S&P says Bitcoin-backed bonds face stress test after Bitcoin crash
Wall Street’s first attempt at a bond sale backed by a Bitcoin loan was thrown into turmoil as a sharp decline in Bitcoin triggered a forced liquidation.
Jefferies bankers spent months pitching institutional investors for a $188 million asset-backed debt deal tied to thousands of loans issued by crypto lender Redon, the report said. wall street journal Report.
The structure is designed to package one-year loans made to individuals who pledge Bitcoin as collateral, with proceeds from the sale of the bonds providing additional funding to Ledn to expand new credit.
But the trade has been put to the test after Bitcoin has fallen about 27% since mid-January, triggering margin calls across the lending pool. Reddon was reportedly forced to liquidate about a quarter of the loans he intended to back the deal. W.S.J.
In other words, Bitcoin-backed credit products faced a stress test fairly early on when Bitcoin price fluctuations triggered margin calls across the loan book.
Reddon’s bonds are expected to pay investors 3 to 6 percentage points above the benchmark interest rate.
As Jefferies expands its presence in structured finance, it increasingly offers more complex and less-tested asset-backed products.
The bank is also increasing its focus on crypto trading, advising trading platform NinjaTrade on its $1.5 billion sale to the Kraken exchange last year.
Initially, Jefferies told investors that the Ledn bonds would be backed by $199 million in Bitcoin-backed loans and $1 million in cash. Its composition has changed significantly since liquidation, with approximately $150 million in loans and $50 million in cash now forming the collateral pool. WSJ reported.
In other words, what was marketed as a bond backed primarily by interest-bearing loans is now backed by far more cash, indicating the vulnerability of the structure in the event of a sharp drawdown.
S&P Bitcoin Bond Rating
Despite the disruption, the bond transaction remains scheduled to close on February 18, according to S&P Global Ratings, which rated the bond. Redon will now have to reallocate the liquidation proceeds to new loans to generate the interest income needed to pay bondholders.
S&P Ratings has outlined the structure and key risks behind Ledn Issuer Trust 2026-1. The initial collateral pool consisted of 5,441 fixed-rate balloon loans to 2,914 borrowers with an aggregate principal amount of approximately $199.1 million as of December 31, 2025, according to S&P.
The loan is secured by approximately 4,079 Bitcoins, representing approximately $356.9 million as of the closing date, with a weighted average interest rate of 11.8% and a weighted average loan-to-value ratio of 55.8%.
The report noted that Bitcoin’s sharp decline in early February forced Reddon to liquidate a “substantial portion” of the loan scheduled for the deal. S&P said that while maintaining the total collateral package at $200 million, all liquidations were executed below the 81.4% LTV threshold and the composition of the portfolio shifted towards fewer loans and more cash in the funding account.
S&P’s analysis focused on borrower default behavior, recovery rates during liquidation, and concentration risk.
The agency said margin-driven defaults are the most severe stress scenario because liquidations occur at a time when Bitcoin prices are falling, and delays in execution can dilute or destabilize the most important markets.
S&P said traditional consumer loan performance metrics have limitations because Ledn underwrites loans primarily based on Bitcoin collateral rather than the borrower’s credit profile.
At the ‘A’ stress level, the authorities applied a conservative 100% default assumption and modeled stresses on the rated notes that included a default rate of 79% and a recovery rate of 68% for the BBB Class A tranche.
S&P highlighted structural mitigation measures such as overcollateralization, early amortization triggers, a liquidity reserve funded by 5% of outstanding notes, and Redon’s automated liquidation engine, which has successfully liquidated 7,493 loans without loss of principal over seven years.
Still, S&P pointed to key weaknesses, including Bitcoin’s historical volatility, regulatory uncertainty, and conflicts of interest related to Redon’s past practice of leveraging unpaid interest to make rolling loans.
Redon plans to require cash interest payments on renewal starting in 2027, which S&P said will reduce liquidity stress over time.
According to WSJ, If the price of Bitcoin falls and the loan exceeds 70% of the collateral value, the borrower will need to add more Bitcoin. At 80%, Ledn will automatically liquidate the collateral to repay the debt.
This article about Bitcoin-backed bonds facing stress test after Bitcoin drop first appeared in Bitcoin Magazine by S&P and was written by Mika Zimmerman.
