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Michael Saylor’s company strategy, formerly known as MicroStrategy, is more than just a belief in Bitcoin. Since pivoting from Enterprise Software to Crypto in August 2020, it has transformed into a Bitcoin investment vehicle, with more than 25 times more stocks rising sharply. But beneath happiness there is an increasingly self-referential capital structure.
There were three key factors in the strategy approach to fundraising. First, we have issued more than ever more common stocks than ever to use stock trading at about twice the company’s net asset value (NAV) to raise funds to buy Bitcoin.
Second, to ensure an incredibly favorable condition, they have used the high volatility of their own stocks to issue huge amounts of convertible bonds. Initially, these convertibles were secured against Bitcoin Holdings, but today, unpaid bonds are not protected, thus eliminating the risk of margin calls. If the stock price cannot rise enough for bonds to convert, the company will still have to pay back the money, but maturity is being pushed out and even if the price of Bitcoin drops sharply, it will still give a breathing quarter of strategy (at least until the first investor is placed in September 2027).
Third, we issued three classes of permanent preferred stocks: STRK, STRF and STRIDE.
The logic was simple. I raised as much money as possible to buy Bitcoin. Strategy is currently Bitcoin’s biggest corporate holder everywhere. But that latest move may mark a shift.
Earlier this week, the strategy announced its $4.2 billion in Stride offering in the market. On the surface, it looks like yet another bid to raise cash for more Bitcoin purchases. However, what fell into the announcement was the announcement clause. Proceeds may also be used to pay dividends to other classes of preferred stocks, namely contests and strikes (added the emphasis on Alpha Bill).
The strategy is intended to use net income from the ATM program for general corporate purposes, including Bitcoin acquisitions and working capital, and could also use net income to pay dividends to holders of 10.00% Series A perpetual conflict preferred stock.
This is not a refinance, but a company exchanges expensive capital and exchanges cheap funds. It is also not the typical dividend capitalization reinforcement that a company borrows to pay shareholder dividends. A dividend summary usually assumes that the business generates enough cash to support more debt. The legacy software division of strategy does not generate enough free cash flow to cover these preferred dividends. Of course, Bitcoin doesn’t bring in income.
Instead, this operation is different. The strategy effectively reserves the right to use money from new securities to support the old, reassuring investors that they can continue to publish fresh papers to cover dividend payments. This is intended to give them the confidence to buy future preferred stocks.
The entire structure is on two pillars. First, the market capitalization of a strategy is consistently traded beyond the value of Bitcoin holdings. This is a rare occurrence in what appears to be an efficient market. The best explanation for NAV Premium is that Saylor has ordered his loyal supporters and has strong narrative momentum in his Bitcoin strategy. Second, strategies must maintain permanent access to capital markets. You need to continue to find new buyers for that paper, including common stocks, convertible bonds, preferred stocks and more.
Reliance on these two factors poses obvious risks. The company does not have hedges, diverse incomes, or plan B. Its fate rests on the assumption that capital is always available and Bitcoin prices will rise, or at least continue to rise. A long-term recession or financing closure can force unthinkable. This represents the existential crisis of “purchases and hodol” maximalists.
For now, music is unfolding. Bitcoin’s rally has raised both Strategy’s NAV and inventory premiums to NAV, and investors continue to scream Saylor’s papers. But the newer layers of financial engineering are making the structure more intense. The strategy proves that its approach will pay off in bull markets. The question is whether the tide can withstand storms when it inevitably spins.
