In re Compute North Holdings, Inc., No. 22-90273 (Bankr. S.D. Tex.)
- Compute North Holdings, Inc., a large data center with a focus on cryptocurrency mining, files for Chapter 11 protection amidst an atrocious business environment for all things crypto.
- Compute North was pushed into bankruptcy after its relationship with one of its primary lenders broke down.
- Debtors’ plan to sell all its assets quickly may be a challenge for unsecured creditors.
The Filing: Compute North Holdings, Inc. and related entities, a data center company with a focus on blockchain and cryptocurrency mining, recently filed for chapter 11 in the Southern District of Texas. Compute North’s CFO and Treasurer submitted the debtors’ first day declaration.
Why it Happened: The declaration describes “a confluence of events” that created a liquidity crisis for Compute North, most notably: (1) the severe drop in Bitcoin prices, (2) the nearly doubled price of the electricity needed to mine Bitcoin, and (3) supply chain issues restricting Compute North’s access to inventory.
According to the declaration, in 2022 the relationship between Compute North and one of its primary lenders (and approximately 1% equity holder), Generate Lending, LLC broke down. Generate Lending agreed to lend up to $300 million to Compute North in February 2022 (of which Compute North tapped approximately $114 million with approximately $101 million outstanding). But in July 2022, Generate Lending noticed technical defaults on the loan. Having done so, Generate Lending was able to exercise remedies resulting in an effective takeover of the borrower entity and its subsidiaries which own two of the data center facilities. Generate Lending also took over a bank account containing over $23 million at the time. According to the declaration, Compute North is hoping for an expedited reorganization resulting in a scaled-down operation or a 363 sale. In a later filing, Compute North sought approval of bid procedures for the sale which envisions a sale hearing on November 8, 2022.
Maximum Recoveries: Compute North’s equity holders and unsecured creditors may have a difficult time recovering here. Despite claiming between $100 million and $500 million in estimated assets in its voluntary petition, Compute North estimates approximately $209.7 million owed to secured creditors, including Generate Lending, and $18.4 million to general unsecured creditors. As of September 30, 2022, no unsecured creditors committee has been formed. Per the first day declaration, Compute North anticipates filing a proposed plan in the near term which may provide unsecured creditors some insight.
Business Implications: Compute North’s bankruptcy reflects the atrocious business environment for all things cryptocurrency. Recent interest rate hikes showed just how much cryptocurrency demand was driven by margin, and any company that expanded in 2021 or early 2022 when the price of Bitcoin was in the $30,000 to $60,000 range must deal with the new—potentially long lasting—reality of higher interest rates resulting in lower crypto prices.