(Bloomberg) -- Hedge funds including Diameter Capital Partners, Canyon Partners and Farallon Capital Management scooped up an $874.5 million obligation FTX owed to BlockFi Inc., according to people familiar with the matter, marking the largest trade to-date in the surging market for debt tied to Sam Bankman-Fried’s fraud-tainted exchange.
The transaction is the latest sign that the surprising secondary market for creditor claims that’s emerged from FTX’s ashes will be a boon for debt investors. Obligations fetching about 10 cents on the dollar when FTX collapsed will be fully repaid with interest, a rare win benefiting customers and hedge funds that amassed large bets when prospects for repayment were dim.
The exact purchase price couldn’t be learned. Mohsin Meghji, an adviser overseeing payments to BlockFi customers, said BlockFi’s FTX claims were sold “at a substantial premium” to their $874.5 million face value. The payments are poised to help BlockFi customers burned by FTX’s collapse recoup funds, as well.
BlockFi was a crypto lender that blamed its own failure on Bankman-Fried’s enterprise falling apart. Its claim is the largest to trade in the FTX Chapter 11 case and is “one of the largest claim trades ever,” said Vladimir Jelisavcic, founder of Cherokee Acquisition, which brokers bankruptcy claims.
A consortium that includes Diameter, Canyon and Farallon acquired BlockFi’s claim, said the people, who were not authorized to discuss the transactions publicly.
The sale comes as major distressed-debt investors have increased positions in creditor claims. Attestor Limited grew its holdings from $394 million in January to more than $760 million as of June 22, according to court records. Farallon increased its holdings from roughly $258 million to $615 million over the same period, court papers say. Diameter has more than $400 million in exposure, Bloomberg News reported.
Higher payouts
BlockFi had substantial connections to Bankman-Fried’s firm at the time it collapsed, including an outstanding $975 million loan to FTX’s trading arm Alameda Research. A BlockFi creditors committee alleged the crypto lender had a flawed business model and ignored concerns raised internally about lending to Alameda. BlockFi said it performed reasonable due diligence and that the lender failed “because FTX and Alameda were and are fraudulent enterprises.”
FTX’s bankruptcy advisers settled in March, providing BlockFi with $874.5 million in claims against FTX and Alameda. The settlement gave Meghji, the adviser overseeing distributions to BlockFi customers, the option to sell the FTX claims, he said in a statement. BlockFi advisers commenced a sale process on June 24 and closed the transaction on July 10, Meghji said.
Following the sale, BlockFi customers are expected to recover 100% of their allowed claims, Meghji said. BlockFi had projected customers could recover between as little as 36 cents on the dollar and about 94 cents on the dollar, largely depending on the outcome of the FTX dispute, according to a May 2023 court filing.
Full repayment doesn’t mean customers will be made whole, however. Customer claims are based upon the dollar value of their accounts at the time BlockFi filed Chapter 11 in November 2022. Bankruptcy lawyers for BlockFi and other failed crypto platforms have said Chapter 11 rules require claims are set this way, which prevents further potential losses but means customers missed out on surging crypto prices.
Kenneth Aulet, a lawyer representing Meghji who earlier represented the creditors committee, said in an interview that BlockFi’s customers were overwhelmingly retail investors who have suffered greatly since the lender failed nearly two years ago. Aulet didn’t discuss terms of the claims sale, citing confidentiality provisions.
Some customers put substantial sums on the platform, including their life savings, Aulet said. Though distributions won’t fully rectify the damage that’s been done, Aulet said customers are receiving far more than what could have been anticipated when BlockFi filed bankruptcy.
“It is the most we could return to customers,” he said.
The case is BlockFi Inc., 22-19361, US Bankruptcy Court for the District of New Jersey (Trenton).
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