As much discussed in FT Alphaville, Michael Saylor’s bitcoin accumulator Strategy (née MicroStrategy) has seen its common stock and flagship “Stretch” preferred stock spiral downward over the last month.
We’re not sure this situation is salvageable, but at minimum any rescue plan requires rowing back on previous plans and eating a big slice of humble pie. And today, Strategy belatedly accepted the inevitable, announcing a five-part “Digital Credit Capital Framework” to try to turn things around.
With the common stock MSTR and Stretch over the past month falling 45 and 20 per cent respectively, management needed to reclaim some agency over events. Notably, the company also issued a plain text press release: no wacky memes, no AI-generated videos, no crazy stuff. And for now, the news has staunched the losses with both MSTR and STRC up 4-5 per cent today.
However, while today’s move may buy some time, it doesn’t resolve the central flaws of the project.
The framework has five parts. First, the company has ringfenced $2.55bn for a cash reserve dedicated to paying interest and preferred dividends. According to the company, this represents approximately 17.4 months of coverage at current run-rates, or 25.9 months if you include $1.25bn of the “Board-authorised reserve-building BTC monetisation capacity” — ie bitcoin it has been authorised to sell but has not yet actually sold.
Second, the framework increases the dividend on Stretch to 12 per cent per annum. When the instrument was launched, Saylor described it as delivering “money market-like stability with market-leading risk-adjusted returns.” A 12 per cent coupon (and over 15 per cent current yield) is more akin to a junk-rated or even distressed instrument, but this money market wannabe has “broken the buck” by a humongous margin.
Third, Strategy said it would repurchase $1bn of preferred securities, with Stretch as the stated initial priority. Since Stretch is trading near 75 cents on the dollar, buying it back is highly accretive, and Alphaville had recommended buying it back even before the latest lurch downward. According to the release, the company notes that repurchases will not be funded from the cash reserve but can be financed via bitcoin sales.
However, the company seems to have reneged on its de facto promise to defend the price at par. Compare its previous quasi-commitment — “STRC’s dividend rate is adjusted monthly to encourage trading around STRC’s $100 par value and to help strip away price volatility” — to today’s press release:
Strategy will not necessarily increase the STRC dividend rate solely because STRC trades below its stated amount.
STRC dividends remain subject to declaration by the Board of Directors or an authorized committee and are not guaranteed.
The final two components involve a $1bn common stock buyback, and a “BTC Monetization Program” under which the board has authorised management to sell bitcoin for three purposes: to replenish the cash reserve up to $1.25bn; to fund preferred dividends and interest if “more advantageous” than issuing equity; and to fund the repurchases of preferred stock or equity.
These represent significant retreats from the original bitcoin treasury project, whatever Michael Saylor, Strategy’s co-founder and executive chairman, may claim.
Saylor has built his entire public persona on a HODL credo. “Never. No. We’re not sellers,” he has said. “We’re only acquiring and holding bitcoin. That’s our strategy.” Earlier this month, he was already walking back that commitment. At the Bitcoin Prague conference earlier this month, he explained away the decision to sell 32 bitcoins: “I said to you, never sell your bitcoin; I never said that the company wouldn’t sell its bitcoin.” Even the crypto industry was taken aback by the chutzpah.
Whatever the fine rhetorical distinctions, it’s clear that the biggest corporate owner of bitcoin is now a seller, and likely for more than just $1.25bn. After all, where will management find the $2bn for the buybacks of the preferred and common stocks?
Even leaving aside the buybacks, the arithmetic is daunting. Strategy has issued approximately $15.5bn of perpetual preferred stock and has $6.7bn of outstanding convertibles, all of which are significantly out-of-the-money.
The annual dividend and interest expense runs to around $1.76bn and the company also faces $5.91bn of investor puts on the convertibles between September 2027 and September 2028. The legacy software business generates no cash.
Taking into account the $2.55bn cash reserve, that means the company has to come up with around $6.9bn in the next two years or so if nothing changes. The company has 847,363 bitcoins worth $50bn at current prices, which may fall as Strategy starts to sell its stash.
In short, the cash requirements are huge, and shareholders’ equity is now at serious risk.
As for buying back Stretch at a discount, while it reduces the dividend burden, it also deploys capital that could otherwise extend the runway offered by the cash reserve. And if the buybacks are funded by selling bitcoin, then Strategy is liquidating the asset that had justified last year’s preferred issues in the first place. This is an extraordinary volte-face in a short period of time.
The release quotes chief executive Phong Le — who has collected $130mn from stock sales ever since Strategy pivoted to bitcoin August 2020 — as saying:
Strategy is evolving from one-way capital issuance to active capital management.
That is one way of putting it.
Another is that Strategy has spent nearly six years building an investment vehicle premised on boundless enthusiasm for its securities. Strategy is now discovering that enthusiasm, like bitcoin’s price, does not travel in one direction only.
