50 questions El Salvador should answer before selling the bitcoin-backed ‘volcano bond’
A thread:
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1. Where can we find an offering circular, prospectus, or whitepaper for the bitcoin bond?
2. Will an offering circular, prospectus or whitepaper be made public before the issuance?
3. Should buyers expect the legal framework for the bitcoin bonds to be passed by El Salvador's congress prior to issuance? Where can buyers find draft versions of the 20 bills reported by Reuters in January?
4. Why is LaGeo issuing the bond rather than the Republic of El Salvador? (reported by FT)
5. Should buyers expect Moodys / S&P / Fitch to rate LaGeo before or after the $1bn issuance?
6. Will LaGeo’s bond be guaranteed by the Republic of El Salvador?
7. What currency will the bond be sold in? USD? USDT? Bitcoin? Will buyers be able to choose the currency of the purchase?
8. What currency will the principal, 6.5% interest and bitcoin 'dividend' be paid in? USD, USDT, or bitcoin?
9. Why is the coupon set at 6.5% when an already-issued 2032 El Salvador bond is yielding 19% on the secondary market? Will the coupon be increased prior to issuance?
10. How will the bitcoin dividend work? Will bondholders incur losses if the price of bitcoin trends downward after the $500m purchase?
11. Suppose the bitcoin position is worth $600m in year 5. What will the bitcoin dividend be? Half of the total upside ($50m)? Or $10m, half of the upside divided by five years?
12. Will bondholders be able to “strip” the traditional bond from the claim on the bitcoin dividend and sell them independently of one another?
Infrastructure:
13. Will LaGeo directly execute the infrastructure projects for bitcoin city with the proceeds from the bond issuance? Or will it invest in power generation? Or both?
14. What are the key infrastructure/energy projects for bitcoin city? Where can buyers find the basic project descriptions, budgets and timelines?
15. Have the infrastructure/energy projects already been prepared with feasibility studies, engineering studies, etc, or are they at an earlier stage in the process?
16. If LaGeo will not carry out the projects, what entities will? Will there be public tenders? If so, will the public tenders occur under the same rules as the national government’s tenders? Do state-owned enterprises have a separate process/procedures?
17. What experience does LaGeo have in contracting or executing infrastructure projects, as opposed to energy projects?
Bitcoin city:
18. How many residents and businesses does the government expect to move/set up in bitcoin city? In what timeline?
19. What is the state of development at bitcoin city? Is there already water / sewage / electricity / road connections / telecom or does this need to be built?
20. Who owns the land where bitcoin city will be built? The government? Private persons? A mix? Are there risks involved with eminent domain / expropriation?
21. With no income tax or sales tax or other taxes, how will bitcoin city generate revenue for the national and municipal government to fund public works and public services on an ongoing basis?
22. What municipal authority will oversee the public services (schools, police, street lights) in bitcoin city? An existing local govt. entity or a new one?
23. What happens if there is low residential and business demand for bitcoin city? How would this affect LaGeo's finances?
Ability to pay:
24. With $135m in revenue and $35m in profit, how will LaGeo have the cashflow to make a new $65m per year interest payment?
25. Have the holders of LaGeo’s notes issued in 2017 and the debt issued in 2014 been consulted about the new $1bn liability?
26. Will the volcano bond be senior to those liabilities?
27. Will LaGeo receive annual transfers or capitalizations from the Government to help make debt payments?
28. If so, will these transfers be discretionary or automatic (built into the budget)?
29. If LaGeo does not receive these transfers, can LaGeo be expected to default?
30. What happens if the government lowers the price at which LaGeo sells its energy to transmission/distribution companies?
Bitcoin custody:
31. Will LaGeo have the keys to the wallet with the $500m bitcoin position?
32. If so, what person, specifically, will have the keys? The CEO, the chairman of the board?
33. If so, will anyone else have the keys to the wallet? Will it be multi-sig?
34. What processes and procedures will be in place to ensure the BTC is not misappropriated by these people?
35. What happens if the wallet gets hacked? Will there be insurance?
36. Or will the wallet be held by a third party? If so, who will this third party be? How will they be selected? How much will they be paid for the custody service?
37. Will the BTC in the wallet be loaned, staked or otherwise deployed to produce yield for LaGeo?
38. If so, what people and processes decide what yield-generating alternatives are appropriate?
39. Will there be processes/procedures in place to ensure these yield-generating opportunities are diversified?
40. What happens if some of the BTC is lost while loaning, staking or otherwise producing yield? Will LaGeo need to put down new money? Or will bondholders take the loss?
Events of Default:
41. Will the volcano bond be “secured” or collateralized by the $500m BTC purchase? Can bondholders automatically seize and liquidate the position in the event of default?
42. Will a default on LaGeo’s volcano bond trigger a default in the Rep. of El Salvador’s vanilla bonds?
43. Will a default in the Republic of El Salvador’s vanilla bonds trigger a default in the volcano bond?
44. If LaGeo fails to produce audited financial statements every quarter, will that trigger default?
45. Will failure to adhere to the pre-agreed arrangements about bitcoin custody, insurance and investment trigger default?
46. Will there be any bond covenants that force LaGeo to maintain certain metrics? i.e. debt/EBIDA, EBIT to debt service?
47. What happens in the event of default? Can bondholders “accelerate” the bond, making the principal outstanding immediately due and payable?
Other:
48. Can the government privatize LaGeo while the bitcoin bond remains outstanding?
49. Who are the intended buyers of the bond if U.S. persons are prohibited from using bitfinex? Is there enough demand outside the U.S.?
50. Could there be more demand if another exchange that was not banned in the U.S. was used?
51. Will buyers need a specific type of wallet to be able to purchase the bonds?
52. Will the tokenized bond be able to move between chains? If so, what are the risks associated to this?
53. If a bondholder has their tokens stolen, can the stolen tokens be “invalidated” or “nullified”? If so, can the victim of the theft be made whole by the issuer with new tokens?
54. Doesn't this self-described bond count as a security? Shouldn't it be subject to securities regulation in basically all jurisdictions?
55. There is a reason prospectuses are often over 100 pages long. Questions need answers...
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Frank Muci
@frankmuci
Occasional blogs on econ/finance/development/crypto. Policy Fellow @LSEPublicPolicy. Views my own.