July 5, 2022 –  Voyager Digital Holdings, Inc. and two affiliated debtors (Toronto Stock Exchange (TSX); "Voyager" or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York"*, lead case number 22-10943 (Judge TBA). The Debtors, who offer crypto-currency brokerage services, are represented by Joshua A. Sussberg of Kirkland & Ellis LLP. Further board-authorized engagements include: (i) Berkeley Research Group, LLC (“BRG”) as financial advisors, (ii) Moelis & Company (“Moelis”) as investment bankers, (iii) Consello Group (“Consello”) as strategic and financial advisors and (iv) Stretto Inc. as claims agent. 

* The Debtors intend to seek recognition of their Chapter 11 cases in the Ontario Superior Court of Justice (Commercial List) pursuant to the Companies’ Creditors Arrangement Act ("CCAA").

The Debtors’ lead petition notes more than 100,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn. Documents filed with the Court list the Debtors’ largest unsecured creditor as Alameda Research Ltd. with a $75.0mn unsecured loan. In true crypto fashion, 48 creditors on a top 50 list (Google being the lone exception) are unidentified beyond the amount of the claim; with each of the top 50 unsecured creditors nearing or above the $1.0mn mark.

Highlights

• Crypto-Currency Broker Files for Bankruptcy with Over $1.0bn in Liabilities and 100,000 creditors (ie Acount Holders)
• Cites "Implosion" of Terra and Three Arrows Capital (3AC) as Pushing  "Cryptocurrency Winter" into "Cryptopocalyse”
• In Recent 12-Month Stretch Lent $5.15bn of Cryptocurrency (Deposited by Account Holders), Including $650mn to 3AC
• Will Pursue Claims of $650mn Against 3AC
• Lender Alameda Set to Recover Nothing on $75.0mn Claim
• Prepetition Sales Efforts Stumble and Then Collapse After July 1st Decision to Put Debtors into "Maintenance Mode" (ie freeze accounts)
• Absent Arrival of Sponsor/Buyer, Chapter 11 Plan Has Account Holders Receiving 100% of New Equity in Coins/New Equity/VGX Tokens/3AC Loan Recovery Mix

Petition Date Press Release

In a press release announcing the filing, the Debtors stated: "The proposed Plan of Reorganization (Plan) would, upon implementation, resume account access and return value to customers. Under this Plan, which is subject to change given ongoing discussions with other parties, and requires Court approval, customers with crypto in their account(s) will receive in exchange a combination of the crypto in their account(s), proceeds from the 3AC recovery, common shares in the newly reorganized Company, and Voyager tokens. The plan contemplates an opportunity for customers to elect the proportion of common equity and crypto they will receive, subject to certain maximum thresholds.

The Company continues to evaluate all strategic alternatives to maximize value for stakeholders.

The Company has over $110 million of cash and owned crypto assets on hand, which will provide liquidity to support day-to-day operations during the Chapter 11 process, in addition to more than $350 million of cash held in the For Benefit of Customers (FBO) account at Metropolitan Commercial Bank. Voyager also has approximately $1.3 billion of crypto assets on its platform, plus claims against Three Arrows Capital (“3AC”) of more than $650 million.

Voyager previously announced that its subsidiary, Voyager Digital LLC, issued a notice of default to 3AC for failure to make the required payments on its previously disclosed loan of 15,250 BTC and $350 million USDC. Voyager is actively pursuing all available remedies for recovery from 3AC, including through the court-supervised processes in the British Virgin Islands and New York."

Stephen Ehrlich, the Debtors'Chief Executive Officer, noted: “This comprehensive reorganization is the best way to protect assets on the platform and maximize value for all stakeholders, including customers….While I strongly believe in this future, the prolonged volatility and contagion in the crypto markets over the past few months, and the default of Three Arrows Capital (3AC) on a loan from the Company’s subsidiary, Voyager Digital, LLC, require us to take deliberate and decisive action now. The chapter 11 process provides an efficient and equitable mechanism to maximize recovery.”

The Debtors also announced the appointment of four new independent directors.

Goals of the Chapter 11 Filings

The Debtors provide [Docket No. 15]: "…this is not a “free-fall” filing without direction. On the contrary, Voyager has a path forward and a plan to swiftly bring these chapter 11 cases to an appropriate conclusion. Voyager’s proposed chapter 11 plan of reorganization…contemplates a standalone restructuring that the Company can effectuate without a sale or a strategic partner. The Company will continue a robust marketing process—one that was already underway prepetition—to test the value proposition of the Company’s business. This process is designed to position Voyager for success in a turbulent market environment, allowing the Company to support go-forward operations and preserve the value of its customers’ assets."

Plan Summary

The Ehrlich Declaration (defined below) provides: "Under the Plan, account holders will receive a combination of (i) coins, (ii) new common shares in reorganized Voyager, (iii) existing VGX tokens, (iv) and any recovery on account of the 3AC Loan. Account holders can also elect to increase or decrease their pro rata recovery of equity in reorganized Voyager in exchange for an equal increase or decrease in the amount of coins such account holder is entitled to. Ultimately, the standalone restructuring will provide account holders with a meaningful recovery on account of their claims and vest ownership of the goforward business of the Company in its customers.

The Plan effectively functions as a “stalking horse” proposal. The Company will continue discussions with strategic third-party investors to solicit interest in sponsoring the Plan or otherwise providing financing to Voyager in exchange for partial or full ownership of the reorganized Company. Ultimately, pursuing the standalone restructuring and a marketing process in tandem will allow the Company to consummate the most value-maximizing transaction available.

Potential Asset Sale

The Debtors' "robust" prepetition marketing efforts generated liitle interest in either of the Debtors' proposed dual paths (ie a sale or "capital raise") with investment banker Moelis' efforts generating a single (ultimately unacceptable) proposal from the 60 parties (22 NDAs) they contacted. The Ehrlich Declaration (defined below) does, however, suggest that there were "indications" of interest in respect of an in-court sale process. Ehrlich provides: "In late June 2022, the Company, with the assistance of Moelis, commenced a comprehensive, dual-track marketing process to solicit investor appetite in either (a) a sale of the Debtors’ entire business to either a financial sponsor or a strategic company in the cryptocurrency industry and (b) a capital raise whereby a third party (individually or as part of a consortium) would provide a capital infusion into the Debtors’ business enterprise. I understand that Moelis reached out to 60 potential financial and strategic partners across the globe, including domestic and international strategic cryptocurrency-related businesses and private equity and other investment firms that currently have cryptocurrency-related investments and/or historical experience investing in the cryptocurrency industry. Ultimately, I understand that 22 parties entered into confidentiality agreements with the Debtors.

I understand that the marketing process yielded one proposal for an out-of-court financing. The Company determined that the proposal was not actionable, however, as the conditions precedent to the proposal and the pro forma capital structure contemplated thereunder were not achievable. I understand that no other counterparty was willing to participate in an out-of-court transaction on the timeline required. However, I understand that several parties indicated interest in participating in a potential in-court transaction. Accordingly, Voyager and its advisors continued to discuss potential transactions and provide diligence to third parties on potential in-court and out-of-court restructuring transactions.”

The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement, see also the Liquidation Analysis below):

• Class 1 “Secured Tax Claims” is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 2 “Other Priority Claims” is unimpaired, deemed to accept and not entitled to vote on the Plan.
• Class 3 “Account Holder Claims” is impaired and entitled to vote on the Plan. Each Holder will its Pro Rata share of: (i) the Coin Allocation; (ii) the Claims Equity Allocation; (iii) the Voyager Token Allocation; and (iv) the 3AC Recovery Allocation; provided that subclauses (i) and (ii) shall be subject to such Holder’s Coin Election or Equity Election, as applicable.
• Class 4 “Alameda Loan Facility Claims” is impaired and entitled to vote on the Plan. Holders of Alameda Loan Facility Claims will not receive any distribution on account of such Alameda Loan Facility Claims.
• Class 5 “General Unsecured Claims” is impaired and entitled to vote on the Plan. Each Holder shall receive its Pro Rata share of the Claims Allocation Pool.
• Class 6 “Section 510(b) Claims” is impaired, deemed to reject and not entitled to vote on the Plan. Holders of Allowed Section 510(b) Claims will not receive any distribution on account of such Allowed Section 510(b) Claims.
• Class 7 “Intercompany Claims” is impaired/unimpaired, deemed to accept and not entitled to vote on the Plan. On the Effective Date, all Intercompany Claims shall be, at the option of Reorganized Voyager, either (a) Reinstated or (b) converted to equity, otherwise set off, settled, distributed, contributed, cancelled, or released, in each case, in accordance with the Restructuring Transactions Memorandum.
• Class 8 “Intercompany Interests” is impaired/unimpaired, deemed to accept and not entitled to vote on the Plan. On the Effective Date, all Intercompany Interests shall be, at the option of Reorganized Voyager, either (a) Reinstated in accordance with Article III.G of the Plan or (b) set off, settled, addressed, distributed, contributed, merged, cancelled, or released, in each case, in accordance with the Restructuring Transactions Memorandum.
• Class 9 “Existing Equity Interests” is impaired, deemed to reject and not entitled to vote on the Plan. Holders of Existing Equity Interests will not receive any distribution on account of such Existing Equity Interests.

Key Definitions

• "3AC Recovery Allocation" means the 3AC Recovery, if any, to be distributed to Holders of Allowed Account Holder Claims."
• "Claims Allocation Pool" means [ ]
• "Claims Equity Allocation" means means New Common Stock in an amount equal to 100% of all New Common Stock, subject to dilution by the Management Incentive Plan, to be distributed to Holders of Account Holder Claims. 
• “Coin Allocation” means all Coins to be distributed to Holders of Account Holder Claims.
• "Voyager Token Allocation" means the Voyager Tokens held by the Debtors as of the Petition Date to be distributed to Holders of Allowed Account Holder Claims.

Events Leading to the Chapter 11 Filings

In a declaration in support of first day filings (the “Ehrlich Declaration”) [Docket No. 15],  Stephen Ehrlich, the Debtors’ Chief Executive Officer, provides: “Recent events in the world economy have roiled traditional markets and the cryptocurrency markets alike. The lingering effects of the COVID-19 pandemic, coupled with rampant inflation and the adverse effects of the war in the Ukraine on the world economy, contributed to a massive sell-off in traditional assets in 2022. Total wealth in the United States declined by $5 trillion between January 2022 and May 2022.

The cryptocurrency market is not immune to these macroeconomic trends and likewise experienced extreme market volatility in 2022. All major coins and cryptocurrency-focused companies have experienced significant declines; as of June 2022, the cryptocurrency market has lost $2 trillion in aggregate market value. Several major liquidity events in the cryptocurrency space, including the implosion of Terra LUNA (‘Luna’)…accelerated the onset of a “crypto winter” and an industry-wide sell-off to manage risk in 2022.

All major cryptocurrencies experienced significant declines in the first half of 2022; Bitcoin slumped 37.3% in June 2022 alone and is down 60% year-to-date. Companies in the cryptocurrency industry also experienced significant equity declines as declining cryptocurrency prices pressured margins and investor pessimism grew….Distressed situations faced by two industry participants—Terra and Three Arrows Capital—exacerbated this ‘cryptocurrency winter.’ The eventual implosion of Terra and Three Arrows Capital, and the resulting fallout, created the ‘cryptopocalyse’.”

The Ehrlich Declaration continues: “… to provide customers with a yield on the assets they store with Voyager, Voyager loans out a portion of its cryptocurrency reserves to third parties. Voyager customers expressly acknowledge that Voyager may loan the customer’s deposited assets (which are pooled with all other retail investors’ deposited assets) to third parties when they agree to the Voyager customer agreement, a requirement to deposit assets on Voyager’s platform. 

The Company has entered into a number of third party loans. Between March 2021 and March 2022, the Company entered into 125 third party loans with 9 different counterparties, lending out cryptocurrency with an aggregate market value of $5.15 billion.

In March 2022, the Company entered into a master loan agreement with 3AC (the ‘3AC Loan’). Pursuant to the 3AC Loan, the Company agreed to lend 15,250 Bitcoins and 350 million USDC to 3AC. The 3AC Loan was callable at any time by the Company. 3AC fully drew down on the 15,250 Bitcoins and 350 million USDC.

After the Luna crash in 2022, the Company began to assess 3AC’s downside exposure and the likelihood of repayment under the 3AC Loan. The Company made an initial request for a repayment by 3AC of $25 million of USDC by June 24, 2022, and subsequently requested repayment of the entire outstanding balance of Bitcoin and USDC by June 27, 2022. 3AC did not repay either requested amount. Accordingly, on June 27, 2022, Voyager issued a notice of default to 3AC for failure to make the required payments under the 3AC Loan.

Once it became clear that 3AC had significant exposure to the Luna crash, Voyager’s management team immediately engaged in efforts to identify sources of potential liquidity to stabilize the Company’s business and ensure that the Company remained adequately capitalized. The Alameda Loan Facility provided the Company with $200 million cash and USDC and 15,000 Bitcoin subject to certain restrictions. The Company could draw on the facility in either U.S. dollars or Bitcoin, providing the Company with capital to fund its business and cryptocurrency to facilitate trade execution if necessary. The Alameda Loan Facility also communicated to the market at large that Voyager had significant cash on hand and support from one of the industry’s key players.

The Alameda Loan Facility, however, was only a partial solution to the Company’s liquidity issues. General market pessimism due to significant declines in cryptocurrency prices, coupled with concerns about the 3AC Loan, contributed to an influx of customer withdrawals."

Suspension of Operations

As we previously reported, on July 4th the Debtors announced that they were temporarily suspending trading, deposits, withdrawals and loyalty rewards, effective at 2:00 p.m. Eastern Daylight Time, Friday July 1. The Debtors referred to this suspension as "Maintenance Mode."

In making the announcement, Stephen Ehrlich, the Debtors'Chief Executive Officer, noted: "This was a tremendously difficult decision, but we believe it is the right one given current market conditions….This decision gives us additional time to continue exploring strategic alternatives with various interested parties while preserving the value of the Voyager platform we have built together. We will provide additional information at the appropriate time.

About the Debtors

According to the Debtors: “Voyager Digital Ltd. is a fast-growing, publicly traded cryptocurrency platform in the United States founded in 2018 to bring choice, transparency, and cost efficiency to the marketplace. Voyager offers a secure way to trade over 100 different crypto assets using its easy-to-use mobile application, and earn rewards up to 12 percent annually on more than 40 cryptocurrencies. Through its subsidiary Coinify ApS, Voyager provides crypto payment solutions for both consumers and merchants around the globe.”

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