Annual report pursuant to Section 13 and 15(d)

DIGITAL ASSET LOAN RECEIVABLE, NET OF ALLOWANCE

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DIGITAL ASSET LOAN RECEIVABLE, NET OF ALLOWANCE
 12 Months Ended
Dec. 31, 2022
Digital Asset Loan Receivable Net Of Allowance  
DIGITAL ASSET LOAN RECEIVABLE, NET OF ALLOWANCE

NOTE 5 - DIGITAL ASSET LOAN RECEIVABLE, NET OF ALLOWANCE

 

The Company’s digital asset loan receivable represents two separate digital asset loans made to NYDIG Funding, LLC (“NYDIG”) in August 2021 and December 2021 under a master securities loan agreement, which was terminated at the point of full repayment in kind for both loans in June 2022. A total of 600 bitcoin were loaned to NYDIG. No collateral was posted to Marathon under the terms of the two loans. The digital assets loan receivables were initially and subsequently measured at the fair value of the underlying bitcoin lent at the time of the transfer, approximately $27,241 thousand, and adjusted for expected credit losses, with changes in fair value recorded as unrealized gains and losses in the Consolidated Statements of Other Comprehensive Income (Loss). A loan fee was accrued daily, based on the daily closing price of the underlying bitcoin and a set percentage rate, and paid in cash on a monthly basis consistent with each loan’s confirmation terms.

 

 

Given the limited size and nature of the Company’s digital asset loan receivables, the Company utilized the probability of default (“PD”) loss given default (“LGD”) approach to estimating the allowance for credit loss (“ACL”) at origination and subsequent reporting periods. In order to apply the PD LGD approach, management considered the lifetime of the digital asset loan receivable, the reasonable and supportable forecast period, and the PD LGD.

 

● Life of loan: The contractual maturity of each digital asset loan receivable was one year from origination. As such, the Company used each instrument’s life of loan period for estimating current expected credit losses, unadjusted by any prepayment risk as any risk would be immaterial to either the repayment in kind or the accrued loan fee receivable that is due in cash on a monthly basis.
     
● Reasonable and supportable forecast period: Given the relatively short term nature of the loans, the Company set the reasonable and supportable period to the life of loan. As such, no reversion or post-reversion methodology was required.
     
● Credit quality information and associated probability of default of NYDIG: In order to assess the credit risk of the borrower, Marathon estimated a NYDIG synthetic credit rating as of March 31, 2022 and December 31, 2021 using an Ordinal Logistic Regression Model (“Regression Model”). The Regression Model is a widely used statistical model to classify a company into credit ratings and to estimate PD based on certain business metrics, including total assets, total debt, revenues, EBIT, and net income. Based on the Regression Model results, the Company estimated NYDIG’s synthetic credit rating of “CCC-” as of March 31, 2022 and “B” as of December 31, 2021. The associated probability of default was approximately 2.9% and 7.4%, respectively.
     
● Estimation of losses given default: Given no collateral was posted, the Company assumed a loss given default of 100.0% of the original and subsequent reporting digital asset loan receivable and the accrued loan fee.

 

In addition, the accrued loan fee receivable is reported separately from the digital asset loan receivable and its carrying amount is de minimis at the reporting date. As a result, the reported ACL includes only the impact of any unpaid accrued loan fee receivable at the reporting date.

 

The loans were fully repaid by NYDIG in June 2022 at which time the 600 bitcoin were reclassified into digital assets at the carrying value of the digital assets loan receivable immediately prior to its derecognition at the end of loan. The Company did not have any digital asset loan receivables outstanding as of December 31, 2022. As such, the Company recorded an allowance for loan losses as of December 31, 2021 with an initial provision expense of approximately $851 thousand. As of December 31, 2022 the company recognized a corresponding provision benefit of approximately $851 thousand for the June 2022 repayment in full, resulting in $0 remaining allowance for loan losses at the end of the year.