Coinbase Junk Bonds Further Downgraded by S&P on Weak Profitability, Regulatory Risks

The agency downgraded Coinbase’s credit rating from BB to BB-, taking it one step closer to investment grade.

S&P Global Ratings, the world’s largest rating agency, has reduced Coinbase’s (COIN) long-term credit rating and senior unsecured debt rating, citing inadequate profitability from lower trading volumes and regulatory risks, the agency announced on Wednesday.

Coinbase’s rating was reduced from BB, which signals significant ongoing concerns due to poor commercial, financial, and economic factors, to BB-, which is one step below investment grade. Both ratings are assigned to trash bonds.

Coinbase, along with MicroStrategy, is one of two crypto-related junk bond issuers (MSTR). In after-hours trading on Wednesday, Coinbase shares were unchanged.

The major reasons for the downgrading, according to the ratings agency, were decreased trading volumes following FTX’s collapse, pressure on Coinbase’s profitability, and regulatory risks.

“We believe FTX’s November bankruptcy has substantially harmed the crypto industry’s perceived trustworthiness, resulting in a lack of retail engagement,” S&P noted. “As a result, trade volumes on exchanges, including Coinbase, have dropped dramatically.”

The majority of Coinbase’s revenue comes from retail trading fees, and trading volume has decreased even further in recent weeks. As a result, S&P anticipates that the U.S.-based exchange’s profitability would “remain squeezed” in 2023, with the business expected to “record very tiny positive S&P Global adjusted EBITDA” this year.

Coinbase’s third-quarter revenue in 2022 was 44% lower than the previous quarter, owing to reduced trading activity, the company stated in November.