2024-11-26 17:15 |
Newmarket Capital recently closed the first investment deal for its new Battery Finance loan strategy, which enables borrowers to incorporate bitcoin into long-term financing structures as collateral.
On November 7, 2024, Newmarket Capital, an institutional capital manager and Registered Investment Adviser completed a refinancing for the Bank Street Court apartment in Old City, Philadelphia, PA. The loan was collateralized by both the building and approximately 20 bitcoin.
Newmarket Capital CEO Andrew Hohns is excited about not only setting his company’s new strategy in motion but the symbolism in the deal.
“It's a building that is located less than half a block away from the first bank of the United States,” Hohns told Bitcoin Magazine. “Philadelphia has had a lot of firsts and innovations over the years, and we're proud to contribute another one to the list.”
How The Battery Finance Strategy WorksBattery Finance enables bitcoin to be used as 10% to 30% of the collateral for loans alongside traditional assets. To bring this new strategy to life, Newmarket Capital partnered with Ten 31 to establish Battery Finance, a majority-owned subsidiary of Newmarket Capital that utilizes bitcoin in financing structures.
Unlike other lending companies that let clients borrow against bitcoin with a risk of liquidation in the event that bitcoin’s price drops below a certain threshold, Newmarket Capital removes the risk and offers loan structures without a mark-to-market trigger.
“As lenders, we are constructive on the long-term value of bitcoin and comfortable recognizing bitcoin as collateral without mark-to-market risk,” said Hohns.
“We achieve this by incorporating bitcoin as a component of a broader collateral package alongside traditionally financeable assets. In this way, we have improved our downside through the introduction of bitcoin, an uncorrelated element — an asset that has had such a strong history of appreciation over time — in the collateral package.”
Deals that employ this strategy can be structured differently. In some cases, a borrower can use bitcoin they’re already holding as collateral for a loan, while, in other cases, Newmarket Capital and the borrower purchase bitcoin as part of the loan’s structure. The latter is how the loan for the Bank Street Court building was structured.
“It’s a $16.5 million building, and we offered the building owner a $12.5 million loan,” explained Hohns.
“The use of proceeds was to pay off the existing financing, which was $9 million, to provide them with approximately two million dollars of CapEx for certain improvements to the property they wanted to make,” he added.
“With the remaining $1.5 million dollars, we purchased just shy of twenty bitcoin as part of our combined collateral package.”
(At the time of writing, that bitcoin had already appreciated 30% in value since it was purchased for the loan.)
Unlike traditional loans which often lock borrowers in with prepayment penalties or a make-
whole, the Bank Street Court financing can be paid off at any time with no penalty. To allow for this outcome, the borrower and the lender align to share appreciation on the upside from the bitcoin over the life of the loan.
The longer the loan is outstanding, the greater the share of bitcoin appreciation that vests for the borrower, incentivizing borrowers to take a long term view on the bitcoin.
Although the loan can be repaid at any time and the building released, the earliest that the bitcoin can be wound down is four years, in line with bitcoin’s four year rhythm. The loan carries a single digit interest rate and has a maturity of 10 years.
Bringing Forward Bitcoin’s ValueHohns, a Bitcoiner himself, understands that other Bitcoiners have a low time preference, that they prioritize future economic well-being over more immediate gratification. However, he acknowledges that there are limits to this approach, which is why Newmarket Capital created the Battery Finance strategy.
“The lowest time preference is not feasible for humans, because we have a finite life,” he said.
“There's a point where we want to accomplish things with our lives. We want to grow our business or start a new business or just do the things that we all have passion for, like opening up a MakerSpace or a brewery or a bookstore — whatever the case might be. If you're just HODLing the Bitcoin, you're deferring those dreams,” he added.
“By offering this financing tool, we can essentially serve as a mechanism to transform those time preferences, to bring forward the appreciation of the bitcoin by offering a significant amount of financing to accomplish whatever the real world goals borrowers have.”
Target BorrowersBattery Finance is currently focused on working with borrowers who are interested in acquiring or refinancing commercial properties.
“For the time being, we're inviting interest around loans that are, generally speaking, $10 million to $30 million dollars, which include 10% to 30% percent bitcoin with 70% to 90% percent traditionally-financeable income-producing assets,” explained Hohns.
“This is a tool for both asset owners that want to redenominate some of the equity in their
existing portfolio into bitcoin and its also a tool for Bitcoiners who want to obtain stable long-term financing supported in part by their bitcoin to acquire assets in the real world. This way, they can generate income and accomplish their goals while remaining invested in bitcoin.”
In time, Battery Finance plans to service a broader range of customers.
“We see broad applicability for this lending structure, including, over time, to people that are at different phases of their Bitcoin savings journeys,” said Hohns. “I hope that these kinds of products will develop into solutions that enable people to do things like finance a house or automobile with their bitcoin.”
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