Nuclear bankruptcy judge to approve $70 million financing deal from B. Riley

The federal judge overseeing bitcoin miner Core Scientific’s (CORZ) Chapter 11 bankruptcy filing indicated he will approve a $70 million loan from B. Riley Commercial Capital that will help the company get back on its feet.

Judge David Jones of the Southern District of Texas also said at a hearing Wednesday that he would agree to a group of shareholders’ request to form an official committee to represent their interests in the case, pending a budget for the committee.

Core Scientific filed for bankruptcy in December, after months of a sustained decline in the crypto market with high energy prices weighing on the bottom line. As of late November, before the bankruptcy, Core Scientific’s debt included $552.5 million of outstanding principal under senior secured convertible notes, $41.8 million to B. Riley and $242.5 million under various equipment financing agreements, according to a filing on Dec. 27. February. .

The B. Riley facility, known as debtor-in-possession financing (DIP loans), replaces an earlier temporary order. It is intended to enable the company to reorganize and includes the payment of legal and adviser fees. It comes with an annual interest rate of 10% and has “super priority” over all administrative expenses and unsecured claims, except for some fees known as a “carve-out,” according to a term sheet filed with the court.

A final order on the DIP loan can be signed as early as today, while a new hearing will take place on Friday to discuss the reduction of the shareholders’ committee. A final budget for the DIP financing will also have to be agreed.

B. Riley Commercial Capital is a subsidiary of B. Riley Financial (RILY).

Equipment lender BlockFi had objected to the DIP, saying it did not provide sufficient protection for security, but the issue was resolved before Wednesday’s hearing.

Core Scientific Senior Vice President of Capital Markets & Acquisitions Michael Bros said in a Dec. 21 filing that equipment loans like BlockFi’s are undersecured, with as much as $90 million in collateral.

On February 3, a group of shareholders asked the court to form an official committee that they claimed would provide “critical input with respect to the valuation and negotiation of Chapter 11 plan terms on behalf of the equity.” The group said Core Scientific is solvent and that given the recent rise in bitcoin prices and the improvement in energy markets, “the value available for equity is increasing.”

In its response, Core Scientific agreed that it is not hopelessly insolvent, given recent market movements, and supported the proposal, setting a budget of $4.75 million, including financial advisers’ fees, to be taken from the secured assets of what is known as a carving.

Despite his consent to form the committee, the judge said he will “reserve the benefit” of “hindsight”. If he decides that the interests of the shareholders were not promoted by the committee, or it was done at the expense of other creditors, he can use “a number of tools”, including bringing the committee’s budget down to zero.

The share group represents 69 million shares. That’s less than the issued and outstanding common stock held by company insiders, which is about 29% of the 107 million total, according to the U.S. Trustee’s office.

B. Riley has previously argued that weeks of negotiations over the funding should not be undone by the carve-out’s last-minute request for $4.75 million.

The shareholders also question whether Core Scientific protected its fiduciary duties during the negotiations because it did not adequately look for financing alternatives. The shareholders “successfully encouraged” a third party to submit an alternative to B. Riley’s financing proposal, which they believe was the only competing offer on the table.

“Had Ad Hoc Equity Group been involved from the beginning, the debtors may well have avoided the original agreement with the secured convertible noteholders that allowed for a termination fee of $6 million, which equates to an internal rate of return in excess of 500%,” the group said.

In its response, Core Scientific dismissed these claims as ad hominem attacks and said it spoke to 20 potential lenders for the original financing proposal.

A proposed deal between the noteholders and the bankrupt firm would have left holders of unsecured debt and equity holders fighting for more than 3% of the reorganized company, shareholders said.

DIRECTION (March 2, 2023, 01:05 UTC): Corrects that the judge overseeing Core Scientific’s bankruptcy is David Jones, not Marvin Isgur.