Creditors Of Bankrupt FTX To Receive As Much As 142% Of What They Are Owed

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by Tyler Durden
Wednesday, May 08, 2024 - 07:05 PM

Back in March, when eyeing the tremendous rebound in the crypto space, we joked that creditors in Sam Bankman-Fried's bankrupt exchange, FTX, would recover 200% of their claims.

Well, as so often happens in the "new abnormal", it turns out that we were not joking, because according to the latest reorg plan filed by the bankrupt FTX on Tuesday, most - or roughly 98% of its creditors - would get back 118% of what they had on the FTX platform the day the company entered Chapter 11 bankruptcy. Amazingly, some creditors will recover as much as 142% of what they are owed. Claims will be repaid in cash within 60 days of court approval, although payouts are likely several months away, as FTX winds its way through the final stages of the bankruptcy case.

Under the plan, other non-governmental creditors would get back 100% of their claims plus up to 9% interest to compensate them “for the time value of their investments.” The arrangement is still subject to approval by the Delaware bankruptcy court overseeing the bankruptcy case.

As Coindesk reports, the proposed payouts are higher than earlier estimates from the FTX estate, which said in October it expected to pay back only 90% of customer funds which still was a hefty haul for a bankruptcy where most said recoveries would be virtually nil. In January, current FTX CEO John Jay Ray III revised that estimate, telling the court he expected to be able to pay customers back in full.

So how did FTX creditors - who typically receive just pennies on the dollar for their holdings - luck out so tremendously, and most of them will actually make money following the bankruptcy? Simple: as we hinted in March, FTX has benefited from a historic rally in cryptocurrencies including Solana, a token heavily backed by convicted fraudster and FTX founder Sam Bankman-Fried (in fact, some have wondered if the tremendous ascent of Solana - a B-grade token which traditionally crashes every few months, and is generally the laughing stock within the crytpo community - wasn't another market manipulation meant to generated 100%+ recoveries). 

Other sources of value, including investments made by FTX and Alameda Research – such as its 8% stake in AI startup Anthropic, which was sold piecemeal to institutional investors for $884 million in March – have been liquidated to generate cash to pay back the claims.

“In any bankruptcy, this is just an unbelievable result,” said FTX Chief Executive Officer, John Ray, who took over the firm when it collapsed.

In a Tuesday press release, the FTX estate said it expects to have between $14.5 and $16.3 billion in cash available for distribution by the time a plan is approved by a Delaware bankruptcy court – the result of a year-and-a-half of scraping together the company’s scattered assets around the world and liquidating them.

“As previously disclosed, had a massive shortfall at the time of the Chapter 11 filing in November 2022 – holding only 0.1% of the Bitcon and only 1.2% of the Ethereum customers believed it held,” the press release stated. “Accordingly, Debtors have not been able to benefit from the appreciation of these missing tokens during these Chapter 11 cases.”

FTX's new reorganization plan would also settle a host of claims from regulators and government agencies, including the IRS and Commodity Futures Trading Commission (CFTC).

The IRS agreed to resolve its $24 billion in claims in return for a $200 million cash payment and a $685 million subordinated claim that will only be paid out after all creditors and other governmental entities.

The CFTC and other unnamed governmental claimants agreed to subordinate their claims as long as FTX users and investors were paid in full with interest. There are also plans for a special fund created to make “supplemental restitution” to certain customers and creditors, though the details of this agreement have not been finalized, according to the press release.

A hearing to discuss the proposed plan is scheduled for June.

Former FTX CEO and convicted fraudster Sam Bankman-Fried previously attempted to use the estate’s ability to pay back customers in full as evidence that the collapse of his exchange had “zero” harm to its customers. Before his sentencing in March, Bankman-Fried’s lawyers argued that their client should receive a light sentence, in part because customers would get all their money back.

Ironically, if it hadn't been for the Terra-Luna "stablecoin" implosion exactly two years ago which triggered a liquidation cascade across the crypto universe including a 50% plunge in bitcoin in one month in May and June 2022, not only would FTX still be viable, but SBF would be a free man and also one of the world's richest people.

Ray, along with dozens of FTX creditors, wrote to the court arguing that the estate’s ability to claw together enough to money pay back his victims – the result of “tens of thousands of hours … spent digging through the rubble of Mr. Bankman-Fried’s sprawling criminal enterprise to unearth every possible dollar, token or other asset” – doesn’t mean his conduct wasn’t criminal.

Bankman-Fried was sentenced to 25 years in prison. He plans to appeal his sentence and conviction. In retrospect, considering that those who had money in his bankrupt exchange got as much as a 42% return, he may well end up with a reduced sentence.