This article explores the structure of MicroStrategy bonds and analyzes whether MicroStrategy may be forced to sell Bitcoin to repay bondholders in the event of a cash redemption request by bondholders. The article is sourced from a BitMEX article and compiled and translated by PANews.
MicroStrategy holds over 250,000 Bitcoins, with its stock price trading at a significant premium to Net Asset Value (NAV). This situation is reminiscent of the Grayscale Bitcoin Trust (GBTC) experiencing a similar high premium before converting to an ETF in the previous cycle, attracting significant capital inflows.
However, the reasons behind the high premiums at which these two investment instruments trade remain unclear, without a reasonable explanation. What’s even more puzzling is MicroStrategy’s ability to issue a significant amount of stock at a premium valuation to purchase more Bitcoin, thereby increasing the book value per share. This seemingly “infinite funding” loop is perplexing. Since initiating its Bitcoin strategy, MicroStrategy has announced five stock issuances, raising a total of $4.4 billion.
History seems to be repeating itself. MicroStrategy’s CEO Michael Saylor has been viewed by many as a controversial figure in the Bitcoin space due to some contentious positions, including his apparent hostility towards supporting Bitcoin developers, opposition to privacy technology, and candid opposition to self-custody.
Similarly, Barry Silbert, who controls Grayscale, has been embroiled in controversy for his role as the primary organizer of the 2017 “New York Agreement,” which proposed a doomed plan for the industry to abandon Bitcoin in favor of an alternative coin, “SegWit2x,” based on a flawed and bug-ridden BTC1 client.
With MicroStrategy amassing a substantial amount of Bitcoin and a market value close to $50 billion, concerns have arisen. Particularly, some question whether MicroStrategy’s debt could force it to sell Bitcoin into the market, triggering a downward spiral in prices. Unfortunately, due to the complexity of the debt structure, this question does not have a simple “yes” or “no” answer. Nevertheless, we have reviewed relevant documents and will strive to address this question in this article.
We wish to declare that we are not bond traders, bond market experts, or lawyers, hence adding a disclaimer to this article. The corporate bond market can be highly complex, making it challenging for non-professionals to navigate. This article likely contains numerous errors. Additionally, the article oversimplifies products and does not address many conditions and complexities. Please do not rely on any information in this article, and feel free to point out any inaccuracies.
To our knowledge, since announcing its Bitcoin strategy, MicroStrategy has issued seven rounds of publicly traded convertible bonds, as follows:
Firstly, it is important to note that two of these bonds have been fully redeemed and are therefore not relevant to outstanding debt. Therefore, MicroStrategy has five outstanding convertible bonds with a principal value of $4.25 billion. Hence, we will review these five bonds.
The structure of the bonds is relatively complex, with four different types of conversion options known before maturity. The following summarizes these conversion options for the latest instrument (2028 maturity bond) from MicroStrategy:
MicroStrategy 0.625% 2028 Bond Schedule:
To our knowledge, except for the zero-coupon bond issued by MicroStrategy in September 2021, the mechanisms for the other four convertible bonds are essentially the same, with only price and date differences. Holders of the zero-coupon bond do not have the right to redeem cash before the maturity date unless a “fundamental change” occurs in the business. This could be crucial if Bitcoin prices drop.
The table below lists key dates related to the cash conversion options for the five bonds:
Source: Bond issuance documents
Note: * Stock must trade at a price 30% or more above the conversion price for 20 consecutive or non-consecutive days in any 30-day rolling trading window.
It is noteworthy that for the zero-coupon bond, MicroStrategy’s cash option date in February 2024 has passed. The conversion price is $143.25, with a 30% premium at $186.23. Currently, MSTR’s stock price is $214, well above this price. However, it has only traded above this price for 11 days in the past 30 trading days. Therefore, the option is about to be in effect but not exercisable. Exercising this option would create value for MSTR shareholders, but bondholders are likely to be able to prevent this by exercising their conversion rights.
These complex factors make bond valuation quite challenging due to the multiple potential outcomes of convertible bonds. However, many bondholders are likely experienced professional bond investors with models to perform these calculations.
Four of the five outstanding bonds come with interest payments. These coupons are cash liabilities, and theoretically, MicroStrategy could be forced to sell Bitcoin to fulfill payment obligations. However, given the relatively low interest rates and the company’s traditional software business generating ample free cash flow to cover interest costs, even in the event of a significant Bitcoin price drop, it is unlikely that MicroStrategy would be forced to sell Bitcoin to pay bond interest. In conclusion, we believe that the interest costs are unlikely to compel MicroStrategy to sell Bitcoin.
MicroStrategy’s debt stands at $4.25 billion, calculated based on borrowed principal. Meanwhile, the company’s stock currently has a market value of $43 billion, with its Bitcoin holdings valued at $17 billion. Therefore, bonds constitute a relatively low proportion of MicroStrategy’s capital structure. However, if the Bitcoin price were to plummet significantly, such as to around $15,000 per coin, and MicroStrategy cannot further leverage, analysts may need to consider the possibility of Bitcoin being “forcibly liquidated.”
Nevertheless, the potential forced liquidation points would be concentrated around the mentioned maturity and option exercise dates in the article, spread between 2027 and 2031, with specific and clear timeframes. Therefore, even if Bitcoin were to drop to around $15,000, we believe the likelihood of MicroStrategy being forced to sell Bitcoin to repay bonds remains low.
While MicroStrategy is unlikely to be forced to sell Bitcoin, a more probable scenario, in our view, is that MicroStrategy may proactively sell Bitcoin to maximize shareholder interests. Currently, MicroStrategy’s stock price trades at a significant premium to its NAV. Once this premium diminishes or turns into a discount (which is almost inevitable), and with the bonds nearing maturity, selling Bitcoin to raise funds to repay debt would be the optimal choice in line with shareholder interests.
However, as long as the stock price maintains its premium, MicroStrategy can continue these “loop financing” operations without the need to sell Bitcoin. Of course, this substantial premium status is unlikely to persist indefinitely.
Furthermore, it is worth noting that if MicroStrategy’s stock price continues to maintain a premium and there is strong demand in the market for MSTR bonds, the company may issue more debt. This would increase its debt risk and raise the possibility of forced Bitcoin sales in the event of a significant drop in Bitcoin prices. However, at present, MicroStrategy’s leverage ratio is low, and its liquidation risk is also at a low level.