Voyager Bankruptcy Drama Gives Painful Lessons on Counterparty Risks – The Defiant

By the end of June, top executives at a cryptocurrency exchange with Voyager Digital, 3.5M users, knew they were in deep trouble. Three Arrows Capital, a Singapore-based hedge fund, owed cryptocurrencies worth millions and showed no signs of repaying the loan.

Voyager CEO Stephen Ehrlich and his team have started a frenzy to save their four-year-old company from the kind of bankrupt running across the crypto sector. They have hired lawyers. They hired a Wall Street Investment Bank as a potential savior.

Huge stress

And they reached out to Alameda Research, a trading firm co-founded by Sam Bankman-Fried, billionaire Crypto Impresario. It agreed to give Voyager $ 200M in cash and a revolving credit line financed by 15,000 bitcoins even though Voyager was under a lot of pressure.

What happened next is a cautionary tale about the dangers of adversarial risk, and how crypto, despite the promise of blockchain technology, is not free from the same dangers and mistakes that have plagued traditional financing for so long.

In 2021, Voyager Digital earned 415M, 59 times more than the previous year. Just five months later, the company, located in Jersey City, NJ, with 1.3B of assets, filed for Chapter 11 bankruptcy.

It was the latest victim of the 2022 cryptocurrency crash Yet the story of how it fell and what happened next can show how the art can assert itself and get back on its feet.

Three-part model

“Borrowers are facing short-term ‘bank runs’, usually due to the downturn in the cryptocurrency industry and defaulting on a significant third-party loan,” Ehrlich told a New York court in the dry language of bankruptcy filings. “But the defaulters have an effective business and a plan for the future.”

In March everything started to change. Co-founded in 2018 by Ehrlich and a trio of Wall Street and Silicon Valley entrepreneurs, Voyager was one of the many platforms that married the TradFi experience with crypto games. The firm had a three-part business model: it provided brokerage services to crypto traders; Custodial services that hold crypto for customers and pay them with interest; And lending cryptocurrencies, paying interest with profits.

That month, Voyager sat with clients in arrears of about B 6B worth of cryptocurrency loans even though the firm listed on the Toronto Stock Exchange had a market capitalization of only $ 64M, according to court filings. Borrowers included Genesis Global Capital, Wintermute Trading and Galaxy Digital. Alameda Research borrowed $ 377M at rates ranging from 1 to 11.5%, court documents show.

The imbalance was bad. Worse, Voyager’s new main counterparty was Three Arrows Capital, a hedge fund that cut $ 10 billion in assets through crypto and a swath to invest in top-tier projects like Solana, Avalanche and most meaningfully Terra.

Liquidity problems

In March, Voyager Three Arrows lent 15,250 bitcoins and USDC, valued at about M 350M, a stablecoin that, when taken together, lent about $ 1 billion. The timing couldn’t have been worse because Crypto, including the stock, had fallen into a serious bear market.

In early May, when Terra Stablecoin, UST, suddenly slipped its peg, it started a chain reaction of failure across the ecosystem of interlocking tokens and wiped out the $ 60B project. In a declaration filed as part of Voyager’s bankruptcy, Ehrlich said he and his management team were immediately concerned about the exposure of Three Arrows to Terra. On June 22, Voyager claimed that Three Arrows would repay a loan worth $ 658M within five days or face default.

It also tapped Alameda Research’s credit line for M 75M, yet to no avail. “The Alameda loan facility was a partial solution to the company’s liquidity problems,” Ehrlich said in his announcement.

Meanwhile, Voyager hired Kirkland & Ellis, a powerful corporate law firm, and Moelis & Co., a Wall Street investment bank, to find a white knight who could provide “potential sources of new liquidity.”

To that end, Jake Dermont, head of the Moelis Financial Institutions Group, and his team requested 60 potential partners in the investment industry with an interest in cryptocurrencies that could be acceptable for a strategic agreement with Voyager. Twenty of these firms have signed privacy agreements and attached thousands of pages of Voyager’s financial records to evaluate the company, court records show. Moelis purchased Voyager as an acquisition target.

“The Almeida loan facility is only a partial solution to the company’s liquidity problem.”

Stephen Erlich

Yet only one potential suitor agrees to make an offer to Voyager for financing out of the possibility of bankruptcy. But it was not accepted. “Potential opponents have expressed concern about the current uncertainty in the cryptocurrency market,” Dormont said in a statement filed in bankruptcy court.

Now Ehrlich, a capital market veteran and CEO of ETrade Professional Trading from 2002 to 2006, must run the company through Chapter 11 bankruptcy, a court-supervised process that allows companies to settle outstanding debt and restructure its operations.

Cash $ 110M

Ehrlich insisted Voyager was not going anywhere and that it could continue operations. Voyager has already asked the court for permission to continue paying its 351 employees and to continue respecting some debit card transactions at its own discretion. The platform has more than $ 110M in cash and crypto assets, $ 350M in customer money and $ 1.3B in crypto assets. It hopes to strengthen those numbers by recovering something owed to the Three Arrows

Yet Three Arrows itself is bankrupt, and it is not clear how and whether Voyager, one of many lenders, will recover a significant portion of the 65 654M loan. For Alameda Research, it is now Voyager’s No. 1 creditor, with a line of $ 75M, according to court documents.

Cryptopaclypse

Ehrlich notes that he and his team have considerable experience in managing market volatility. And Wall Street history has been loaded with cases where one or two companies can crack the entire market. This is a tragic moment in the evolution of this young industry that has now happened in crypto.

“The final explosion from Terra and Three Arrows Capital, and as a result, ‘cryptocurrencies’ have been created,” Ehrlich said in the announcement.

As Voyager Digital joins the list of fallen platforms, the focus will shift to the next one.

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