After a year of borrowing and buying, what’s the outlook for the bitcoin bulls at MicroStrategy?
MicroStrategy (MSTR) currently sits on a huge loss on their bitcoin purchases. Based on a current bitcoin price of $20,300, their 129,699 aggregate bitcoin holdings are worth $2.6 billion, down from a total purchase cost of roughly $4 billion (average cost $30,700). Hence they are sitting on unrealized losses of ~$1.4 billion on their purchases.
The last couple of years have been a wild ride for MSTR shareholders, and ironically, the share price ($186) doesn’t sit that far above the share price in the summer of 2020 when they announced their first bitcoin purchase (approximately $140).
Michael Saylor has appeared bemused by the continuous speculation online at MSTR having their bitcoin holdings liquidated at around $21,000 due to the recent $200 million loan with Silvergate. Even searching for Michael Saylor’s name on Twitter brought up the auto-complete phrase “Michael Saylor liquidated.”
This speculation is pretty misleading, but even still, where does the recent market turmoil in Bitcoin leave them? To consider this, let’s simply outline the terms of the various debts they have taken on in the last couple of years, including that Silvergate loan.
FIRST CONVERTIBLE NOTE OFFERING — DECEMBER 2020
MicroStrategy Completes $650 Million Offering of 0.750% Convertible Senior Notes Due 2025
The first convertible note offering was for $650 million, due in December 2025. The interest rate payable for these by MSTR was just 0.75%, making the servicing of this debt pretty easy — just under $5 million interest cost per year.
Hence, these convertible bond holders are not receiving much interest, but they do have the option to convert their investment to MSTR shares at $398 per share. Thus this represents a type of call option on the future price of MSTR shares, albeit one which is now worth less at current market prices.
To illustrate the convertible part, let’s say MSTR stock is priced at $500 per share at the redemption date in Dec 2025 — if you had $1 million of convertible notes they would then be worth $1.25 million, since you could buy the shares for $398 and immediately sell them for $500. This, and other upside scenarios, explain the low interest rate payable.
SECOND CONVERTIBLE NOTE OFFERING — FEBRUARY 2021
MicroStrategy Completes $1.05 Billion Offering of Convertible Senior Notes Due 2027 at 0% Coupon and 50% Conversion Premium
This offering (which raised $1.05bn) is much along the same structure as the first, albeit at even better terms from an MSTR point of view, and worse terms for the convertible bond holders. This time, the interest rate is 0%, so there is no interest cost and the redemption date is in February 2027.
The convertibility for these notes only contains value if the share price of MSTR is above $1,432 per share — hence much less likely to be converted than the previous offering. It seemed comparatively more likely at the time, given the stock price closed at $955 on February 16, 2021.
Skeptics will question the virtue of raising this much debt to buy bitcoin, but one element seems clear in hindsight — MSTR and Michael Saylor got a pretty good deal in borrowing on these terms at the time.
SENIOR SECURED NOTES — JUNE 2021
MicroStrategy Completes $500 Million Offering of 6.125% Senior Secured Notes Due 2028 With Bitcoin Use Of Proceeds
This represented a more conventional bond offering. MSTR borrowed $500 million until 2028, at an annual interest rate of 6.125%. This makes the annual interest cost of these bonds approximately $30.6 million, substantially more than the previous convertible notes interest cost combined.
This announcement also coincided with the establishment of a subsidiary — “MacroStrategy” — which would hold the existing 92,079 bitcoin that they owned. While the new debt was senior secured notes — having a high priority of being paid versus other creditors in the event of future insolvency — crucially they are not secured against the 92,079 bitcoin. This becomes relevant when we consider the later Silvergate bitcoin-backed loan.
SILVERGATE BANK LOAN — MARCH 2022
This loan was slightly different — borrowing $205 million for three years which is backed by the MacroStrategy-held bitcoin. As linked to in slides 11 and 12 in this presentation, this was initially backed by 19,466 bitcoin, but more can be specifically pledged as collateral should the price of bitcoin fall.
First Quarter 2022 Financial Results Presentation
The “top up” loan-to-collateral-value ratio is 50%. It is this fact that has presumably led many to cite the MSTR liquidation price on the loan as the price of bitcoin falling below $21,000 — at this point the 19,466 bitcoins would be worth below $410 million (2 x 205), and they would need to pledge more collateral under the terms of the loan. But as Michael Saylor pointed out and the slides above show, there are a further 95,643 bitcoins which have not yet been pledged, and could be.
The math works as follows regarding the $3,562 referenced in the tweet. At that price point the total 115,109 bitcoin available to back the loan would be only worth $410m, so MicroStrategy would have to pledge some other collateral to keep the 50% loan-to-value ratio going.
How about the interest cost on this loan? It’s based on the 30-day average SOFR (Secured Overnight Funding Rate) plus 3.7%. At the time of writing (end of June, 2022) SOFR is about 1%, so this makes 4.7% total. Based on 4.7% interest, it would cost them about $9.6 million annually to service the interest currently. However, the 1% SOFR rate is expected to go higher. Further SOFR rises would not prove too material though — at 4%, for example, (and hence 7.7% total) the interest cost would be $15.8 million.
So what can we conclude from all this?
The interest costs in total from all the debt raised to buy bitcoin look manageable, totalling around $45 million ($5m + $0 + $30.6m + $9.6m) per year at present. This looks affordable to service — the recent quarterly results show gross profit for the recent quarter at $94 million.
Even given huge recent declines in the price of bitcoin, MSTR’s holdings should not be impacted by the price in the short term, unless it falls massively, to $3,500k. This is due to the sheer amount of bitcoin they have available to back the Silvergate loan, to keep the backing at a 50% loan-to-value ratio.
What is of course striking is the current huge on-paper loss that MSTR is sitting on in terms of its bitcoin purchases, given that their average cost basis is $30,700 per bitcoin. It would no doubt prove a problem for them if the bitcoin price remains below this in the longer term and some of the debt starts to near redemption. The first loan due is the Silvergate loan in March 2025. Given this is with bitcoin backed as collateral, it may actually be possible to roll this over in a similar fashion.
The next due is the first convertible note offering in December 2025. If MSTR is still sitting on huge bitcoin losses at this point, they may find it hard to roll over that $650 million debt in the market. It would lead to a tricky decision as they would presumably want to avoid selling any bitcoin at a loss in order to pay back the debt.
One aspect is very much on their side, though: In the world of Bitcoin, or indeed even the wider macroeconomic environment, December 2025 feels like a very long time away.
It seems unlikely that MSTR would seek (or indeed be able) to raise much more debt in current market conditions — as Michael Saylor points out in the interview clip below, they borrowed previously on pretty advantageous terms. It also seems unlikely right now that they would sell additional equity into the market to buy more bitcoin, which they have also done previously, as the share price is currently so low.
They could carry on buying more bitcoin with profits and indeed, while writing this, MSTR did announce a further small bitcoin purchase of $10 million.
What seems likely alongside this is opting to keep some future profits in dollars for optionality over the next couple of years rather than buy more bitcoin with it, despite bitcoin’s lower price. The Q1 2022 results linked above (see point 1) would suggest that they are currently building some cash reserves, holding $93 million in cash versus $63 million three months earlier.
One final option would be to buy back some of their own shares with profits from the business, given that their share price has declined by a higher proportion over the last 6-12 months than the bitcoin price. This essentially would send a signal that the market undervalues MSTR relative to even the bitcoin price, and would constitute a defiant, albeit risky, show of faith in their strategy.
Finally, it’s worth watching this video link from CNBC for some recent thoughts from Michael Saylor, which includes the following quotes:
Interviewer: “Would you consider buying more?”
Michael Saylor: “Yeah. If your time horizon is one month, then Bitcoin looks like a volatile risk asset. But if your time horizon is ten years, it looks like a risk off store of value asset …”
“… we borrowed 2.2 billion dollars at a blended interest rate of 1.8% before interest rates doubled. It seemed like a reasonable thing to do. $1.7 billion is unsecured, the rest is a 7 year term after we borrowed the money. The margin loan is well managed …”
“… Bitcoin is the first and only legitimate scarcity in the universe.”
Source: Bitcoin Magazine