MicroStrategy (MSTR) at the moment sits on an enormous loss on their bitcoin purchases. Based mostly on a present bitcoin value of $20,300, their 129,699 mixture bitcoin holdings are price $2.6 billion, down from a complete buy price of roughly $4 billion (common price $30,700). Therefore they’re sitting on unrealized losses of ~$1.4 billion on their purchases.
The final couple of years have been a wild journey for MSTR shareholders, and satirically, the share value ($186) doesn’t sit that far above the share value in the summertime of 2020 once they introduced their first bitcoin buy (roughly $140).
Michael Saylor has appeared bemused by the continual hypothesis on-line at MSTR having their bitcoin holdings liquidated at round $21,000 as a result of current $200 million mortgage with Silvergate. Even looking for Michael Saylor’s identify on Twitter introduced up the auto-complete phrase “Michael Saylor liquidated.”
This hypothesis is fairly deceptive, however even nonetheless, the place does the current market turmoil in Bitcoin depart them? To contemplate this, let’s merely define the phrases of the assorted money owed they’ve taken on within the final couple of years, together with that Silvergate mortgage.
First Convertible Notice Providing — December 2020
MicroStrategy Completes $650 Million Providing of 0.750% Convertible Senior Notes Due 2025
The primary convertible word providing was for $650 million, due in December 2025. The rate of interest payable for these by MSTR was simply 0.75%, making the servicing of this debt fairly straightforward — slightly below $5 million curiosity price per yr.
Therefore, these convertible bond holders usually are not receiving a lot curiosity, however they do have the choice to transform their funding to MSTR shares at $398 per share. Thus this represents a sort of name possibility on the long run value of MSTR shares, albeit one which is now price much less at present market costs.
As an instance the convertible half, let’s say MSTR inventory is priced at $500 per share on the redemption date in Dec 2025 — when you had $1 million of convertible notes they’d then be price $1.25 million, since you possibly can purchase the shares for $398 and instantly promote them for $500. This, and different upside situations, clarify the low rate of interest payable.
Second Convertible Notice Providing — February 2021
This providing (which raised $1.05bn) is way alongside the identical construction as the primary, albeit at even higher phrases from an MSTR viewpoint, and worse phrases for the convertible bond holders. This time, the rate of interest is 0%, so there isn’t a curiosity price and the redemption date is in February 2027.
The convertibility for these notes solely comprises worth if the share value of MSTR is above $1,432 per share — therefore a lot much less more likely to be transformed than the earlier providing. It appeared comparatively extra doubtless on the time, given the inventory value closed at $955 on February 16, 2021.
Skeptics will query the advantage of elevating this a lot debt to purchase bitcoin, however one ingredient appears clear in hindsight — MSTR and Michael Saylor bought a reasonably whole lot in borrowing on these phrases on the time.
Senior Secured Notes — June 2021
This represented a extra standard bond providing. MSTR borrowed $500 million till 2028, at an annual rate of interest of 6.125%. This makes the annual curiosity price of those bonds roughly $30.6 million, considerably greater than the earlier convertible notes curiosity price mixed.
This announcement additionally coincided with the institution of a subsidiary — “MacroStrategy” — which might maintain the present 92,079 bitcoin that they owned. Whereas the brand new debt was senior secured notes — having a excessive precedence of being paid versus different collectors within the occasion of future insolvency — crucially they don’t seem to be secured in opposition to the 92,079 bitcoin. This turns into related once we think about the later Silvergate bitcoin-backed mortgage.
Silvergate Financial institution Mortgage — March 2022
This mortgage was barely totally different — borrowing $205 million for 3 years which is backed by the MacroStrategy-held bitcoin. As linked to in slides 11 and 12 on this presentation, this was initially backed by 19,466 bitcoin, however extra might be particularly pledged as collateral ought to the value of bitcoin fall.
First Quarter 2022 Monetary Outcomes Presentation
The “high up” loan-to-collateral-value ratio is 50%. It’s this incontrovertible fact that has presumably led many to quote the MSTR liquidation value on the mortgage as the value of bitcoin falling under $21,000 — at this level the 19,466 bitcoins can be price under $410 million (2 x 205), and they might have to pledge extra collateral beneath the phrases of the mortgage. However as Michael Saylor identified and the slides above present, there are an extra 95,643 bitcoins which haven’t but been pledged, and may very well be.
Linked MicroStrategy Investor Relations Tweet.
The maths works as follows relating to the $3,562 referenced within the tweet. At that value level the overall 115,109 bitcoin obtainable to again the mortgage can be solely price $410m, so MicroStrategy must pledge another collateral to maintain the 50% loan-to-value ratio going.
How in regards to the curiosity price on this mortgage? It’s primarily based on the 30-day common SOFR (Secured In a single day Funding Price) plus 3.7%. On the time of writing (finish of June, 2022) SOFR is about 1%, so this makes 4.7% complete. Based mostly on 4.7% curiosity, it might price them about $9.6 million yearly to service the curiosity at the moment. Nevertheless, the 1% SOFR charge is predicted to go greater. Additional SOFR rises wouldn’t show too materials although — at 4%, for instance, (and therefore 7.7% complete) the curiosity price can be $15.8 million.
Conclusions
So what can we conclude from all this?
1. The curiosity prices in complete from all of the debt raised to purchase bitcoin look manageable, totalling round $45 million ($5m + $0 + $30.6m + $9.6m) per yr at current. This seems to be inexpensive to service — the current quarterly outcomes present gross revenue for the current quarter at $94 million.
MicroStrategy Declares First Quarter 2022 Monetary Outcomes
2. Even given large current declines within the value of bitcoin, MSTR’s holdings shouldn’t be impacted by the value within the brief time period, until it falls massively, to $3,500k. That is as a result of sheer quantity of bitcoin they’ve obtainable to again the Silvergate mortgage, to maintain the backing at a 50% loan-to-value ratio.
3. What’s after all placing is the present large on-paper loss that MSTR is sitting on by way of its bitcoin purchases, provided that their common price foundation is $30,700 per bitcoin. It might little question show an issue for them if the bitcoin value stays under this in the long term and a number of the debt begins to close redemption. The primary mortgage due is the Silvergate mortgage in March 2025. Given that is with bitcoin backed as collateral, it could really be attainable to roll this over in a similar way.
The following due is the primary convertible word providing in December 2025. If MSTR continues to be sitting on large bitcoin losses at this level, they could discover it arduous to roll over that $650 million debt available in the market. It might result in a tough resolution as they’d presumably need to keep away from promoting any bitcoin at a loss with a purpose to pay again the debt.
One side may be very a lot on their facet, although: On the earth of Bitcoin, or certainly even the broader macroeconomic setting, December 2025 seems like a really very long time away.
4. It appears unlikely that MSTR would search (or certainly have the ability) to boost far more debt in present market circumstances — as Michael Saylor factors out within the interview clip under, they borrowed beforehand on fairly advantageous phrases. It additionally appears unlikely proper now that they’d promote extra fairness into the market to purchase extra bitcoin, which they’ve additionally carried out beforehand, because the share value is at the moment so low.
5. They might stick with it shopping for extra bitcoin with earnings and certainly, whereas penning this, MSTR did announce an extra small bitcoin buy of $10 million.
6. What appears doubtless alongside that is opting to maintain some future earnings in {dollars} for optionality over the following couple of years reasonably than purchase extra bitcoin with it, regardless of bitcoin’s lower cost. The Q1 2022 outcomes linked above (see level 1) would recommend that they’re at the moment constructing some money reserves, holding $93 million in money versus $63 million three months earlier.
7. One remaining possibility can be to purchase again a few of their very own shares with earnings from the enterprise, provided that their share value has declined by a better proportion over the past 6-12 months than the bitcoin value. This basically would ship a sign that the market undervalues MSTR relative to even the bitcoin value, and would represent a defiant, albeit dangerous, present of religion of their technique.
Lastly, it’s price watching this video hyperlink from CNBC for some current ideas from Michael Saylor, which incorporates the next quotes:
Interviewer: “Would you think about shopping for extra?”
Michael Saylor: “Yeah. In case your time horizon is one month, then Bitcoin seems to be like a risky danger asset. But when your time horizon is ten years, it seems to be like a danger off retailer of worth asset …”
“… we borrowed 2.2 billion {dollars} at a blended rate of interest of 1.8% earlier than rates of interest doubled. It appeared like an inexpensive factor to do. $1.7 billion is unsecured, the remainder is a 7 yr time period after we borrowed the cash. The margin mortgage is nicely managed …”
“… Bitcoin is the primary and solely legit shortage within the universe.”
Not one of the content material on this article needs to be construed as monetary recommendation or taken as an endorsement to purchase or promote shares in MSTR. The creator owns shares in MSTR.
Because of Will Schoellkopf for reviewing this text.
It is a visitor put up by BitcoinActuary. Opinions expressed are totally their very own and don’t essentially replicate these of BTC Inc. or Bitcoin Journal.
