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. This article is sourced from a BitMEX article and compiled and translated by PANews.
MicroStrategy holds over 250,000 bitcoins, and its stock price is significantly higher than its Net Asset Value (NAV). This reminds us of the Grayscale Bitcoin Trust (GBTC), which experienced a similar high premium before converting to an ETF and attracted a large influx of funds.
However, we are unable to understand why these two investment vehicles can trade at such a high premium and cannot provide a reasonable explanation. What is even more confusing is that MicroStrategy can even issue a large number of shares at a premium valuation to purchase more bitcoins, thereby raising the book value per share. This seemingly “infinite funding” loop is perplexing. Since initiating its Bitcoin strategy, MicroStrategy has announced five equity issuances, raising a total of $4.4 billion.
History seems to be repeating itself. MicroStrategy’s CEO, Michael Saylor, has been seen as a “villain” in the Bitcoin field due to some controversial positions. These positions include his apparent hostility towards supporting Bitcoin developers, opposition to privacy technology, and his outspoken opposition to self-custody, albeit temporarily.
Similarly, Barry Silbert, who controls Grayscale, has been controversial due to his role as the main organizer of the “New York Agreement” in 2017, which proposed a doomed proposal for the industry to abandon Bitcoin and support the flawed and vulnerable BTC1 client’s alternative coin, “SegWit2x.”
As MicroStrategy accumulates a large amount of Bitcoin, with a market value close to $50 billion, concerns have arisen. In particular, some have questioned whether MicroStrategy’s debt would force it to sell Bitcoin into the market, triggering a spiral of price decline. Unfortunately, due to the complexity of the debt structure, there is no simple “yes” or “no” answer to this question. Nevertheless, we have reviewed the relevant documents and will do our best to answer this question in this article.
We would like to declare that we are not bond traders, bond market experts, or lawyers, so we add this disclaimer to the article. The corporate bond market can be extremely complex and difficult for non-professionals to navigate. This article likely contains many errors. Additionally, this article oversimplifies the products and does not comment on many conditions and complexities. Please do not rely on any information in this article, and if there are any mistakes, please feel free to correct them.
As far as we know, since announcing its Bitcoin strategy, MicroStrategy has issued seven rounds of publicly traded convertible bonds, as shown below.
First, it is important to note that two of these bonds have been fully redeemed and are no longer relevant to outstanding debt. Therefore, MicroStrategy has five outstanding bonds with a principal value of $4.25 billion. Hence, we will review these five bonds.
The structure of the bonds is relatively complex, and as far as we know, there are four different types of conversion options before maturity. The following figure summarizes these conversion options for the latest instrument (2028 bonds).
MicroStrategy 0.625% 2028 Bond Schedule:
As far as we know, except for the zero-coupon bond issued by MicroStrategy in September 2021, the mechanisms for the other four convertible bonds are basically the same, with only differences in price and dates. Holders of zero-coupon bonds have no right to redeem cash before the maturity date unless there is a “fundamental change” in the business. This could be crucial if the Bitcoin price drops.
The table below lists the key dates related to the cash conversion options for the five bonds:
Source: Bond Offering Documents
Note: * The stock must trade above the conversion price by more than 30% in any 20 trading days within a rolling 30-day trading window.
It should be noted that for the zero-coupon bond, MicroStrategy’s cash put option date in February 2024 has already passed. The conversion price is $143.25, and a 30% premium on this basis is $186.23. Currently, MSTR’s stock price is $214, well above this price.
However, it has only traded above this price for 11 days out of the past 30 trading days. Therefore, the put option is about to become effective but cannot be exercised yet. Exercising this option would create value for MSTR shareholders, but bondholders may be able to prevent this by exercising their conversion rights.
These complex factors make bond valuation quite difficult because convertible bonds have multiple potential outcomes. However, many bondholders are likely experienced professional bond investors who have models to perform these calculations.
Four out of the five outstanding bonds carry interest payments. These interest payments are cash liabilities, and theoretically, MicroStrategy could be forced to sell Bitcoin to fulfill its payment obligations.
However, given the relatively low interest rates and the fact that its traditional software business generates sufficient free cash flow to cover interest costs, even if the Bitcoin price experiences a sharp decline, it is not likely to force the company to sell Bitcoin to pay bond interest. Therefore, we believe that interest costs will not lead to MicroStrategy being forced to sell Bitcoin.
MicroStrategy’s debt size is $4.25 billion, calculated based on its borrowed principal. Meanwhile, the company’s stock currently has a market value of $43 billion, and its Bitcoin holdings are valued at $17 billion. It can be seen that bonds do not constitute a high proportion in MicroStrategy’s capital structure.
However, if the Bitcoin price were to experience a substantial decline, such as dropping to around $15,000 per coin, and MicroStrategy is unable to raise further debt, then analysts may need to consider the possibility of Bitcoin’s “forced liquidation.”
However, this potential forced liquidation timeframe would be concentrated around the mentioned maturity and option exercise dates, which are spread between 2027 and 2031, and the timing is very specific. Therefore, even if Bitcoin were to really drop to around $15,000, we believe the possibility of MicroStrategy being forced to sell Bitcoin to repay bonds is still low.
Although it is unlikely that MicroStrategy will be forced to sell Bitcoin, we believe a more likely scenario is that MicroStrategy will actively sell Bitcoin to maximize shareholder interests. Currently, MicroStrategy’s stock price has a significant premium compared to its net asset value.
Once this premium disappears or even turns into a discount (which is almost inevitable), and the bonds are about to mature, selling Bitcoin to raise funds for bond repayment would be the best choice in line with shareholder interests.
However, as long as the stock price continues to maintain a premium and there is still strong demand for MSTR bonds in the market, the company may issue more debt. This would increase its debt risk and increase the likelihood of forced liquidation in the event of a Bitcoin price crash.
But for now, MicroStrategy has a relatively low leverage ratio, and its liquidation risk is at a low level.
