Core Scientific could get $72 million loan to avoid bankruptcy

By Sarah Lizee

Olympia, Wash., Dec. 14 – One of Core Scientific, Inc.’s largest creditors, B. Riley Financial, Inc., said Wednesday that it has engaged with the company to restructure its debt and provide liquidity through $72 million of new-money financing to avoid a potential bankruptcy proceeding, according to a press release.

On Oct. 26, Core Scientific announced that it would be suspending all principal and interest payments coming due in October and early November to several of its equipment lenders and for other financings, including its two bridge promissory notes.

The company said it was also exploring strategic alternatives with respect to its capital structure and suggested that all options, including bankruptcy, were on the table.

Since then, Core Scientific's common shares have declined 86% and currently trade at $0.15 per share, representing a market capitalization of about $50 million.

“As one of Core Scientific's largest creditors, this announcement took us by surprise,” B. Riley said in an open letter to Core’s shareholders and lenders.

“Bankruptcy is not the answer and would be a disservice to the company's investors. It will destroy value for the company's shareholders, reduce potential recoveries for the company's lenders, deplete its limited resources and create massive uncertainty for all its stakeholders.”

B. Riley said it believes most of Core’s problems are self-imposed and can be corrected through open discussion and participation with its creditors and equity holders.

The lender approached the company’s board to propose the $72 million financing on favorable terms, providing more than two years of runway for the company to achieve profitability.

“This is a far superior approach for all constituents, one that would avoid bankruptcy while preserving meaningful value for all of Core Scientific's stakeholders,” B. Riley said.

Core Scientific currently has about $300 million of equipment and other loans (B. Riley's outstanding loan is $42 million) that have a very short maturity. These loans were made when the price of bitcoin was significantly higher and the theoretical payoff on miners was significantly faster, B. Riley said.

“These debts were incurred as part of an aggressive, ill-conceived strategy by the company to continue to build out power facilities and expand miners while never selling bitcoin on hand and never hedging prices,” B. Riley stated.

“This approach has led to the company having to sell all of its inventory, representing 9,618 bitcoins in April 2022 valued at $362 million, at a massive loss.”

The lender said this, combined with the fast maturity associated with mining, led the company to its current position.

Based on the model of a B. Riley analyst that has been following Core Scientific since Feb. 10, 2022, adjusted for current metrics, even at a bitcoin price of $18,000, Core Scientific can generate adjusted EBITDA of around $140 million.

Additionally, if the company builds out the Denton, Tex., facility for an incremental $40 million of capital, that could add an additional $25 million of EBITDA, resulting in a run rate EBITDA of around $165 million.

Every $1,000 increase in the price of bitcoin would likely add up to $20 million of EBITDA – meaning that if the price of bitcoin were to increase to $20,000, adjusted EBITDA could be over $200 million on a run-rate basis, B. Riley said.

“If bitcoin prices return to $24,500, we estimate that Core Scientific will generate nearly $275 million of adjusted EBITDA to service creditors,” the lender said.

B. Riley said it is prepared to fund the first $40 million of financing immediately, with zero contingencies.

For the remainder of B. Riley's proposed new financing, at bitcoin prices of $18,500 and below, all principal payments to equipment lenders would need to be suspended until the price of bitcoin recovers to $18,500.

Once that happens, the proposal provides free cash flow will be distributed in cascading amounts to equipment lenders in the form of interest and partial principal payments until they are made whole.

As bitcoin continues to rise, additional free cash flow will be distributed in increasing amounts.

In the meantime, all interest payments to equipment lenders, and B. Riley itself under its outstanding bridge loan, would be paid in kind for one year to provide additional runway for the company.

B. Riley said there isn’t any need to address the convertible debt at this point because it has more than two years remaining to maturity and only $17 million of cash interest payments.

“In our view it would be a gross violation of the fiduciary duties owed by the board and management for those fiduciaries – who must put our interests ahead of their own – to authorize a Chapter 11 filing,” B. Riley said.

Core Scientific is an Austin, Tex.-based bitcoin mining company.

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