Wall Street’s inaugural venture into a public bond sale backed by bitcoin loans has encountered substantial challenges, primarily fueled by a notable decline in bitcoin’s value. Bankers from Jefferies have been actively promoting a $188 million asset-backed bond deal associated with a substantial number of loans issued by the crypto lender, Ledn. This bond structure is designed to consolidate one-year loans extended to individuals who utilize bitcoin as collateral, with the bond sale’s proceeds intended to bolster Ledn’s capital for issuing new credit.
However, the transaction faced immediate pressures as bitcoin’s value plummeted approximately 27% since mid-January, leading to forced liquidations within the loan portfolio. Reports indicate that Ledn had to liquidate about 25% of the loans meant to back this deal, effectively acting as an early stress test for the bitcoin-backed credit product. The volatility in bitcoin prices triggered margin calls throughout the loan book, complicating the prospect of a smooth bond issuance.
Initially marketed with a robust foundation of $199 million in bitcoin-backed loans supplemented by $1 million in cash, the collateral composition has shifted dramatically post-liquidation. Presently, the collateral pool consists of around $150 million in loans along with $50 million in cash, underscoring the fragility of this financial structure during periods of significant market decline.
Despite these obstacles, the bond deal is still projected to close on its scheduled date, with ratings assigned by S&P Global Ratings. To ensure bondholder payments, Ledn now faces the imperative of redeploying the liquidation proceeds into new loans capable of generating the necessary interest income.
S&P’s analysis of the situation revealed insights into the structure and inherent risks associated with Ledn Issuer Trust 2026-1. The initial collateral consisted of 5,441 fixed-rate balloon loans with a combined principal balance of approximately $199.1 million, secured by about 4,079 bitcoins valued at around $356.9 million. The weighted average interest rate for these loans stands at 11.8%, with a loan-to-value (LTV) ratio averaging 55.8%. However, the sharp decline in bitcoin pricing necessitated Ledn to liquidate a significant portion of the loans earmarked for this bond offering.
The rating agency also pointed out that all liquidations were executed beneath an 81.4% LTV threshold, which has adjusted the portfolio towards a greater proportion of cash and fewer loans. S&P’s scrutiny centered on borrower behavior, potential recovery rates during asset liquidation, and concentration risks inherent in the financial product. They highlighted that defaults driven by margin calls represent an acute stress scenario, as such situations often arise in declining bitcoin price environments.
Ledn’s framework for underwriting loans prioritizes bitcoin collateral over traditional borrower credit profiles, which limits the applicability of conventional consumer loan performance metrics. At the ‘A’ stress level, S&P employed a conservative 100% default assumption while modeling stress scenarios for the rated notes, indicating a possible 79% default rate coupled with a 68% recovery for the BBB- class A tranche.
Although S&P identified mitigating structural features such as overcollateralization and automated liquidation mechanisms—demonstrated by Ledn’s successful liquidation of over 7,493 loans without principal losses across seven years—the agency nonetheless flagged significant weaknesses. These include bitcoin’s historical volatility, ongoing regulatory uncertainties, and potential conflicts stemming from Ledn’s prior practices of extending loans by capitalizing on unpaid interest.
In a bid to alleviate long-term liquidity stress, Ledn is set to mandate cash interest payments for loan renewals beginning in 2027. The operational parameters dictate that if bitcoin’s value drops and a loan surpasses 70% of its collateral value, borrowers are required to contribute additional bitcoin. An automatic liquidation of collateral takes place at the 80% threshold, aimed at safeguarding the loan’s repayment.
