Wu said the author   |   Wu Zhuocheng

Editor of this issue   |   Colin Wu

MicroStrategy's debt bullet

On December 9, 2020, MicroStrategy (NASDAQ: MSTR) announced[1] the issuance of $650 million in convertible senior notes, including $550 million in convertible bonds and $100 million in options, with conversion dates of December 15, 2025. The convertible bonds have a coupon rate of 0.750% and are paid semi-annually. The conversion price is approximately $397.99 per share, a premium of approximately 37.5% over the closing price of the common stock of $289.45 on December 8. After deducting the discounts and commissions of the initial purchasers and the issuance costs, the net proceeds from the sale of the notes were approximately $635 million. Subsequently, MicroStrategy purchased 29,646 bitcoins[2] for approximately $650 million in cash, at an average price of approximately $21,925. To date, MicroStrategy holds a total of 70,470 bitcoins, with a total cost of approximately US$1.125 billion and an average purchase price of approximately US$15,964.

On February 17, 2021, MicroStrategy announced again[3] that it would issue convertible senior notes with a total principal amount of US$1.05 billion, including US$900 million interest-free convertible bonds and US$150 million options, with conversion dates of December 15, 2027. The conversion price was approximately US$1,432.46 per share, a premium of approximately 50% over the closing price of the common stock of US$955.0 on December 8. After deducting the discounts and commissions of the initial purchasers and issuance expenses, the net proceeds from the sale of the notes were approximately US$1.03 billion. Subsequently, MicroStrategy purchased 19,452 bitcoins[4] for approximately US$1.026 billion in cash, at an average price of approximately US$52,765. To date, MicroStrategy holds a total of 90,531 bitcoins, with a total cost of approximately US$2.171 billion and an average purchase price of approximately US$23,985.

On June 8, 2021, MicroStrategy announced[5] the issuance of junk bonds with a total principal amount of US$500 million due in 2028, with a coupon rate of 6.125% and interest paid semi-annually, so interest of US$15.3125 million must be paid on June 15 and December 15 of each year. After deducting the discounts and commissions of the initial purchasers and issuance expenses, the net proceeds from the sale of the notes were approximately US$488 million. Subsequently, MicroStrategy purchased 13,005 bitcoins[6] for approximately US$489 million in cash, at an average price of approximately US$37,617. To date, MicroStrategy holds a total of 105,085 bitcoins, with a total cost of approximately US$2.741 billion and an average purchase price of approximately US$26,080.

MicroStrategy's stock "bullet"

On June 14, 2021, MicroStrategy entered into an open market sales agreement with its agent, Jefferies LLC[7], to issue common stock from time to time through Jefferies at a total price of no more than $1 billion. The third quarter financial report[8] showed that as of September 30, 2021, MicroStrategy sold a total of 555,179 shares of common stock through Jefferies, with an average price per share of approximately $727.64. After deducting $4.5 million in sales commissions and expenses, the net proceeds from the stock sale were approximately $399.5 million. The total cost of purchasing Bitcoin in the third quarter was approximately $420 million. So far, MicroStrategy holds a total of 114,042 Bitcoins, with a total cost of approximately $3.16 billion and an average purchase price of approximately $27,713.

On December 9, 2021, MicroStrategy announced that it had purchased an additional 8,436 bitcoins in the fourth quarter, with a total cost of $496 million and an average price of approximately $58,748. So far, MicroStrategy holds a total of 122,478 bitcoins, with a total cost of approximately $3.66 billion and an average purchase price of approximately $29,861.

As of December 9, approximately $100 million of the 1 billion common shares included in the sales agreement remained available for sale.

The ability to pay interest determines whether to sell

Since MicroStrategy's remaining 100 million "bullets" are from the sale of stocks, it does not need to bear interest costs, and the current average cost of the total position is much higher than the market price, so there is no need to use this $100 million to lower the cost price. In other words, if Bitcoin rises in the future, MicroStrategy will not incur additional losses even if it does not sell the remaining 100 million shares. And if Bitcoin falls in the future, using this $100 million to buy the bottom is a drop in the bucket. Therefore, what we really care about is not how much Bitcoin MicroStrategy can buy, but when it sells, which depends on its interest payment ability.

The third quarter financial report shows that as of September 30, MicroStrategy has paid $17.52 million in interest this year, including $2.0625 million in interest on the first note paid on June 15. It can be estimated that MicroStrategy will have to pay at least $50.2075 million (1752+206.25+3062.5) in interest each year starting from 2022.

In the past two years, MicroStrategy's quarterly EBIT has basically remained at around $10 million (excluding Bitcoin impairment losses), or $40 million per year. This shows that if operating income does not continue to grow, MicroStrategy's EBIT in the next few years will not be able to cover interest. At that time, the company can only repay its debts by continuing to raise funds or selling Bitcoin. However, the good news is that the company currently has about $57 million in cash, which can ensure that it will not be in financial trouble until at least June 15 next year.

Considering the high probability of the Federal Reserve raising interest rates in June next year, MicroStrategy is also likely to not have enough cash to pay the subsequent interest expenses at that time. Once the price of the currency plummets and the debt is difficult to repay, the company will face liquidation. At present, since the interest expenses have reached the upper limit of the company's operating income, it is unlikely that the company will be financed through debt in the next four years. Therefore, if you want to obtain cash flow, you can only continue to apply to the SEC to sell additional shares or sell Bitcoin. The former will not be realized in a short time, and the latter may become the only option.

Once the sell-off occurs, the amount will most likely not be less than $500 million, because MicroStrategy needs to repay junk bonds to get rid of high interest. But it should not exceed $1.4 billion at most, because the investment cost price before this year was extremely low, and it would be difficult to buy it back at the same price once it is sold; although the investment cost price in February this year was high, there was no financing cost or maturity pressure, so there was no need to rush to sell.