Insights – Key takeaways from GRR Live Singapore 2022 panel discussion on crypto winter, crypto restructuring options and schemes

An engaging and insightful panel discussion at GRR Live Singapore 2022 “Question Time” held on 24 August 2022 where the panel answered questions direct from the audience on topical issues in restructuring.

DHC Capital Partner, David Chew participated on the panel with Lingqi Wang (Partner, Fangda Partners) and Joshua Taylor (Managing Director, Alvarez & Marsal).

Key takeaways from the panel discussion:

  • Crypto winter ahead?

    • We have seen filings in Singapore – Vauld (s.64 moratorium), Zipmex (s.64 moratorium), Defi Payments (s.64 moratorium) and Hodlnaut (Judicial management) and globally – most notably Celsius (Chapter 11)

    • We expect more to come due to the contagion effect

    • Crypto companies are now facing 2 issues. First, value has dropped (mark to market basis) or counterparties have defaulted leading to asset liability mismatch (i.e. balance sheet / solvency problem). Second, there is no liquid market for assets now as counterparties have frozen accounts, users seek to withdraw, loan redemptions and negative operating cash burn (i.e. short term liquidity challenges)

    • Raising fresh capital will be the way forward. Difficult market conditions, but there is capital out there

    • We see the market situation like the early 2000’s following the dot com bust. Initially, it was a massive land grab. Market share was the goal as valuations were based on growth potential / users / page views and tech companies spent big on high profile advertising (e.g. crypto advertising on F1 teams and NBA teams and arenas). Now the message is different, path to profitability. Preserve cash. Operationally cut the burn to survive. Clean out the also rans and create the giants (whether existing or new player). Out of this winter, there will be big winners, possibly through consolidation

  • Crypto restructuring options?

    • Possible restructuring options:

      • Discounted pay off in cash for creditors / depositors requiring urgent liquidity

      • Issuing creditors / depositors who are “long crypto” a combination of (i) new mined coins from blockchain, (ii) new recovery coins and /or (iii) equity in crypto company post restructuring

  • Singapore’s reputation as a crypto / blockchain hub suffering?

    • We do not see the recent filings having a material impact

    • MAS has been open and welcoming and encouraging crypto and blockchain related services

    • MAS was a forerunner in developing a licencing regime for crypto companies and this has potentially led to misunderstanding in the market between “Singapore based” vs “Singapore licensed” and expectation gap on what licensed means (i.e. licensed companies are not subject to risk-based capital or liquidity requirements like a bank and MAS has warned the public that the values of cryptocurrencies are extremely volatile and customers’ monies are not protected under the law)

    • We see an end game where:

      • MAS will take a tough stance on money laundering and consumer protection

      • Expect to see MAS bring in regulation on custody obligations for third party custodians of crypto assets and provide additional consumer safeguards for crypto trading

    • MAS believes in fintech industry, distributed ledger technology and blockchain technology (supporting cryptocurrencies) as it offers benefits to solve real problems like cross-border settlement and cross-border trade finance. All part of Web3.0

  • Key bottlenecks faced when multiple group entities file for bankruptcy?

    • Scheme structure: Individual scheme at each scheme entity vs deed poll structure involving one scheme entity with one combined scheme vote

    • Restraining creditor actions: Use of Section 64 and Section 65 IRDA moratorium to provide breathing room for key entities in the group and prevent race to the Court scenario

    • Creditor ranking: Structural sub-ordination and security over assets at different entities grant different rights to creditors, which need to be recognised in the restructuring waterfall in line with the recovery under the comparator

    • Transparency: Ensuring information is shared equally

  • Improvements to promote rescue financing / super priority rescue financing in Singapore?

    • Law / Regulatory

      • Law is good. Still relatively young law. Some smaller cases have been successfully completed (click here for more information)

      • Possible amendments to the law to provide certainty of completion from an investor perspective would be beneficial (e.g. out of the money creditors and shareholders excluded from voting and classification of scheme creditors where investor buys into the debt)

    • Market

      • Better credits – better businesses, better quality assets and bigger sizes (new money quantum US$75 million +)

      • Companies taking pro-active steps to address debts at an earlier stage in the cycle to give more options

      • Active secondary debt trading market – high yield bonds, leveraged loan market and bank loans

  • Will schemes be the way forward for debtor companies to restructure in Singapore?

    • Schemes will remain first choice tool

    • Provides access to moratorium if there is a burning platform, cash is tight and creditors threatening enforcement

    • Flexible tool allows avenue for new money to be part of the solution and can provide releases for third party entities

    • Certainty via use of early bird and lock up agreements

    • Speed. Trend towards quicker schemes with completion time under 6 months

    • Not a one-size fits all approach. Specific cases where a scheme may not be appropriate:

      • Bond restructuring. Use consent solicitation exercise where bondholders can be identified, and support obtained

      • Fraud situations. Judicial management may be better option where there are management integrity issues

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