Would you lend a company $400m if it had lost $7m on $480m of revenue last year? Perhaps — if it was growing rapidly, or had been hit hard by special circumstances, or you were getting paid handsomely for the risk. With MicroStrategy’s new bond issue, none of these things are necessarily true.
But the company does have $3bn or so of bitcoin sitting in its treasury unit, and it plans to spend the proceeds of its new issue on buying more.
This isn’t a totally new departure for the company. Chief executive and founder Michael Saylor is a bitcoin true believer. According to his Twitter account: “Bitcoin is a swarm of cyber hornets serving the goddess of wisdom, feeding on the fire of truth, exponentially growing ever smarter, faster and stronger behind a wall of encrypted energy."
Click through to the firm’s investor relations site, and explore the “bitcoin” tab, and you will be directed to “hope.com”, a separate site MicroStrategy appears to control, which is dedicated to explanatory videos and information about bitcoin for corporations, with the tagline “Bitcoin is Hope”.
Saylor has already hitched his firm’s wagon firmly to the cryptocurrency, raising two convertible bonds in December and February and spending the money on bitcoin. That had a certain logic to it — as equity-linked instruments, convert holders can benefit from the upside to becoming a bitcoin vehicle, and volatility in the price makes the embedded option more valuable.
Having never traded above $200 a share between the dotcom boom and its CB-funded crypto pivot, MicroStrategy enjoyed a storming rally immediately afterwards, touching a high of $1272 in February. The convert’s 50% conversion premium gives a strike of $1432, so it’s well out of the money (the shares closed at $469 on Monday), but the option still has a value.
Senior secured debt is another matter. It’s certainly more attractive for the company, as there’s no potential dilution, though it’s fair to assume that, when the bond is priced later on Tuesday, the coupon will be a bit spicier than the 0.75% and 0% on the converts.
Most important for prospective investors is the carve-out of MicroStrategy’s existing bitcoin holdings, worth the best part of $3bn, from the security package of the bonds. The 92000 or so bitcoin will be hived off into a subsidiary, MacroStrategy LLC, which is outside the security package for the bonds.
That leaves repayment of the notes dependent on MicroStrategy’s underlying business, which is relatively small in scale and very highly levered.
Moody’s dug deep to assign the new bond a Ba3 rating and the corporation itself a B3, while acknowledging that gross leverage was more than 20x. The agency usually considers 7x leverage to be the cap for a B3-rated firm, but factored in “a very low cost of borrowing” from the convert.
Of course, bondholders will also have access to the bitcoins purchased with the new issue, which will remain inside the restricted group. If bitcoin does go to the moon from its current $32k price, that will constitute a healthy collateral cushion to support bondholders — but it’s a binary bet with little upside, unlike buying the converts. The best case for the bonds is successfully clipping coupons to maturity, and the worst case is that bitcoin slumps again, leaving them with a weak collateral package.
Moody’s also flags the risk of further bitcoin bonds, noting that “the company has engaged in aggressive financial policies by raising debt in order to fund the purchase of volatile, unregulated digital assets […] there is potential for the company to further increase financial leverage over time as it continues its strategy of purchasing digital assets.”
From an accounting perspective, bitcoin is straightforwardly a losing proposition — companies have to write down the value of digital assets when they trade below carrying value, but do not mark them up beyond their purchase price. That partly accounts for MicroStrategy’s terrible leverage metrics, as its latest numbers incorporate writedowns on its bitcoin holdings but give no credit to the upside. According to the company, its average purchase price has been $24k, well below Tuesday’s levels of $32k.
Potential investors should easily be able to look beyond this quirk of accounting, but there’s still a lot of risk here — and it constitutes a major test of institutional enthusiasm for bitcoin-aligned products. As a 144A offering, the new bond has to go to qualified institutional buyers, most of whom are managing money for others on a professional basis. The gangs of self-proclaimed "apes" and HODLers that are active in retail stocks, meme stocks and crypto could not support the deal, even if they want to.
So deal execution may be a challenge for underwriter Jefferies, despite the enthusiasm for Saylor and his firm among the bitcoin community. To asset managers that pass on the deal, Jefferies’ high yield sales team could simply say, as the crypto true believers do, “have fun staying poor”, but it might not be the prudent approach.