Proposes Debt Restructuring to Core
Scientific Board in Order to Avoid Bankruptcy
LOS
ANGELES, Dec. 14, 2022 /PRNewswire/ -- B. Riley
Financial, Inc. (NASDAQ: RILY) ("B. Riley"), a diversified
financial services platform which is one of the largest creditors
of Core Scientific, Inc. (NASDAQ: CORZ) ("Core Scientific" or "the
Company"), today issued an open letter to Core Scientific
shareholders and lenders.
In light of Core Scientific's strategic alternatives process
with respect to its capital structure, B. Riley has engaged with
the Company to restructure its debt and provide liquidity to avoid
a potential unnecessary and value destructive bankruptcy
proceeding. We believe that there is a path forward and have been
proactive in working through a solution, specifically by providing
debt on a number of unencumbered assets. B. Riley strongly
urges the Company's Board of Directors to work with creditors
expeditiously to achieve a productive resolution for the benefit of
all Core Scientific stakeholders.
The full text of the letter is as follows:
An Open Letter From B. Riley To Core Scientific's
Shareholders And Lenders
Dear Fellow Shareholders and Lenders of Core Scientific:
On October 26, 2022, 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 also
stated that it was 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 approximately $50
million.
As one of Core Scientific's largest creditors, this announcement
took us by surprise. 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.
Moreover, bankruptcy is not necessary at all. In
our opinion, the vast majority of Core Scientific's issues are
self-imposed and can be corrected in conjunction with an open,
transparent discussion and ongoing participation with its creditors
and equity holders. To that end, B. Riley has proposed to Core
Scientific's Board of Directors that it would provide $72 million in new, non-cash pay 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.
Our proposal and analysis are as follows. Core Scientific
currently has approximately $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 than it is today and the theoretical payoff on miners was
significantly faster. 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. 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. This
decision combined with the fast maturity associated with mining has
led the Company to its current position.
Our analyst, Lucas Pipes, has
been following Core Scientific since February 10, 2022. Based on his model,
adjusted for current metrics, even at a Bitcoin price of $18,000, Core Scientific can generate Adjusted
EBITDA of ~$140 million.
Additionally, if the company builds out the Denton, Texas facility for an incremental
$40 million of capital, that could
add an additional $25 million of
EBITDA, resulting in a run rate EBITDA of ~$165 million. On top of that, 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. If Bitcoin prices return to
$24,500, we estimate that Core
Scientific will generate nearly $275
million of Adjusted EBITDA to service creditors.
Our proposal is simple. It provides sufficient liquidity
to avoid bankruptcy. B. Riley's proposal does not purport to
haircut amounts owed to the Company's equipment lenders. B.
Riley 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. We have had extensive discussions with the
Company's equipment lenders and believe this path should be
acceptable to them.
That leaves the convertible debt. There is no reason to
address this debt at the present juncture. It has more than 2
years remaining to maturity and only $17
million of cash interest payments. It is a piece of
paper that was put in place to withstand a reduction in the price
of Bitcoin. To address this now
is unnecessary. If every oil producer had decided to
restructure its debt two years ago when oil traded in the single
digits, the only beneficiary would have been those that
participated in an unnecessary restructuring.
Time is of the essence. We have extensive experience
advising and participating in a "review" process. It is
expensive and when the train gets going it is hard to stop.
Fortunately, due to our involvement with the Company, we are
prepared to move forward with our alternate, superior proposal
immediately. We are also prepared to work with all
stakeholders to achieve the best outcome under the
circumstances. 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.
We strongly urge the Board of Directors to work with us
expeditiously to achieve a productive resolution for the benefit of
all Core Scientific stakeholders.
Sincerely,
Bryant Riley
About B. Riley Financial
B. Riley Financial is a
diversified financial services platform that delivers tailored
solutions to meet the strategic, operational, and capital needs of
its clients and partners. B. Riley leverages cross-platform
expertise to provide clients with full service, collaborative
solutions at every stage of the business life cycle. Through its
affiliated subsidiaries, B. Riley provides end-to-end,
collaborative financial services across investment banking,
institutional brokerage, private wealth and investment management,
financial consulting, corporate restructuring, operations
management, risk and compliance, due diligence, forensic
accounting, litigation support, appraisal and valuation, auction,
and liquidation services. B. Riley opportunistically invests to
benefit its shareholders, and certain registered affiliates
originate and underwrite senior secured loans for asset-rich
companies. B. Riley refers to B. Riley Financial, Inc. and/or one
or more of its subsidiaries or affiliates. For more information,
please visit www.brileyfin.com.
Contacts
Media
Jo Anne
McCusker
jmccusker@brileyfin.com
(646) 885-5425
Investors
Mike
Frank
ir@brileyfin.com
(212) 409-2424
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SOURCE B. Riley Financial