into play – corporate treasury adoption and Bitcoin ETF inflows – Marathon is poised to reap the benefits following Bitcoin halving.

In the end, just as Bitcoin generates fewer rewards, Marathon is setting to boost the value of more shares. Barring more black swan events that cripple Marathon’s debt management, the company remains a risky investment, but so is Bitcoin itself.

Which exposure to Bitcoin will win out in the end, the MicroStrategy (MSTR) exposure or Bitcoin mining company exposure? Let us know in the comments below.