Coinbase junk bonds slip further into distressed territory after SEC's crypto crackdown

By Joy Wiltermuth

Coinbase shares are down 50% on the year

Coinbase Global Inc.'s bonds slipped further into distressed territory Wednesday, a day after the U.S. Securities and Exchange Commission filed charges against the platform as part of its broader crackdown of the crypto industry.

Prices on its most-active 3.375% bonds due in October 2028 fell to about 60.44 cents on the dollar late Wednesday, down from a high Monday of about 64.53, according to BondCliq data. Bond prices and yields move in the opposite direction.

Their Double B credit ratings put the bonds in the high-yield, or "junk-rated," category, marking them as a relatively high default risk. Bonds trading below 70 cents on the dollar are broadly considered distressed.

The SEC on Tuesday charged Coinbase with "unlawfully offering exchange, broker-dealer and clearinghouse functions," and offering its crypto staking service without registering it with the agency, actions that SEC Chair Gary Gensler claimed "deprive investors of critical protections."

The charges were largely in line with the SEC's warning to Coinbase in March, wrote MarketWatch's Tomi Kilgore, but also came with the twist of seeking a disgorgement of any "ill-gotten gains" from any alleged violations, with interest.

Against a volatile stretch for the crypto industry, Coinbase reported a smaller net loss of $78.9 million in the first quarter than its $429.7 million loss in the same quarter last year.

Coinbase (COIN) CEO Brian Armstrong said in a tweet Tuesday that the SEC complaint would allow the company "to finally get some clarity around crypto rules" in court. Coinbase didn't immediately respond to a request for comment for this report.

The chart below shows how volatile the company's stock price has been in the past two months (yellow line), even while its 3.375% bonds (blue line) largely have been stuck in a range of 65 cents to 60 cents.

Coinbase shares were down 50.5% on the year through Wednesday, according to FactSet. The repricing of its most liquid bonds pushed up their yield to 14.2% on Wednesday, about double the 6.9% yield for the broader BB-rated segment of the $1.5 trillion U.S. junk-bond market.

The SEC on Monday charged Binance and its founder Changpeng Zhao "CZ" with 13 securities violation, claiming the world's largest crypto exchange "secretly" allows high-value U.S. customers to trade on the platform. It also claimed billions in customer funds were commingled with those of Merit Peak Limit, a company CZ used to trade directly with customers.

Bitcoin fell 3.2% in the past 24 hours, according to CoinDesk, to around $26,280. It touched a peak above $67,500 in November 2021.

-Joy Wiltermuth

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06-07-23 1916ET

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