Coinbase is seeking to raise US$2bn from a two-part sale of convertible bonds that prefunds maturities of existing debt while maximizing financial flexibility.
JP Morgan is sole books in the marketing of the four- and seven-year CBs at a fixed zero-percent coupon on both tranches and conversion premiums of 50%-55% and 30%-35% respectively. The bank expects to price the offerings after the market close Tuesday.
The crypto-focused exchange’s shares are down 5.4% in Tuesday’s session to US$300.80, extending losses following a steep selloff last week after the release of disappointing second quarter results.
To cushion the blow of selling at a “depressed” share price, Coinbase is purchasing a derivative to increase the effective conversion price on the CBs.
As it stands, the CBs would be convertible at share prices above roughly US$405.00 and US$460.00, but the capped call derivative offsets dilution recognition up to above US$600.00, at the current share price and assuming a 100% upper strike.
In other words, this is an opportunistic financing. In marketing the CBs, JP Morgan is guiding accounts toward credit spreads and implied vol of S+175bp and 57 and S+250bp and 55.
“Obviously, I would rather them not sell at such a high implied vol, but I am biased,” said one convert arb fund manager. “This is a big deal and some of the existing bonds are selling off a bit.
“But I do think this offering will appeal to outright investors.”
The Coinbase financing is among the most aggressively priced/marketed CBs ever, rivalling the US$3bn zero-percent coupon CB that bitcoin hoarder Strategy issued in November last year at a 55% conversion premium to its share price at the time.
Coinbase said it could use the money to repurchase portions of a US$1.4bn principal 0.5% CB or a US$1.265bn 0.25% CB, which are convertible at US$370.45 and US$333.54, respectively, and mature in June 2026 and 2031. Other targets could include US$2bn of 3.375%/3.625% high yield bonds.
But those repurchases would be opportunistic and not part of this transaction.
Coinbase last week reported second-quarter adjusted Ebitda and revenue of US$512.1m and US$1.4bn, well short of the US$641.1m and US$1.6bn analysts had expected. The disappointment was driven by a 26.4% sequential decline in revenue from Q1, according to LSEG data.
“As expected, second quarter trading volume was muted,” wrote analysts at William Blair in a note to clients. “Global trading volume fell 31% and the company volume fell 37%, but we aren’t alarmed by share loss, as Coinbase adjusted its stablecoin pair trading pricing amid a strategic shift.
Coinbase benefits from strategic tie-ins and ownership of USDC stablecoin provider Circle Internet, which gives it a 100% share of revenue from stablecoin traded on its own platform and a 50% share on all other platforms.
Coinbase finished the second quarter with US$7.5bn of cash, so it has money to repay debt. But it is also growing through acquisitions, such as the US$2.9bn cash-stock purchase of crypto derivative Deribit it agreed to in May and is expected to close by year-end.
A CB is the perfect financing vehicle to take advantage of high, volatile growth expectations.