January 26, 2023 – The Debtors’ Official Committee of Unsecured Creditors (the “Committee”) objected to the Debtors’ ability to draw down the $22.5mn balance* of a $75.0mn debtor-in-possession (“DIP”) financing facilty being provided by certain prepetition secured lenders [Docket No. 363], arguing that, “the Debtors do not require any additional financing beyond the $37.5 million borrowed pursuant to the Interim DIP Order….the Debtors’ current liquidity is more than sufficient to bridge them to the planned near-term asset sale.”
As it stands, the Committee argues, the proposed DIP leaves the Debtors in the hands of its convertible noteholders at the expense of unsecured creditors: "Rather than a small, short-term bridge facility, the DIP Lenders seek to impose a DIP Facility on the Debtors that severely restricts the Debtors’ ability to repay borrowed funds…[and] would hand the Company over to the Convertible Noteholders, while unsecured creditors would receive less than 3% of the reorganized equity."
* The Committee provides as to why the requested balance is $22.5mn and not $37.5mn that one might surmise from the Debtors' requesting motion. "The Motion contemplated a $150 million debtor-in-possession financing facility, consisting of $75.0 million in new money loans and $75.0 million in roll up loans. Based on conversations with the Debtors and the Ad Hoc Noteholder Group, the Committee understands that only approximately $60.0 million in new money loans will be subscribed and committed for. Accordingly, this Objection refers to the upward amount of new money loans and roll up loans under the proposed DIP Facility as $60.0 million, rather than $75.0 million."
In arguing that the Debtors currently stand with more than enough financing to see them through their Chapter 11 cases, the Committee points to a 36% rise in the price of bitcoin since the Petition date (NB:the Debtors' budget includes a commitment to sell bitcoin during the pendency of its cases), "several favorable operational outcomes" and the value of unencumbered (and sellable) real estate assets as now making the further financing moot.
This change in circumstances not only leaves the Debtors with "reason for optimism," it has also, the Commitee contends, "led to two separate parties submitting competing debtor-in-possession financing proposals in the last 48 hours."
Those competing DIP financing offers line up against existing DIP financing which the Committee argues was bad to start with, and given it is no longer actually needed, getting considerably worse.
Elements of the current DIP that stand to leave the Debtors financially, strategically and operationally hamstrung include a dollar-for-dollar roll-up of the entirety of the proposed (now anticipated) $60.0mn DIP (needed or not) which increases the balance of what would be owed under the DIP from $37.5mn to what the Committee estimates would be (with fees, etc) $107.6mn. The impact would be to "further minimizes the Debtors’ ability to pay down the facility during these cases…[when]…the Debtors could be in a position to make a material (or full) pay down of the DIP Facility in several weeks."
Repayment of the potentially enlarged DIP also comes with an "unprecedented" 15% termination payment which "appears designed to (i) chill third parties from refinancing the DIP Facility and (ii) encourage the Debtors to convert the DIP Facility into a Rolled Exit Facility (which would entitle the DIP Lenders to up to an additional 30% in warrants pursuant to the RSA)."
The Committee sums up: "Rather than a small, short-term bridge facility, the DIP Lenders seek to impose a DIP Facility on the Debtors that severely restricts the Debtors’ ability to repay borrowed funds on reasonable terms and all but ensures that the Debtors will have little choice but to pursue the restructuring contemplated in the RSA. Here, the RSA transaction would hand the Company over to the Convertible Noteholders, while unsecured creditors would receive less than 3% of the reorganized equity (and then only if they vote in favor of the plan contemplated by the RSA). The DIP Facility contains several onerous terms, which both individually and collectively seek to accomplish this result."
On December 21, 2022, Core Scientific, Inc. and ten affiliated debtors (NASDAQ: CORZ; together “Core Scientific” or the “Debtors”) filed for Chapter 11 protection noting estimated assets of $1.4bn; and estimated liabilities of $1.33bn (as at September 30, 2022). At filing, the Debtors, "a leader in high-performance blockchain computing data centers*," cited the "Crypto Winter," power price increases, the Celsius bankruptcy, "significant overcommitments" in respect of construction costs (ie $200mn) and the failure to pay for leased equipment (then cross-defaulting their Senior Convertible Notes) as compelling their bankruptcy filing.
* 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')."
On December 23rd, the Court hearing the Core Scientific cases issued an order authorizing the Debtors to acces $37.5mn in new money DIP financing, provided by certain prepetition secured lenders, on an interim basis, and (ii) use cash collateral [Docket No. 130, with the DIP loan agreement attached at Exhibit 1]. Authority to access a further $37.5mn of the $75.0mn DIP facility, and a 1:1 roll-up of prepetition secured notes (with DIP lenders permitted a roll-up in an amount equal to their new money DIP commitments), is to be considered at a January 23, 2023 DIP hearing. The Debtors filed a related 8-K available here.
The objection [Docket No. 363] expounds, “The Debtors have good reason to be optimistic about their financial position five weeks into these cases. Since the Petition Date, the price of bitcoin has increased over 36%. At the same time, several favorable operational outcomes have materially increased and improved the Debtors’ cash position. Taken together, the Debtors are approximately ahead […] of initial projections on cash. There is additional reason for optimism: the Debtors have material, largely unencumbered, real estate assets, three of which are worth upwards of […] collectively. The Debtors marketed these properties prior to the Petition Date and are confident […]. This good news has given the Company increasing momentum and led to two separate parties submitting competing debtor-in-possession financing proposals in the last 48 hours.
Against this backdrop, it has become clear to the Committee that the Debtors do not require any additional financing beyond the $37.5 million borrowed pursuant to the Interim DIP Order. Rather, the Debtors’ current liquidity is more than sufficient to bridge them to the planned near-term asset sales and likely sufficient to operate until the conclusion of these cases even in the absence of any asset sales. Nonetheless, the DIP Lenders seek to impose $60.0 million in new money loans on onerous terms, including a dollar-for-dollar roll up that would occur automatically upon entry of the Final DIP Order. Given the significant improvement in the Debtors’ cash position versus budget, there is simply no basis for a DIP Facility of this magnitude and the other unreasonable terms imposed by the DIP Lenders.
Rather than a small, short-term bridge facility, the DIP Lenders seek to impose a DIP Facility on the Debtors that severely restricts the Debtors’ ability to repay borrowed funds on reasonable terms and all but ensures that the Debtors will have little choice but to pursue the restructuring contemplated in the RSA. Here, the RSA transaction would hand the Company over to the Convertible Noteholders, while unsecured creditors would receive less than 3% of the reorganized equity (and then only if they vote in favor of the plan contemplated by the RSA). The DIP Facility contains several onerous terms, which both individually and collectively seek to accomplish this result:
- First, the DIP Facility precludes the Debtors from pursuing non-core asset sales if the net proceeds exceed $10,000,000. This limitation ensures that the Debtors cannot sell their unencumbered real estate assets to pay off the DIP Facility absent the DIP Lenders’ consent. Such a result is particularly objectionable here, where the Debtors’ business judgment is that it is in the best interests of the Debtors’ estates to sell these assets and the proceeds of such sales could potentially be used to repay the DIP Facility […].
- Second, the DIP Facility requires the Debtors to make a ‘Termination Payment’ of 15% in the event the DIP Facility is repaid in cash. The Committee believes that an exit fee of this magnitude is unprecedented under the circumstances and appears designed to (i) chill third parties from refinancing the DIP Facility and (ii) encourage the Debtors to convert the DIP Facility into a Rolled Exit Facility (which would entitle the DIP Lenders to up to an additional 30% in warrants pursuant to the RSA). At minimum, the Termination Payment unreasonably increases the hurdle for the Debtors to repay the DIP Facility during these cases.
- Third, the DIP Facility includes a Roll Up, potentially as high as $60.0 million despite the likelihood that only the $37.5 million in new money loans already extended by the DIP Lenders will be all that is required (i.e., there is no dollar for dollar creep feature and instead the full amount of the Roll Up is automatically created upon entry of the Final DIP Order). The Roll Up increases the DIP Facility’s outstanding balance and therefore further minimizes the Debtors’ ability to pay down the facility during these cases. Said differently, if the Motion is granted without modification, the Debtors would need approximately $107.6 million (comprised of new money loans, Roll Up loans, and various fees). That requirement would be particularly punitive here, where the Debtors’ ultimate need for new money is likely no more than the $37.5 million already borrowed and the Debtors could be in a position to make a material (or full) pay down of the DIP Facility in several weeks. Moreover, the DIP Lenders have already conceded that only prepetition secured debt held by the Convertible Noteholders will be subject to the Roll Up (i.e., the Roll Up’s obligations are contingent on the results of an eventual proceeding that values the Convertible Noteholders’ limited prepetition collateral). Nonetheless, the DIP Facility would require the Debtors to repay the full Roll Up in order to retire the DIP Facility without any valuation of the Convertible Notes’ prepetition collateral having occurred.”
The Debtors' DIP motion [Docket No. 38] states, “By this Motion, the Debtors seek authorization to obtain postpetition financing, and approval of their entry into a superpriority priming senior secured debtor-in-possession credit facility in an aggregate principal amount of up to $75 million (the 'DIP Facility'), provided by certain of the Debtors’ prepetition secured lenders or their affiliates (solely in such capacity, the 'DIP Lenders') and agented by Wilmington Savings Fund Society, FSB (solely in such capacity, the 'DIP Agent'). The DIP Facility consists of (i) a new money multiple draw term loan facility in an aggregate principal amount of up to $75 million (the “New Money Term DIP Facility”, and the loans made thereunder, the 'DIP Loans'), and (ii) upon the final order, a credit facility pursuant to which $75 million in aggregate principal amount outstanding under the Prepetition Secured Notes (as defined below) held by each Backstop Party (as defined in the DIP Loan Agreement) and/or each Prepetition Secured Noteholder (as defined below) in which a Backstop Party is an affiliate, partner or investor (each such Backstop Party and/or Prepetition Lender, a 'Rolled Up Noteholder Party'), shall, upon entry of the Final Order, automatically be deemed substituted and exchanged for, and converted into, DIP Loans (such conversion, the 'Roll Up') on a cashless, interest free, dollar for dollar basis.
The New Money Term DIP provides an aggregate principal amount of $35 million-$40 million (open issues) [NB: this amount now set at $35.0mn], which shall be borrowed (the ‘Interim DIP Borrowing’) in a single borrowing on the Closing Date (as defined in the DIP Loan Agreement) upon entry of the Interim Order. Following entry of the Final Order (as defined below), the remaining aggregate principal amount under the DIP Facility ($75 million total) shall be available, in one or more borrowingsFN3.
The DIP Facility is the result of extensive marketing and hard-fought negotiations, involving both principals and advisors, in a competitive environment that allowed the Debtors to achieve their strategic goals in obtaining postpetition financing in connection with commencing these chapter 11 cases. The result is a DIP Facility that provides the Debtors with up to 9 months of runway and significant flexibility in terms of milestones and covenants governing the term loan. The DIP Facility lays the foundation on which the Debtors will pursue confirmation of a chapter 11 plan and a reorganization of their business to maximize value for all stakeholders.”
FN3: As of the date hereof, the Ad Hoc Noteholder Group has agreed to provide DIP Facility commitments of up to $57.26 million and has agreed to support the syndication of up to $75 million in new money DIP Facility loans to all holders of Convertible Notes.
Key Terms of the DIP Financing:
- Borrower: Core Scientific, Inc.
- Guarantors: Each of the other Debtors (the “DIP Guarantors”).
- DIP Lenders: The lenders that are signatories to the DIP Loan Agreement (the “DIP Lenders”).
- DIP Agent: Wilmington Savings Fund Society, FSB.
- DIP Facility and Borrowing Limits: $75.0mn ($37.5mn interim)
- New Money: $75.0mn (although as noted above, the amount is apparently now $60.0mn
- Roll-Up: $60.0mn (was $75.0mn) on dollar-for-dollar basis
- Interest Rate: The “Applicable Rate” on the New Money Term DIP Facility is 10% per annum, paid in kind. The “Applicable Rate” under the Roll Up loan shall be 0%.
- Default Rate: Applicable Rate plus 2.00%
- Fees and Expenses:
- New Money Loan Commitment Payment: 2.00% (paid-in-kind) of New Money Loans under the New Money Term DIP Facility, accrued and earned on the date New Money Loans are drawn by the Borrower.
- Backstop Payment: Up to $2,000,000 on the Closing Date to each Backstop Party, paid-in-kind, on a pro rata basis.
- Termination Fee: To pay off the DIP Facility in most circumstances, upon entry of the Interim Order, the Debtors will need to pay 115% of all outstanding New Money Loans in cash, in addition to other obligations outstanding. The parties are still negotiating whether such 115% termination fee should also apply to any accrued PIK interest or PIK fees. Upon the Final Order, (i) the Termination Fee for the Roll Up Loan is 2% in cash (except 2% in PIK for an “Acceptable Roll”) and (ii) in certain circumstances when the DIP is replaced by an Exit Loan under a chapter 11 plan, there will be an exit fee of 3% on the New Money Loans (open issue regarding whether this applies to PIK interest or PIK fees), plus amounts payable under the RSA.
- Extension Fee: 2.00%, paid-in-kind, of the aggregate loans outstanding on the date the Borrower extends the Maturity Date of all obligations under the DIP Facility by an additional three (3) months.
- Maturity Date: The Maturity Date shall be the date that is six (6) months after the Petition Date, with an optional three (3) month extension as set forth in the DIP Loan Agreement, subject to paying the Extension Fee. Variance).
- Use of Proceeds: All proceeds of DIP Loans and all Cash Collateral shall, in each case, only be permitted to be used by the Obligors or their Subsidiaries in accordance with the Approved Budget, this Agreement and the DIP Orders (including to pay obligations arising from or related to the Professional Fee Escrow Account).
Proceeds of the DIP Loans and Cash Collateral may not be used for certain enumerated purposes that are contrary to the rights and interests of the Prepetition Secured Parties and DIP Secured Parties (e.g., for investigations and litigation against such parties, incurring indebtedness without prior consent of the DIP Agent, etc.).
- Milestones: The DIP Credit Agreement contains the following milestones:
- The Debtors shall have enter the Final Order; no later than forty six (46) days after the Petition Date;
- The Debtors shall have filed the Final Order confirming an acceptable Plan; as soon as reasonably practicable, but in no event later than thirtyfive (35) days after the Petition Date.
- Deadline to filed with the Bankruptcy Court the Plan and the Disclosure Statement; as soon as reasonably practicable, but in no event later than seventy-five (75) days after the Petition Date.
- Deadline to entered the Confirmation Order, provided that such Milestone shall automatically be extended to two hundred and forty (240) days after the Petition Date in the event that the Maturity Date (as defined in the DIP Loan Agreement) is extended to the date that is nine (9) months after the Petition Date in accordance with the terms in the DIP Loan Agreement; fifty (150) days after the Petition Date.
- Effective Date shall have occurred, provided that such Milestone shall automatically be extended to two hundred and fifty-five (255) days after the Petition Date in the event that the Maturity Date (as defined in the DIP Loan Agreement) is extended to the date that is nine (9) months after the Petition Date in accordance with the terms in the DIP Loan Agreement (the “Effective Date Milestone”); sixty-five (165) days after the Petition Date.
In a press release announcing the filing, the Debtors noted as to the DIP financing: "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."
Initial Budget (See Exhibit 2 of Docket No. 97)
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."
Corporate Structure Chart (with simplified chart following full chart)
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