Moody's has, for the first time ever, rated a Bitcoin-backed municipal bond. The rating agency has given a provisional Ba2 rating to a bond that’s set to be issued via the Business Finance Authority in New Hampshire. The rating was published by Moody's yesterday - March 31st.
Moody's rating noted that the bond was overcollateralized at 1.6 times (meaning the Bitcoin backing the bond is worth 1.6 times the amount being borrowed). They also liked that there was mandatory redemption triggered if the value of the collateral went below 1.4x the value of the bond. Given how volatile Bitcoin is, the agency ultimately decided to provisionally give it a Ba2, meaning "speculative" or "sub-investment" grade.
That may be fair, especially considering the big moves the currency has made in the last few months. The rating also makes it unavailable for many institutional investors. But this is just the first step. Over the long term Bitcoin has generally become less and less volatile. At some point, we could see a BTC-backed bond with a higher rating, if either the volatility goes down or the collateral is even higher than 1.6x.
The total value of the bond is $100 million in two series, both maturing in 2029. One of the series has an "upside participation", which means that if BTC goes up the bondholder will receive 15% of the appreciation upon maturity. Interest on the bond is financed by liquidation of the collateral. There’s not yet any information about at what rate the bond will be priced.
The New Hampshire Business Finance Authority is only a conduit issuer and the real borrower is CleanSpark and the deal was structured by Wave Digital Assets - a digital asset advisory firm. Citizens of New Hampshire, therefore, have nothing to worry about - there's no taxpayer or state money at stake.
The purpose of the bond is to buy Bitcoin, CleanSpark is betting that BTC will appreciate and backing their bet with debt. This is similar to companies like MicroStrategy that issue new shares for the same reason. The BTC backing the bond is held in custody by BitGo.
As more companies hold Bitcoin and/or other crypto on their balance sheets, this step by Moody's to acknowledge Bitcoin as a collateralizable asset is very interesting. It also points to a shift in how companies and institutions view crypto, as more of a natural part of an organization's assets, just like cash or gold. With this first one out of the way, more rating agencies could be inclined to rate Bitcoin-backed bonds.
Maybe this is the start of a trend, now that a reputable rating agency has accepted Bitcoin as collateral. A lot of companies have crypto on their balance sheets and borrowing against them could give the asset extra value. A Ba2 rating is pretty low though, so it remains to be seen at what overcollateralization the agencies start giving it an investment grade one.
