Posted October 7, 2024 at 4:21 PM EST.
A US bankruptcy court approved the plan to reorganize bankrupt crypto exchange FTX on Monday, meaning between $14.7 billion and $16.5 billion in assets recovered should be distributed to FTX creditors.
Many investors expected that these distributions would immediately lead to increased demand and higher prices for cryptocurrencies, with creditors using the recovered funds to reinvest in digital assets. The reality, however, is much more complex.
Approval of the reorganization plan by U.S. Bankruptcy Judge John Dorsey does not immediately turn on the distribution spigot, according to Kyle, an advocate for FTX creditors known as Mister Violet on X. First, the court must set a date for implementing the plan, known as effective datewhich is currently estimated be October 31.
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“Given (the debtors’) track record, I would expect (the timeline) to slip a little bit,” Kyle said. “It’s probably more likely that the effective date of the plan will be sometime in November, maybe late November, and at that point the debtors can actually start the distribution process.”
What is the distribution schedule?
Once the effective date is reached, debtors will have 60 days to make distributions in what is called the “convenience class,” which includes all individual customer claims under $50,000. Approximately $1.2 billion in recovered assets will be distributed to this class, taking into account the debtor recovery estimates.
The redistribution timeline remains ongoing and depends on logistics, Yesha Yadav, a law professor at Vanderbilt University, said in an email to Unchained.
“The current payment schedule is progressive: smaller creditors with less than $50,000 in debt should be repaid sooner, and larger creditors will potentially have to wait until next year before receiving a distribution,” he said. Yadav said.
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According to Kyle, the largest group of creditors, known as the “entitlement class”, will likely be paid no earlier than February next year. That group has about $9 billion in claims, and Kyle said he expects those creditors to receive between 100 and 110 cents on the dollar in the spring of next year, followed by interest payments on the unpaid portion of their claims until these claims are settled. paid in full, and an additional distribution from the $12.7 billion regulation between the FTX domain and the Commodities Futures Trading Commission (CFTC). The FTX domain estimates a final recovery rate of between 129% and 143% for the eligibility class.
John, an FTX creditor and debt buyer who requested anonymity due to fears of retaliation from debtors, noted that the bankruptcy estate has not met all deadlines set so far.
“I think the convenience classes will get their money, maybe next year – April, May, something like that – and it won’t be quite complete, but phased out,” John said. Thomas Braziel, co-founder of troubled investment firm 117 Partners, agreed that payments were likely to arrive in waves, based on his experience in other bankruptcy cases involving crypto companies, such as Mt. Gox, Celsius and Voyager.
What impact will the distributions have on the market?
According to experts, whenever distributions take place, they are unlikely to be major liquidity events for the crypto market, in which creditors use the recovered funds to drive up crypto prices. cryptography. This is due to the outsized role that claim buyers and distressed investment firms played in this bankruptcy case.
A report from Fortune in March showed that hedge funds Attestor, Baupost, and Farallon are the largest holders of FTX claims, with $520 million, $518 million, and $346 million in claims, respectively. In February this year, broker Cherokee Acquisition noted that the top six holders of FTX claims were troubled companies, having amassed a position of $1.3 billion.
In total, about half of the debts on file, or between $6 billion and $7 billion, belong to companies in difficulty, according to Braziel. Kyle arrived at a similar figure, noting that one of the ad hoc groups – mostly made up of claim buyers but not representing all of the claim buyers in the case – collectively sits on claims worth approximately $6 billion.
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“I say with extreme confidence, almost none (of the debt buyers) will redeploy into crypto,” Kyle said. “A lot of them won’t be allowed to, even if they wanted to.” Several of the debt buyers are funds that have limited partner agreements that are not crypto investors.
Braziel helped negotiate numerous claims transactions and also purchased a small fraction of client claims through his investment company. In those cases, the distributions go to the customers and they will decide how to invest the money, Braziel said.
“Most of these guys are big crypto enthusiasts and they already own a lot of crypto. They are not redeploying into crypto,” Braziel said.
John, FTX’s creditor and small claims buyer, works in crypto but said it was “far from it” that all of the money from his distributions would be deployed into crypto. “Everything seems a little too expensive,” he noted.
However, not everyone stays away; crypto investment firm Sol Strategies said The block intends to purchase more Solana tokens with the capital recovered from FTX. And some members of the rights class in this case are institutional crypto firms that traded on FTX, Braziel said.
Being primarily made up of retail investors, the convenience class is most likely to reinvest profits into crypto, but Kyle said he is skeptical that this will happen.
“That will be less than $1 billion coming to market in December/January, and that’s the actual number,” Kyle said. “Anyone who considers this a major liquidity event will be sorely mistaken.”
Another consideration in all of this is that many of the major crypto bankruptcies, such as those of Celsius and Voyager, sold the crypto assets recovered during the bankruptcy proceedings in order to repay creditors, which exerted some selling pressure. in the crypto market.
“I actually think the most optimistic thing for the crypto markets is the fact that all of these successions are basically over,” Braziel said. “There are a few things on the fringes, but for the most part, they’ve sold a lot of their bags, in crypto parlance.”
