[Just filed. Developing story] December 21, 2022 – Core Scientific, Inc.and ten affiliated debtors (NASDAQ: CORZ; together "Core Scientific" or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case No. 22-90341 (Judge David R. Jones). The Debtors, "a leader in high-performance blockchain computing data centers*," are represented by Alfredo R. Pérez of Weil, Gotshal & Manges LLP. Further Board authorized appointments include: (i) AlixPartners, LLP as financial advisors, (ii) PJT Partners LP as investment bankers and (iii) Stretto Inc. as claims agent.
* The Debtors add: "Headquartered in Austin, Texas, the Company is one of the largest blockchain infrastructure, hosting provider, and digital asset mining companies in North America, with approximately 814MW of capacity across eight operational data centers in Georgia (2), Kentucky, North Carolina (2), North Dakota, and Texas (2) (the ;Data Centers'). The Company mines digital assets for its own account (“Self-Mining”) and hosts miners for third-party customers ('Hosting Operations')."
The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets of $1.4bn; and estimated liabilities of $1.33bn (as at September 30, 2022). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) BRF Finance Co., LLC ($42.4mn), (ii) Dalton Utilities ($6.8mn utilities claim) and (iii) Shell Energy Solutions ($3.8mn utilities claim).
Highlights
- Leading Operator of "Blockchain Computing Data Centers" and Digital Asset Miner File for Bankruptcy with $1.33bn of Debt
- Cites "Crypto Winter," Power Price Increases, Celsius Bankruptcy, "Significant Overcommitment" as to Construction Costs (ie $200mn) and Failure to Pay for Leased Equipment (then Cross-Defaulting into Senior Convertible Notes) as Compelling Bankruptcy
- Executes Restructuring Support Agreement with Holders of 66% of Senior Convertible Notes that Will See Debt-for-Equity Swap
- Lines up $75.0mn of DIP Financing with Only $4.0mn of Cash on Hand
In a press release announcing the filing, the Debtors note: "…after a comprehensive review of potential alternatives and exhaustive discussions with various Company stakeholders, the Company expects to enter into a restructuring support agreement (the 'Restructuring Support Agreement') with the Ad Hoc Noteholder Group, representing more than 50% of the holders of its convertible notes.
During this process and upon emergence, the Company will continue to operate its existing self-mining and hosting operations, which remain significantly cash flow positive on a debt-free basis. The Company is committed to operating normally during the implementation of its restructuring. The Company remains dedicated to providing hosting services and self-mining in its state-of-the-art data centers.
The Restructuring Support Agreement will be subject to a 'fiduciary out' for the Company to pursue better alternatives. As contemplated, the restructuring will reduce the Company's funded indebtedness by hundreds of millions of dollars and reduce annual interest expense by tens of millions of dollars.
Pursuant to the contemplated Restructuring Support Agreement, the Company's existing convertible noteholders will equitize their debt into a significant majority of the common stock of the reorganized company. In addition, holders of general unsecured claims and existing common shareholders would also receive meaningful recoveries in the form of reorganized common stock and warrants exercisable for significant portions of the common stock of the reorganized enterprise upon obtaining certain valuation thresholds. Both the common stock and the warrants will enable stakeholders to capture a share of the Company's future growth.
The filing of these cases was necessitated by a decline in the Company's operating performance and liquidity suffering from the prolonged decrease in the price of bitcoin, the increase in electricity costs necessary to power the Company's data centers, and the failure by certain of its hosting customers to honor their payment obligations. In response to these factors, the Company has actively taken steps to decrease monthly costs, delay construction expenses, reduce and delay capital expenditures and increase hosting profitability.
The Company extensively explored potential financing alternatives and actively negotiated with various stakeholders. In consultation with its advisors, the Special Committee of the Board of Directors of the Company determined that the restructuring contemplated by the Restructuring Support Agreement represents the optimal path forward and best positions the Company for long-term success."
Restructuring Support Agreement
The Debtors have entered a restructuring support agreement with an ad hoc group of holders of over 66% of the Debtors' Convertible Notes (the "Ad Hoc Noteholder Group") and the agreement, the “Restructuring Support Agreement” or “RSA,” attached to Docket No. 5 as Exhibit B). The RSA, xecuted as at the Petition date, includes the following key terms: "
- At emergence, (i) the refinancing of the DIP Facility with third-party exit financing for 112% of the then-outstanding debt amount or (ii) the rolling of the DIP Facility into 4- year exit term loan facility on the same terms and the issuance of warrants to the DIP lenders for a certain percentage of the New Common Shares,4 subject to dilution by the Management Incentive Plan and warrants issued to holders of general unsecured claims and existing equityholders.
- The equitization of the Convertible Notes in exchange for 97% of the New Common Shares, subject to dilution by the Management Incentive Plan, the warrants issued in connection with the rolling of the DIP Facility and the warrants issued to holders of general unsecured claims and existing equityholders;
- The issuance of $75 million in New Second Lien Notes to certain holders of Convertible Notes at their option;
- The issuance of Miner Equipment Takeback Debt to holders of Miner Equipment Financing Claims (for the secured portion of their claims);
- The reinstatement of secured Non-Miner Financing Claims; and
- Meaningful recoveries to holders of General Unsecured Claims and existing equity in the form of New Common Shares and warrants exercisable as certain enterprise values are achieved."
DIP Financing
The press release provides: "In connection with the Restructuring Support Agreement, the Ad Hoc Noteholder Group has agreed to provide commitments for a debtor-in-possession facility (the 'DIP Facility') of up to $56 million and has agreed to support the syndication of up to an additional $19 million in new money DIP Facility loans to all holders of convertible notes. These funds, along with ongoing cash generated from operations, are anticipated to provide the necessary financing to effectuate the planned restructuring, facilitate the emergence from Chapter 11, and cover the fees and expenses of legal and financial advisors."
Events Leading to the Chapter 11 Filing
In a declaration in support of first day filings (the “Bros Declaration), Michael Bros, the the Debtors' Senior Vice President of Capital Markets & Acquisitions, provided as to the calaylsts for the bankruptcy filing: “
- First, the Debtors’ financial performance has been drastically impacted by the precipitous and prolonged decline in the price of bitcoin during the so-called 'crypto winter' that began in the spring of 2022.
- Second, as a bitcoin mining company heavily dependent on power to operate the computing power necessary to sustain Self-Mining and Hosting Operations, power price increases that began in early 2022 have negatively impacted the Debtors’ margins and, as a result, the Debtors’ liquidity position.
- Third, the chapter 11 filing of Celsius Mining LLC (together with its debtor affiliates, 'Celsius'), one of the Debtors’ largest hosting customers, exacerbated the Debtors’ problems. In addition to the amounts Celsius owed the Debtors for the period prior to Celsius’s bankruptcy, for which the automatic stay in Celsius’s chapter 11 case protected it from having to pay, Celsius has continuously failed to pay the 'power pass through' charges owed to Debtors, even for the period after Celsius’s chapter 11 filing. These unpaid amounts total approximately $7 million, most of which has accrued during the Celsius postpetition period.
- Fourth, the Debtors significantly overcommitted for construction costs to build out additional mining capacity. As of the Petition Date, the Debtors were committed on over $200 million in construction costs, while contractors had asserted more than $70 million in past due invoices and asserted mechanics liens.
- Fifth, the Debtors were indebted on approximately $275 million of equipment financing, and they were not making payments on significant amounts of equipment financing as of the Petition Date. This equipment financing is largely undersecured, and as of the Petition Date, the Debtors believe that the value of the collateral securing the equipment may be $90 million or less.
- Sixth, as the Debtors’ liquidity waned, one of the Debtors’ equipment lenders accelerated the debt owed, which caused a cross default to the Debtors’ secured convertible notes, which have a principal balance of over $550 million.
- Seventh, the Debtors faced other litigation and debts that made pursuit of an out-of-court path simply unworkable in the Debtors’ judgment when considering the totality of circumstances.
Taken together, these factors, along with the Debtors’ significant debt service costs and construction commitments, placed a considerable strain on the Debtors’ liquidity. As stock prices fell and the industry deteriorated, the Company was unable to access the capital markets after October 2022 to raise equity for additional liquidity. As of the Petition Date, the Debtors have only approximately $4 million in total liquidity."
About the Debtors
According to the Debtors: “Core Scientific is one of the largest publicly traded blockchain computing data center providers and miners of digital assets in North America. Core Scientific has operated blockchain computing data centers in North America since 2017, using its facilities and intellectual property portfolio for colocated digital asset mining and self-mining. Core Scientific operates data centers in Georgia, Kentucky, North Carolina, North Dakota and Texas. Core Scientific's proprietary Minder® fleet management software combines the Company's colocation expertise with data analytics to deliver maximum uptime, alerting, monitoring and management of all miners in the Company's network."
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