Good day and welcome to WSJ Pro Bankruptcy's Daily Briefing. It's Thursday, November 10. In today's newsletter, crypto exchange FTX is on the brink after its rescue deal with Binance fell through and it told investors it needs billions of dollars. Carvana's bonds dropped as investors worried about its debt burden. And a bankruptcy judge shielded Hertz from paying make-whole claims to bondholders, even though other appeals courts have ruled differently.

FTX's fate unclear after Binance snubs rescue deal. Crypto exchange Binance reversed course on a rescue offer for FTX Wednesday, leaving the prominent digital firm with an uncertain future as it faces a shortfall of up to $8 billion. After the rescue deal fell apart, FTX founder and Chief Executive Sam Bankman-Fried told investors he needs emergency funding due to customer withdrawal requests received in recent days, according to people familiar with the matter.

FTX told investors that it was hoping to raise up to $4 billion in equity to fill the shortfall, the people said. The collapse of FTX's deal with Binance only intensified questions about the cause and full extent of FTX's financial problems.

Besides the firm and Mr. Bankman-Fried, well-known institutions that invested in the exchange are on the hook for potentially big losses. Among investors in a $900 million fundraising last year were SoftBank Group Corp., Sequoia Capital, hedge fund Third Point and tech-oriented private-equity firm Thoma Bravo.

Sequoia said in a letter to investors it is writing off the $150 million that one of its funds invested in FTX because of "solvency risk." And individual traders could also lose funds. FTX has halted withdrawals of both crypto and fiat currencies from the exchange, according to a pinned post in its official Telegram channel.

• SEC, DOJ investigating FTX. The Securities and Exchange Commission and Justice Department are investigating FTX following its sudden implosion this week, a person familiar with the matter said. The SEC’s investigation, which has been continuing for months, is focused on the company’s U.S. subsidiary, FTX.US, which lists dozens of crypto tokens.
   
• Pain spreads to crypto-linked companies. Investors dumped shares of companies that hold cryptocurrencies or derive fees from trading them. Coinbase Global fell almost 10% despite assurances from its chief executive on Twitter that the company has sufficient assets for customer withdrawals and doesn’t have any material exposure to FTX. Shares of Silvergate Capital, the closest U.S. bank to the crypto world, dropped 12% and have shed some 75% of their value this year. Shares of MicroStrategy, which pivoted from business software into largely a buy-and-hold vehicle for bitcoin, fell nearly 20%.
   
• Crypto has reinvented bank runs. Bank runs are a major part of financial history, but are a modern rarity because there are many mechanisms and guardrails in place to deal with them. That's not the case for crypto, which might need to universally adopt some of the conventions of traditional finance to guard against more ruinous runs on crypto lenders and brokers, according to WSJ's Heard on the Street commentary.

Carvana bonds hit fresh lows. Carvana’s bonds are touching all-time lows, spotlighting the rising borrowing costs hitting the used-car seller at a time when the company’s cash position is being depleted.

Carvana’s long-term bonds have declined to distressed levels, with some now trading as low as 33 cents on the dollar. The yield on the company's 10.25% notes was over 30%, a sign that Carvana would struggle to borrow from bond markets presently.

The used-car business thrived when people opted to drive to avoid mass transportation during the pandemic. But car prices have dropped as interest rates went up and concerns over a recession grew, denting the company’s growth prospects.

Carvana, which promised to reinvent the business of selling used cars, has never turned a profit and has borrowed money to cover its losses. A $731 million drop in its available cash in the third quarter has led bankers, investors and analysts to focus on how Carvana can generate liquidity from its real-estate assets to fund operating losses.

Virgin Islands' $150 million propane fight clouds solar plans. The global surge in fuel costs has hit hard in the far-flung U.S. Virgin Islands, adding another financial pressure to a government-run utility already fighting to stay solvent, placate an unhappy supplier and find backing to develop renewable power.

The Virgin Islands Water and Power Authority has hovered near bankruptcy for years, but its financial woes are intensifying. Its most important fuel supplier, Houston-based Vitol Inc., has threatened in recent weeks to cut off shipments of liquid propane if WAPA doesn’t pay back $150 million in contract arrears.

Propane makes up the bulk of WAPA’s power generation, and it can’t afford to keep the lights on for long without continued shipments from Vitol. The problem is that WAPA lives hand-to-mouth, barely scraping together the cash every week to order fuel, pay wages and make interest payments to banks and bondholders.

Vitol’s demands come at a bad time for WAPA, already pummeled by rising fuel costs and in the midst of negotiations to bring utility-scale solar and battery power to the U.S. territory’s largest island, St. Croix. And any payment to Vitol carries political implications because its debt stems from a much-criticized construction project that went over budget.

Last year, Judge Mary Walrath of the U.S. Bankruptcy Court in Wilmington, Del. said Hertz has no obligation to make premium payments on bonds scheduled to come due in 2022 and 2024 to compensate for its early retirement of those debts.

Those premium payments, known as make-wholes, are designed to make up for creditors’ lost interest payments when bonds are redeemed or refinanced early. The judge also declined last year to grant bondholders interest payments at the contractual rate after the rental car provider’s 2020 chapter 11 filing.

She had been asked to reconsider those rulings in light of two intervening appeals court rulings that had reached differing conclusions. She declined bondholders' request in a bench ruling Wednesday, saying she would "leave my decision as it is."

The judge had left the door open in last year's ruling to awarding premium payments on Hertz bonds maturing in 2026 and 2028. After hearing arguments Wednesday, she ruled Hertz didn’t have to make those payments either. — Becky Yerak

• Earlier: Judge Trims Hertz Bondholders’ Bankruptcy Claims

Brooklyn hotel owner ordered to let go of the property. A bankruptcy judge on Wednesday ordered the bankrupt Tillary Hotel's owner to cooperate with its top lender for a credit-bid acquisition of the 12-story Brooklyn property under the hotel’s restructuring plan.

Judge Sean Lane of the U.S. Bankruptcy Court in White Plains, N.Y., enforced the property owner’s obligation to cooperate with lender TH Holdco LLC, an affiliate of hospitality-focused Ohana Real Estate Investors LLC, whose purchase plan has been put on hold since June pending appeal filed by the owner and its mezzanine lender.

A federal court last month denied an appeal of the restructuring plan, and the property owner and the mezzanine lender indicated they wouldn't appeal further. TH Holdco then asked Judge Lane to intervene, saying it has been unable to complete the deal because of the lack of cooperation from the owner.

The bankruptcy case covered the 12-story building that houses the Tillary Hotel, a boutique lodging at the foot of the Manhattan Bridge in Brooklyn, as well as residential apartments. —Akiko Matsuda

Boys and Girls Club chapter nets $11 million bankruptcy loan. A New York bankruptcy judge said Madison Square Boys & Girls Club was in dire need of the loan, overruling a challenge brought by a creditors committee representing survivors of childhood sexual abuse who have sued the youth group.

“It’s pretty clear the debtor needs these funds to run the case,” Judge Sean Lane of the U.S. Bankruptcy Court in New York said during a hearing Wednesday.

The loan, provided by Carver Federal Savings Bank, will cover administrative costs incurred by the chapter 11 that Madison said it couldn’t otherwise pay. The loan also averts a potential liquidation of the chapter, its lawyer said in the court hearing.

The survivors' committee opposed the loan because it will grant Carver new liens on Madison property and assets. Madison has said 140 abuse claims were pending against the organization at the time it filed bankruptcy in June. — Jonathan Randles

• Investors bet rates could reach two-decade high. Wall Street pros spent much of this year betting that the Federal Reserve’s aggressive rate hikes would quickly cool the economy and stem rising prices. But last week’s better-than-expected jobs report was the latest sign of economic strength to catch investors off guard. Now, more are seriously considering whether the central bank’s target rate will rise as high as 6% before it takes its foot off the brake.
   
• Covid's persistent drag on the U.S. workforce. While Covid-19 restrictions are practically gone and infections are way down, researchers say the virus is having a persistent effect, keeping millions out of work and reducing the productivity and hours of millions more. Another half a million workers have dropped out of the labor force due to lingering effects from previous Covid infections. The resulting labor shortages are contributing to upward pressure on wages and inflation, one reason the Fed delivered its fourth consecutive 0.75 percentage point interest rate increase last week.
   
• October inflation report to outline latest price trends. The U.S. inflation report for October, to be released Thursday, will show how consumer prices changed last month, signaling whether their rate of increase is easing as interest rates climb. Price pressures have remained stubbornly high in large part because they have spread increasingly from goods to more labor-intensive services, where inflationary momentum tends to be slow to reverse once it gets going.

Share your tips, suggestions and feedback with the WSJ Pro Bankruptcy team: Soma Biswas; Alexander Gladstone; Jodi Xu Klein; Akiko Matsuda; Jonathan Randles; Alexander Saeedy; Andrew Scurria; Becky Yerak. 

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