In order to buy more bitcoins, MicroStrategy recently announced a new convertible bond raising plan, this time the amount reached 900 million US dollars. MicroStrategy’s successive big moves make us wonder, how is this different from the bond issued last time? And why is there a new round of convertible bond financing not long after the last bond issuance?
What is a convertible note (convertible bond)?
First, a convertible bond or bill is a bond, but then it can be “converted” into equity at a specific price. Because of this potential conversion, the company can pay a lower interest rate. In other words, the company can repay debts in the future by way of equity dilution. Therefore, if a company is in a high-speed growth period or has poor credit status, it may choose this path.
MicroStrategy’s first convertible bond
In December 2020, MicroStrategy (hereafter replaced by MS) announced its first issuance of convertible bonds, with a very clear purpose to buy Bitcoin. Citibank immediately lowered the rating of MS Corporation (code MSTR) to “sell”. But the market generally chooses to be bullish.
The appetite of investors is so great that MS has expanded its issuance from US$400 million to US$550 million and added an additional US$100 million in buying options. The final issuance scale reached 650 million US dollars.
MS’s bonds are priced very low, with interest rates only 0.75% per annum. Therefore, on the basis of the company’s annual operating profit of 40 million US dollars, only 4 million interest needs to be paid, and the debt coverage ratio reaches 10 times (more than 2 times is a strong financial performance).
The company’s CEO, Michael Saylor, has adopted a more aggressive strategy in terms of bond conversion prices. The execution price of the convertible bond was set at US$398 per share, while the stock price at that time was US$289, which is equivalent to a 35% premium to investors.
MS’s latest bond issuance
This month, MS announced a new proposal to issue 600 million US dollars of convertible bonds and an additional 90 million conditional purchase quota. Compared with the last time, the pricing of this round of bond financing is more aggressive. The bond issuance scale has also been expanded to 900 million U.S. dollars, plus a conditional purchase of 150 million U.S. dollars. This round of bonds are zero-coupon bonds, sold at a premium of 50% higher than the par value. At the end of the fundraising, the quota of US$1.05 billion has been completed. Obviously, investors’ enthusiasm for this kind of definite upside expectations is still very high.
So the question is, why do investors maintain continued enthusiasm for such products? One explanation is that, apart from the previously issued US$650 million convertible bonds, MS has no other debts. Given that its operating income and balance sheet already hold bitcoin assets that have doubled the market value (from the initial 1.1 billion to the current US$3.4 billion), it can free up more financing space.
MS company owns more bitcoins than any other entity company, which gives more scarce value to its core business and current holdings of BTC assets. For many institutional investors, investing in MS can be seen as a “almost free bitcoin call option.”
Tesla’s addition of Bitcoin to its balance sheet has helped make it the norm for companies to use Bitcoin as a reserve, but MS is the only public company that actively borrows to acquire more Bitcoin.
Moreover, according to MS’s “Bitcoin acquisition strategy” stated in its 10K, it has no intention of stopping the plan. In the foreseeable future, it will use the remaining part of the cash flow and free up debt space to acquire more and more bitcoins.
MS is still the only listed company in the market that has continuously borrowed to acquire more bitcoins. Its pricing of these bonds and rising stock prices show its success in this strategy. Obviously, they will not stop anytime soon.
Original Title: Why Investors Are So Excited About MicroStrategy’s Bitcoin Acquisition Plan