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

S&P Global Ratings, the biggest rating agency globally, has downgraded its long-term credit rating and senior unsecured debt rating on Coinbase (COIN), citing weak profitability from lowered trading volumes and regulatory risks, the agency said Wednesday.

Coinbase’s rating was lowered from BB, which indicates major ongoing uncertainties to adverse business, financial and economic conditions, to BB-, a further step away from investment grade. Both ratings are considered junk bonds.

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

The ratings agency said weakened trading volumes in the aftermath of FTX’s collapse and pressure on Coinbase’s profitability, as well as regulatory risks, were the main reasons for the downgrade.

“We believe FTX’s bankruptcy in November has severely hit the crypto industry’s perceived credibility, causing a lack of retail engagement,” S&P wrote. “As a result, trading volumes across exchanges, including Coinbase, have declined sharply.”

Coinbase earns most of its revenue from retail trading fees, and trading volume has dropped even more sharply in recent weeks. As a result, S&P expects the U.S.-based exchange’s profitability to “remain pressured” in 2023, saying the company could “post very small positive S&P Global adjusted EBITDA,” or earnings before interest, taxes, depreciation and amortization, this year.

Coinbase’s third-quarter revenue in 2022 was down 44% compared to the second quarter, which was driven by lower trading volume, the company said in November.