January 25, 2023 – The Debtors filed a motion to extend (for a second time) the periods during which they have an exclusive right to file a Chapter 11 Plan and solicit acceptances thereof, through and including March 31, 2023 and June 30, 2023, respectively [Docket No. 1940]. Absent the requested relief, the Plan filing and solicitation period is scheduled to expire on February 15, 2023. A hearing to consider the motion is scheduled for February 15, 2023, with objections due by February 8, 2023.
In the motion*, the Debtors provide significant additional detail as to the establishment of a "Recovery Corporation" which would" hold the Debtors’ liquid and illiquid assets and manage them over time to maximize value as markets improve," and avoid a timeline that would obligate the Debtors to "sell these assets at ‘firesale prices'." Key elements of the proposed Recovery Corporation framework include: (i) “Asset Share Tokens” for larger account holders that would reflect the value of the assets managed by the Recovery Corporation and which would entitle their holders to dividends as assets are monetized, (ii) a one-time, discounted payment in liquid cryptocurrency for smaller ("Convenience Class") account holders and (iii) the establishment of a litigation trust to pursue claims against certain insiders and potential causes of action (presumbaly Convenience Class holders not to share in this potential recovery).
*See also our coverage as to the January 24th hearing at which the Debtors first unveiled the parameters of the Recovery Corporation transaction.
As the present motion explains, the Debtors are having considerable issues with "harvesting quickly" their illiquid assets (marketing as to their mining business apparently faring a bit better), with those illiquid assets notably including staked ETH, some of which is locked up until 2026, and investments in other cryptocurrencies.
The Debtors' apparent preference is to have the proposed Recovery Corporation managed by a third party, noting that they have "received a bid from a potential plan sponsor (that is unaffiliated with Celsius or its founders) that could manage the recovery corporation." If negotiations do not advance with that plan sponsor (or another identified in the near term), the Debtors are prepared to manage the Recovery Corporation themselves. If a recovery corporation transaction in one form r another is not agreed, the Debtors provide that they "may have no other choice but to liquidate their assets, either through a self-liquidation or through a transaction with a third party to wind down the company."
If the structure is agreed, the Debtors, who believe they have worked through other key gating issues (including "clarifying which assets form part of the Debtors’ estates, authorizing the sale of stablecoins, and paving the way for the return of cryptocurrency assets to certain customers with custody accounts") insist that they are "well-positioned to finalize and file a chapter 11 plan, disclosure statement, and solicitation materials in the near term."
The Extension Motion
The motion [Docket No. 1317] notes, “For the benefit of all stakeholders, the Debtors actively pursued a dual-track process of marketing all of their assets for sale while simultaneously developing a path towards a standalone reorganization.
Importantly, the Debtors have significant ‘illiquid’ assets that cannot be harvested quickly, including (a) staked ETH (which is locked up until the staking periods conclude—the last of which expires in 2026), (b) the Debtors’ mining business, (c) retail and institutional loan receivables, and (d) investments in other cryptocurrency companies. These illiquid assets represent a significant percentage of the Debtors’ total assets. Accordingly, in order to maximize the value of their assets, the Debtors will need to either obtain fair prices from a buyer who is willing to recover the value of these illiquid assets over time, or enter into a transaction that allows the Debtors or their successors the time to realize the full value of these illiquid assets over time.
To date, the Debtors received several bids for the illiquid assets. Aside from certain interest in the mining business, however, these bids have not been compelling. Indeed, other than the proposals for the mining business, these bids received to date have severely undervalued these illiquid assets, and the Debtors do not believe it is appropriate to sell these assets at ‘firesale prices,’ which would lead to significantly less value to distribute to their account holders under a chapter 11 plan.
Accordingly, the Debtors, in consultation with the Committee, believe that given the bids received to date, the best path forward is to pursue a transaction that harvests the value of the Debtors’ illiquid assets over time and distributes that value to account holders. That transaction would establish a new ‘recovery corporation,’ which will hold the Debtors’ liquid and illiquid assets and manage them over time to maximize value as markets improve. Through the recovery corporation, the value of the Debtors’ assets, including the Debtors’ liquid and illiquid cryptocurrency, loan receivables, mining assets [NB: The Debtors are also continuing to pursue standalone options for the mining business that could be pursued in addition to the recovery corporation transaction] and proceeds from litigation claims, will be distributed to account holders.
The Debtors received a bid from a potential plan sponsor (that is unaffiliated with Celsius or its founders) that could manage the recovery corporation, or the Debtors could manage the recovery corporation themselves if acceptable terms cannot be reached with the plan sponsor. If the parties are unable to reach a definitive agreement on the terms of the recovery corporation transaction, the Debtors may have no other choice but to liquidate their assets, either through a self-liquidation or through a transaction with a third party to wind down the company
The Debtors, in consultation with the Committee, are negotiating with the potential plan sponsor to determine the best path forward. As disclosed at the January 24, 2023 omnibus hearing, discussions are crystalizing around a framework with the following key features:
- Recovery Corporation Features. The Debtors are considering operating the recovery corporation on a stand-alone basis or via a third party plan sponsor who would invest in and operate the recovery corporation. In either formulation, the recovery corporation will be fully licensed and registered and will comply with all applicable federal and state regulations. The recovery corporation will also have a dedicated management team and digital assets will be held by a licensed third-party custodian. Discussions regarding the mining assets remain ongoing.
- Form of Consideration for Creditors. The interests of the recovery corporation will be “tokenized” and distributed to account holders with claims above a certain threshold as “Asset Share Tokens” that reflect the value of the assets managed by the recovery corporation. Asset Share Tokens will entitle their holders to dividends from the recovery corporation as assets are monetized and will be freely tradeable by holders.
- Convenience Class. All creditors with claims under a certain threshold, or creditors who choose to reduce their claims to the threshold, will be offered a one-time distribution of liquid cryptocurrency (e.g., stablecoins, Bitcoin, or Ethereum) at a discount to the value of their claims.
- Establishment of a Litigation Trust. The Debtors also expect to create a litigation trust to pursue claims against certain insiders, claims identified in the Examiner’s report, as well as other claims and causes of action that will be agreed upon by the Debtors and the Committee.
Once negotiations are completed and the documentation is finalized, the Debtors anticipate promptly filing a chapter 11 plan reflecting the value-maximizing path forward.
Additionally, the Court has now issued rulings on a number of novel legal issues presented in these chapter 11 cases, clarifying which assets form part of the Debtors’ estates, authorizing the sale of stablecoins, and paving the way for the return of cryptocurrency assets to certain customers with custody accounts. With these threshold legal questions answered, the Debtors are well-positioned to finalize and file a chapter 11 plan, disclosure statement, and solicitation materials in the near term. As one additional gating issue, the Examiner’s final report is due on January 30, 2023. Filing a chapter 11 plan prior to the Examiner’s final report would be premature, as the Debtors and all key constituencies in these chapter 11 cases will benefit from a review of the Examiner’s independent analysis.”
About the Debtors
According to the Debtors: “Built on the belief that financial services should only do what is in the best interest of the customers and community, Celsius is a blockchain-based platform where membership provides access to curated financial services that are not available through traditional financial institutions.”
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