He made $25 million betting on FTX’s bankruptcy claims

24-04-02 18:00

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Original title: Hedge funds that scooped up FTX bankruptcy claims are looking at 9-figure paydays. One investor shares how he could rake in $25 million

Original author: Niamh Rowe, Fortune Crypto

Original compilation: Luffy, ForesightNews

When rumors began to circulate on the Internet that FTX was in trouble, one of FTX's customers, Louis d'Oringy, did not ignored, instead turning his attention back to the friends he was entertaining at his Miami Beach apartment.

"Fake news," he recalled. He put down his laptop and left the increasingly anxious cryptocurrency community for a day of relaxation at the beach.

But after a few hours, the atmosphere changed. He came home and saw tweets about FTX customers’ withdrawal requests being rejected.

“Things were getting hectic,” he recalled. As the sun set through the floor-to-ceiling windows, the then 31-year-old wondered how things would play out next.

"Then," he recalled, "suddenly we couldn't withdraw the money we had in FTX."

D'Oringy is one of more than a million victims trying to recover lost funds from FTX. FTX has collapsed since co-founder Sam Bankman-Fried’s financial fraud came to light.

“At the time, it felt like the end of the crypto world,” he said. "The outlook is very pessimistic, and no one thinks Bitcoin will reach new all-time highs again." But in cryptocurrency's darkest hour, d'Oringy's thoughts began to Transformation occurs.

Louis d'Origny from Has purchased over 1,000 FTX bankruptcy claims since December 2022

“My opinion is that Sam did not have enough time to commit this fraud and lose money .I'm pretty sure they'll be able to recover a significant amount of money," he said.

D'Oringy sees an opportunity: Many creditors like him hope to get at least some of their money back, but how exchanges raise a total of $8.7 billion when they declare bankruptcy There is no clear information on the gap and there are no guarantees. In other words, creditors may sell their claims at a discount.

So what if they could hedge their claims?

Debt trading is a risk but also an opportunity

D'Oringy used his own previous Boutique fund Arceau bought some of the Celsius bankruptcy claims, but he's still new to the field. Most investors he knew didn’t want to wade into FTX’s murky waters—no one was willing to put up money to buy the claims.

But within weeks of the Miami incident, d'Oringy began using his own money to purchase FTX positions from hedge funds and requested liquidation.

“We don’t know any more about the bankruptcy. We took a big risk, I just said it and did it ” d’Oringy told Fortune.

Trading bankruptcy claims is a high-risk, high-reward strategy. As Lehman Brothers, Enron and General Motors went bankrupt, debt traders are believed to have made hundreds of millions, if not billions, of dollars from these once-giant companies. But more often than not, the debt may end up being worthless.

"The end result was much better than I imagined," he said.

When a company goes bankrupt, creditors face lengthy bankruptcy proceedings in court with no guarantee of what percentage of their claims they will receive. Instead, many choose to immediately sell their claims for cash to a buyer willing to take the risk of a collapse in the value of the claims, with the buyer's losses depending on how much of the debt the bankruptcy administrator is able to recover.

Calculating the exact timing and value of debt transactions has been complicated since FTX filed for Chapter 11 bankruptcy in the District Court of Delaware on November 11, 2022 . Industry traders told Fortune that some debt transactions were conducted on online platforms, while others were private transactions where buyers were not required to submit transfer applications immediately, creating delays, while some debt transactions were simply reported as their own claims.

As of March 28, there have been 49 transactions exchanging claims worth more than $439 million on Claims Market, the industry’s leading online trading platform. Meanwhile, hedge funds have purchased more than $2.3 billion worth of deeply discounted claims, according to court records as of March 20.

While the bankruptcy court has not set a specific date for creditors to be paid, it now appears likely that they will be paid in full. "It appears that the client is expected to be reimbursed in full," Bankman-Fried told a Manhattan court at Thursday's sentencing.

When a claim is first approved, creditors sell their claims at a low price. More than 60 claims with a total value of more than $1 million have transacted on the market – selling at around 10% in November 2022 and now at 93%, signaling growing confidence in repayment.

Meanwhile, two people with knowledge of the debt trading told Fortune that it is estimated that due to rising cryptocurrency values and the increase in FTX’s holdings Shares in artificial intelligence startup Anthropic were sold for more than $880 million, and the value of these claims may exceed their initial value by 120% to 140%.

A bet with a return rate of more than 700%

Debt buyers tell Fortune Magazine, the appointment of John J. Ray III as new CEO at the time FTX filed for bankruptcy also fueled interest in the claims. “He immediately started selling all the assets that were uncertain (price fluctuations), and institutional debt buyers liked that because they didn’t want Bitcoin,” d’Oringy explained.

According to data submitted in the FTX case report, FTX has recovered approximately $7 billion in assets to date, including liquidated cryptocurrencies, 38 banks located in the Bahamas properties and US$2.6 billion in cash.

The legacy includes approximately 59 million SOL and 21,482 Bitcoins, which have gained approximately 1,000% and 343% respectively since the company filed for bankruptcy. %. FTX will sell 41 million SOL to institutional investors at a price 68% below the current market price, which is worth approximately $7.65 billion at the time of publication. This angered some of the victims, including Sunil Kavuri, who criticized Bankman-Fried for "constantly lying and saying we would all be adequately punished" during the sentencing.

As of March 20, Chapter 11 filings show that d'Oringy has purchased approximately $29 million worth of claims. He said the bonds were purchased for $3.5 million with personal funds: "It was a family office investment of mine and some friends." The return on the investment was more than 700 percent.

d'Oringy purchased his first bond at Christmas when he was reunited with his family. He recalls the worried looks on his parents' faces, who teased him that the family might be bankrupt by next Christmas because of his gamble. The claim, worth nearly $3 million, settled on Dec. 28, 2022, for 6% of its original value, according to contracts seen by Fortune.

The buyers expected to reap the biggest returns from FTX’s remains so far are hedge funds specializing in distressed debt. Attestor, Baupost and Farallon lead the race with claims worth more than $520 million, $518 million and $346 million respectively as of March 20. The funds use other entity names, people familiar with the matter confirmed.

Another big player in the bet, and a friend of d'Oringy's, is Thomas Braziel, a bankruptcy debt broker at 117 Partners who represents some of the market's The largest hedge funds buy debt. Braziel said his first transaction was on Nov. 12, 2022, before the bankruptcy was officially filed. He spent about $240,000 on $8 million of debt (about 3% of its stated value), while another transaction cost about $210,000 on $3.5 million of debt.

Debt trading is not easy

The current valuation is the same as the debt on April 27 last year Valuations for buyers' near misses vary widely.

In a Zoom call with debtors in Singapore, d'Oringy was close to closing a $3 million debt purchase agreement. During the call, news broke that the IRS had filed a $44 billion claim against FTX, accusing it of evading taxes.

"You know, during the call, we were freaking out," he said. But he ultimately decided to buy the debt. "This is really, really scary."

Although the IRS reduced the claim to $20.4 billion, if no objection is filed, in this case , creditors will still face bankruptcy. "We'll get nothing," d'Oringy said.

However, FTX has launched a legal battle over the claim, asking the court to dismiss it: it would "potentially halt indefinitely the debtor's progress and liability to clients and other creditors "Any distribution." In other words, that's unlikely to materialize since IRS claims would leave fraud victims out of pocket, sources tell Fortune.

In July, FTX launched its own public portal for customers to file claims. But in the early days of the deal, there was limited information about which assets could be liquidated or how claims could be verified. Many appear to be crowdsourced via Twitter, and KYC is conducted in a time-consuming and ad hoc manner, d'Oringy said.

Braziel said: "It is really, really difficult to buy debt." He said that he purchased at least two or three debts, but they all turned out to be fraudulent. of.

Due to the speed of verifying claims, d'Oringy purchased 40 claims in the first year of trading. That gave him another idea: speeding up the due diligence process through automation. In December, he co-founded his own portal, FTX Creditor, which he describes as a "custom CRM, KYC and due diligence solution," which he says has reduced the verification process from days to 30 minutes . The company currently has 14 employees spread across all continents who answer calls from creditors 24 hours a day.

The company, which specializes in claims under $100,000, aims to provide retail investors with a convenient way to close sales over a 30-minute phone call. Avoid getting stuck in lengthy transaction confirmations.

Public records show that FTX Creditor has purchased nearly 1,000 claims worth about $100 million since December. Assuming a purchase price of 70% of the debt, that would mean the company would make a profit of about $30 million, according to market estimates — some of which may have been proceeds from d'Oringy's earliest debt purchases.

But d'Oringy explained that rising debt values have slowed transactions somewhat. Still, more than $6 million worth of debt is on the market this week alone, and Braziel is still buying debt at a 70% discount, according to a contract seen by Fortune.

D'Oringy decided to continue running FTX Creditor after FTX but once those claims were paid off, he would take a vacation first.

Is it considered wisdom to put money into these claims? K. But in D'Oringy's opinion, these situations arise just by chance. He used a word that was completely different from intelligence: "luck."