Crypto lender Ledn Inc. has made headlines with its groundbreaking sale of $188 million in securitized bonds linked to Bitcoin-backed loans, a notable first in the asset-backed debt market. This innovative transaction consists of two bond tranches. One tranche received an investment-grade rating, priced at a spread of 335 basis points over the benchmark rate, as reported by Bloomberg. Jefferies Financial Group Inc. acted as the sole structuring agent and bookrunner for the deal.
The bonds are collateralized by a pool comprising over 5,400 consumer loans originating from Ledn, where borrowers have used their Bitcoin assets as collateral. These loans boast a weighted average interest rate of 11.8%, but the volatility inherent in Bitcoin’s pricing remains a significant risk factor. Should the cryptocurrency’s price decline sharply, loans may fall underwater, creating potential challenges for both lenders and borrowers.
According to an S&P Global Ratings report, Ledn has implemented algorithmic liquidation protocols to mitigate risks. This system triggers the sale of Bitcoin collateral when a default condition is reached, applying the generated proceeds to pay off outstanding loans. However, recent fluctuations in Bitcoin prices, particularly a sharp drop in early February, have compelled Ledn to liquidate a significant portion of loans associated with the bond issuance, although all liquidations occurred below an 81.4% loan-to-value (LTV) threshold. This action adjusted the portfolio mix toward fewer loans and increased cash reserves in the funding account, all while maintaining the overall collateral package at approximately $200 million.
S&P’s evaluation highlighted critical aspects such as borrower default behavior and recovery rates during liquidation, alongside concentration risks. They indicated that margin-driven defaults pose the most considerable risk, particularly when Bitcoin prices plummet, potentially affecting liquidations in thin or volatile markets. S&P noted that since Ledn primarily underwrites loans based on Bitcoin collateral rather than the credit profiles of borrowers, traditional metrics for consumer loan performance are less applicable in this context.
At the ‘A’ stress level, S&P applied a conservative 100% default assumption, projecting significant stress scenarios, including a 79% default rate and a 68% recovery for the BBB- class A tranche. Despite these challenges, S&P acknowledged various structural mitigants, such as overcollateralization and early amortization triggers, plus a liquidity reserve funded at 5% of the note balance. The report also commended Ledn’s automated liquidation system, which has effectively managed the liquidation of 7,493 loans over the past seven years without incurring principal losses.
Looking ahead, Ledn plans to implement a requirement for cash interest payments on loan renewals starting in 2027, a strategy S&P believes will alleviate liquidity pressures over time. Meanwhile, Bitcoin’s market performance remains mixed; despite a modest recovery, it continues to trade approximately 46% below its October highs, hovering around $66,000 at present.
