Core Scientific, Inc. – Seeks Authority for $70mn Replacement DIP Financing Facility to be Provided by B. Riley Commercial Capital; Cites “Vastly Superior” Terms, Necessity of Maintaining Financing Cushion Given Bitcoin Volatility

January 31, 2023 – The Debtors requested Court authority to: (i) access $70.0mn of new money in replacement debtor-in-possession (“DIP”) financing, (the “Replacement DIP Facility”) including $35.0mn on interim basis, to be provided by B. Riley Commercial Capital, LLC (“B. Riley” or the “Replacement DIP Lender”), (ii) repay its existing DIP Lenders and (iii) use cash collateral [Docket No. 389, with the Replacement DIP Term Sheet attached at Exhibit 1]. 

The Debtors and their investment banker PJT Partners believe that the replacement financing is "vastly superior" to the original DIP, with improved terms including (i) borrowing costs cut by two thirds, (ii) the elimination of the roll-up, (iii) elimination of milestones, (iv) the extension of the maturity date, and (v) the elimination of the requirement that the Debtors pursue the "vehemently opposed" Restructuring Support Agreement (see further below).

A hearing on the emergency motion is scheduled for February 1, 2023.

The switch in DIP financing providers follows a January 28th objection filed by the "Ad Hoc Equity Group" in which those stakeholders argued “the DIP Facility is disproportionately large and unreasonably costly.” That objection sought an adjournment of the scheduled February 1st DIP hearing "by at least one week" unless two competing financing offers (it turns out there were actually four) were ready for consideration in time for that hearing. That delay will now not un-necessary, with all parties, including the prepetition lenders who agreed to provide the initial $75.0mn DIP financing package on board with the switch (although there remains some negotiating to be done with the DIP lenders…wearing their prepetition lender hat…as to continued access to cash collateral). 

Those prepetition-turned-DIP lenders are set to walk away with $9.0mn in interest and fees (in addition to the $37.5mn of principal made available to the Debtors on December 23rd) for what was just a 5-week involvement as DIP lender.

An earlier objection filed by the Debtors’ Official Committee of Unsecured Creditors (the “Committee”) [Docket No. 363] had argued that (principally in light of a rebound in the value of Bitcoin that the Debtors' have pledged to sell), “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.” 

The terms of the Replacement DIP Facility will probably have the Committee shaking its head and muttering "I told you so," with the Debtors now not even requiring access to the replacement DIP to repay the $46.0mn (principal and interest) owed in respect of the original DIP. 

In a declaration in support of the replacement DIP, investment banker AlicPartners provides: "More specifically, in connection with entering into the Replacement DIP Facility, the Debtors must repay the Original DIP Facility lenders approximately $46 million, which includes the Original DIP Borrowings of $37.5 million and an additional approximately $9 million in interest, termination expenses and other fees. Given the Debtors’ improved liquidity position and the fact that there are fees associated with drawing down on the Replacement DIP Facility, the Debtors have determined to use balance sheet cash, in part, for this repayment."

So why the need for the apparent financing cushion? Bitcoin volatility. AlixPartners continues: "The historical price of bitcoin and the speed of the recent run-up demonstrate the volatility of the asset class, and therefore, there is no guarantee that it will remain at current levels. Given this, even with the recent run-up in bitcoin prices, it is prudent that the Debtors have available additional financing through the Replacement DIP Facility that the Debtors can access if needed."

In an earlier, unusual (and for some in hindsight perhaps maddening) twist, B. Riley, owed $42.0mn by the Debtors, had published an open letter urging the Debtors not to file for bankruptcy, arguing that such a filing was both un-necessary and value destructive. In that December 14th entreaty to the Debtors' board, B. Riley also offered to provide $72.0mn "in new, non-cash pay financing on favorable terms, providing more than two years of runway for the Company to achieve profitability." NB: B. Riley was invited to pitch for a DIP financing role in December and declined to make a proposal.

Comparison of DIP Facilities

The Debtors' investment banker PJT Partners provides [Docket No. 390]: "…the Replacement DIP Facility provides numerous benefits to the Debtors estates as compared to the Original DIP Facility. The Replacement DIP Facility provides the Debtors with capital at a significantly lower cost. The cost of capital of the Replacement DIP Facility is approximately one-third of the annualized cost of the Original DIP Facility. 

In addition, the Replacement DIP Facility has several features that provide the Debtors with greater ability to pursue the best possible outcome for all stakeholders in these chapter 11 cases. The Replacement DIP Facility eliminates all of the milestones under the Original DIP Facility and has a 12-month maturity with a 3-month extension compared to the Original DIP Facility, which has a 6-month maturity with a 3-month extension. The Replacement DIP Facility eliminates the requirement that the Debtors pursue the Restructuring Support Agreement (including the chapter 11 plan term sheet) negotiated with the Ad Hoc Group. The Debtors understand that the Creditors’ Committee and an ad hoc group of equity holders vehemently oppose the chapter 11 plan contemplated by the Restructuring Support Agreement. The Debtors intend to negotiate with all stakeholders to propose a confirmable, and hopefully consensual, chapter 11 plan following Court approval of the Replacement DIP Facility. Significantly, the Replacement DIP Facility also eliminates the Roll Up, which reduces takeout costs if the Original DIP Facility were to be approved on a final basis.

 Although the Replacement DIP Facility does not come with the consensual use of cash collateral that was provided by the Original DIP Facility, negotiations have been ongoing with the Ad Hoc Group to reach a consensual agreement that would permit the Debtors to continue to use cash collateral….

The Replacement DIP Facility also provided better terms than any of the other three postpetition financing proposals that the Debtors received over the last week. The Replacement DIP Facility provides the Debtors with greater flexibility relative to the Original DIP Facility and the other three postpetition financing proposals received, and the Replacement DIP Lender did not seek to prime any existing liens or link funding of the Replacement DIP Facility to any particular chapter 11 exit structure or chapter 11 plan.

 The table below summarizes certain key features of both the Replacement DIP Facility and the Original DIP Facility in a side-by-side comparison.

Key Terms of the Replacement DIP Facility:

• Borrowers: 
  • Core Scientific, Inc
  • Core Scientific Acquired Mining LLC
  • Core Scientific Operating Company
  • Core Scientific Specialty Mining (Oklahoma) LLC
  • American Property Acquisition, LLC
  • American Property Acquisitions I, LLC
  • American Property Acquisition VII, LLC
  • Radar Relay, Inc.
  • Starboard Capital LLC
  • RADAR LLC
  • Core Scientific Mining LLC.
• Initial DIP Lender: B. Riley Commercial Capital, LLC
• Guarantors: 
  • Core Scientific Acquired Mining LLC
  • Core Scientific Operating Company
  • Core Scientific Specialty Mining (Oklahoma) LLC
  • American Property Acquisition, LLC
  • American Property Acquisitions I, LLC
  • American Property Acquisition VII, LLC
  • Radar Relay, Inc.
  • Starboard Capital LLC
  • RADAR LLC
  • Core Scientific Mining LLC and any future subsidiaries of Core Scientific, Inc. that become debtors in the Chapter 11 Cases.
• DIP Agent: B. Riley Commercial Capital, LLC
• DIP Facility and Borrowing Limits: $70.0mn ($35.0mn on an interim basis)
• New Money: $70.0mn
• Roll-up: N/A
• Interest Rate: The “Applicable Rate” on the Replacement DIP Facility is 10% per annum, payable in kind in arrears on the first day of each month.
• Default Rate: Applicable Rate plus 2.00% per annum.
• Expenses and Fees: 
  • Monthly Replacement DIP Agent Fee: $75,000 per month payable, in cash advance, to the Replacement DIP Agent for its sole account and benefit, on the Closing Date and the first business day of each calendar month thereafter.
  • Upfront Premium: 3.50% (paid-in-kind) of Replacement DIP Loans under the Replacement DIP Facility, accrued and earned on the date upon entry of the Proposed Replacement Interim DIP Order.
  • Extension Fee: 3.50% in cash of the aggregate loans outstanding on the date the Borrowers extend the Maturity Date of all obligations under the Replacement DIP Facility by an additional three (3) months.
  • Exit Premium: Following the entry of the Proposed Replacement Interim DIP Order, upon and concurrently with the repayment or satisfaction of the Replacement DIP Loans in whole or in part, the Borrowers shall pay to the Replacement DIP Agent, in cash, 5.00% of the amount of the Replacement DIP Loans being repaid, reduced or satisfied.
• Maturity Date: The Maturity Date shall be the earliest of:
  • the date that is twelve (12) months after the Petition Date; provided, that the Borrowers shall be permitted to extend such date by three (3) months upon paying the DIP Agent the Extension Fee, in cash (any such date being the “Scheduled Maturity Date”) 
  • the effective date of any chapter 11 plan of reorganization with respect to the Borrowers or any other Debtor (a “Plan”); 
  • the consummation of any sale or other disposition of all or substantially all of the assets of the Debtors pursuant to section 363 of the Bankruptcy Code;
  • the date of the acceleration of the DIP Loans and the termination of the DIP Commitments in accordance herewith or with the DIP Documents; 
  • the date of the DIP Agent’s written notice to the Borrowers of the occurrence of an Event of Default (as defined below) under the DIP Facility;
  • dismissal of the Chapter 11 Cases or conversion of the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code; and 
  • 30 days after the date on which the Motion is filed (or such later date as agreed to by the DIP Agent), unless the Replacement Final DIP Order has been entered by the Bankruptcy Court on or prior to such date (such earliest date, the “DIP Termination Date”).
• Use of Proceeds:The proceeds of the Replacement DIP Facility shall be used only for the following purposes: 
  • Payment in full of the obligations under that certain senior secured super-priority debtor-in-possession loan and security agreement, dated as of December 22, 2022 (the “Existing DIP Credit Agreement”), among the Borrowers, the lenders party thereto from time to time and Wilmington Savings Fund Society, FSB, as administrative agent, including, without limitation, any fees, premiums, costs or expenses related thereto; it being agreed that such amounts shall be payable from the Borrowers’ existing cash at such time (including the Initial Draw); 
  • working capital and other general corporate purposes of the Borrowers and the Guarantors and certain subsidiaries; 
  • any adequate protection payments in accordance with the Proposed DIP Orders; 
  • professional fees and expenses of administering the Chapter 11 Cases, to the extent the Bankruptcy Court authorizes payment (including fees incurred prior to the Closing Date); 
  • fees and expenses payable under the DIP Facility; 
  • interest and other amounts payable under the DIP Facility; and vii. funding of the Carve-out Account. Proceeds of the Replacement 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 Replacement DIP Secured Parties (e.g., for investigations and litigation against such parties, incurring indebtedness without prior consent of the Replacement DIP Agent, etc.).
• Milestones: None, except the Debtors shall have obtained Final Replacement DIP Order; No later than 30 days following the filing of the Motion.

Replacement DIP Financing Motion

The motion [Docket No. 389] states, “On January 30, 2023, the Debtors filed a notice with the Court [Docket No. 378] informing all parties that they reached an agreement with a lender on the terms of a replacement post-petition financing facility and intend to pay off their existing DIP financing loan. By this Motion, the Debtors seek authorization to obtain approval of their entry into a superpriority non-priming replacement senior secured debtor-in-possession credit facility in an aggregate principal amount of up to $70 million (the ‘Replacement DIP Facility’), provided by B. Riley Commercial Capital, LLC (‘B. Riley’ and solely in such capacity, the ‘Replacement DIP Lender’) and agented by B. Riley Commercial Capital, LLC (solely in such capacity, the ‘Replacement DIP Agent’). The Replacement DIP Facility consists of a new money multiple draw term loan facility in an aggregate principal amount of up to $70 million (and the loans made under the Replacement DIP Facility, the ‘Replacement DIP Loans’). Details of the terms of the Replacement DIP Facility can be found in the ‘Replacement DIP Term Sheet’ attached as Exhibit 2 to the Proposed Replacement Interim DIP Order.

The Replacement DIP Facility will provide an aggregate principal amount of $35 million on an interim basis, which shall be borrowed in a single borrowing (the ‘Interim DIP Borrowing’) on the Closing Date upon entry of the Interim Order…

By this Motion, the Debtors also seek the authority to pay off the Original DIP Facility and to use the Cash Collateral of their Prepetition Secured Noteholders. As of the time of the filing of this Motion, the Debtors are in the process of negotiating the terms for the consensual use of Cash Collateral with the Ad Hoc Group and are hopeful that an agreement will be reached shortly. If an agreement cannot be reached, the Debtors intend to seek the nonconsensual use of cash collateral. The Debtors continue to work with the Replacement DIP Lender, the Committee, and the Ad Hoc Group on the terms of the Proposed Replacement Interim DIP Order and will file revised documents prior to the hearing, which the Debtors seek to schedule for February 1, 2023 (the time for the hearing originally scheduled as the final hearing on the Original DIP Facility).”

Marketing Efforts

In a declaration in support of the Replacement DIP motion [Docket No. 390], John Singh, a Partner at PJT Partners states: “…leading up to the Petition Date, the Debtors, through PJT, launched a broad marketing process designed to maximize competition and solicit proposals from a wide range of prospective lenders, including (i) creditors already in the Debtors’ capital structure, (ii) banks outside of the Debtors’ capital structure, (iii) institutional and alternative lenders outside the Debtors’ capital structure, and (iv) strategic parties.

Prior to the Petition Date, PJT contacted 24 potential lenders it believed may have been interested in providing the Debtors with postpetition financing, including an ad hoc group of the Prepetition Secured Parties (the ‘Ad Hoc Group’), B. Riley, and several alternative lenders outside of the Debtors’ capital structure. Nine (9) parties signed non-disclosure agreements, and the Debtors received two (2) initial proposals, including one from the Ad Hoc Group and one from a third party that ceased negotiations prior to reaching an agreement with the Debtors. The Debtors ultimately determined that the best path forward was pursuing the DIP Facility provided by the Ad Hoc Group, as that was the only remaining financing proposal and the Debtors were able to obtain several concessions from the Ad Hoc Group through negotiations.

Following entry of the Original Interim DIP Order, the Debtors continued to pursue potential alternative postpetition financing that would (i) improve terms relative to those of the Original DIP Facility and (ii) pay off the Original DIP Facility prior to final approval thereof and effectiveness of the roll-up contemplated thereunder.

Subsequent to the entry of the Original Interim DIP Order, PJT contacted forty-eight (48) potential lenders that it believed may have been interested in providing the Debtors with postpetition financing, seven (7) of which PJT had previously contacted during the prepetition DIP marketing process. Twenty (20) parties signed non-disclosure agreements, and the Debtors received four (4) initial proposals for a replacement DIP facility. The Debtors negotiated with three of the four potential Replacement DIP Lender, as the fourth proposal was received too late to be actionable in a timely manner, including trading multiple term sheets. All four potential lenders engaged in significant diligence during the postpetition DIP marketing process. From these discussions, it was clear that the negotiated term sheet with B. Riley would provide the Debtors with the best terms—as a whole—for a postpetition financing facility. The Debtors were able to reach an agreement with B. Riley, as reflected in the Replacement DIP Term Sheet. Over the course of the past few days, the Debtors also provided the Ad Hoc Group with ample opportunity to improve their DIP Facility terms. Specifically, the Debtors requested that the Ad Hoc Group agree to several changes to the DIP Facility, including eliminating the Roll-Up, eliminating the default based on termination of the Restructuring Support Agreement, permitting asset sale proceeds to be used to pay off the DIP Facility, and improved economics. In addition, the Debtors shared the term sheets received on a timely basis with both the Ad Hoc Group and the Committee. The Ad Hoc Group indicated an unwillingness to make the significant changes that would have been required to make its DIP Facility competitive with the other proposals the Debtors received.

The Replacement DIP Facility provides numerous benefits to the Debtors’ estates in the form of a lower cost of capital as well as greater flexibility to pursue a restructuring that will maximize value for all interested parties. It also eliminates the Roll Up contemplated in the Original DIP Facility and resolves the Creditors’ Committee’s objections to the Original DIP Facility. Such flexibility includes removing milestones and eliminating the Restructuring Support Agreement.”

Case Status

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 (i.e., $200mn) and the failure to pay for leased equipment (then cross-defaulting their Senior Convertible Notes) as compelling their bankruptcy filing.

On December 23rd, the Court hearing the Core Scientific cases issued an order authorizing the Debtors to access $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), was to be considered at a January 23, 2023 DIP hearing (detailed below). The Debtors filed a related 8-K available here.

Revised Budget

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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