MicroStrategy's Debt Dilemma: A Balancing Act Between Bonds and Bitcoin

The behavior of MicroStrategy in borrowing money to purchase Bitcoin has stirred quite a controversy. Adam Cochran, a partner at CEHV and a known figure in the crypto space, recently dissected the precarious financial position of MicroStrategy, a company headed by Michael Saylor and known for its large Bitcoin holdings. Cochran outlined the company's obligations regarding its 2025 and 2028 convertible notes in a series of tweets on October 9, 2023. The notes have pull forward provisions on liquidity, allowing them to be moved to 2025. With a forward of $120 million in revenue against costs of approximately $188 million, MicroStrategy still faces $36 million in coupon payments on its debt.

MicroStrategy's Bitcoin Accumulation

MicroStrategy has been aggressively accumulating Bitcoin, under the stewardship of its CEO, Michael Saylor. As of September 24, 2023, the firm holds a whopping 158,245 bitcoins, acquired at an average price of $29,582 per bitcoin, amounting to a total investment of approximately $4.68 billion​1​. The acquisition spree commenced on August 11, 2020, and has seen notable purchases including 29,646 bitcoins for $650 million on December 21, 2020, and 19,452 bitcoins for $1.026 billion on February 24, 2021. In 2023 alone, MicroStrategy acquired 17,778 bitcoins for a total of $494.3 million, as per the purchase records​1​.

Convertible Note Conundrum

Cochran highlighted the potential fallout if MicroStrategy fails to pay the convertible note for 2025, which would convert at a $725 million value against the company equity, causing around 15% dilution for holders. The alternative could be refinancing, but the last issuance had a 6.25% yield before the hiking cycle, and Cochran estimates refinancing could drive yields to a staggering 9%-11%.

The Bitcoin Balancing Act

He further noted that Saylor has a few options to manage this debt. One is leveraging the company's Bitcoin holdings before the year end, which would exclude it from liquidity calculations and bring $2.8 billion in conversions. Alternatively, they could let the 2025 bonds convert for a 15% dilution, refinance to double-digit debt yields, or sell a portion of their Bitcoin to cover the debt.

Implications on Bitcoin

Selling Bitcoin, however, could erode confidence and lead to more impairment loss, especially if Bitcoin's price dips below $20k. Cochran suggests that such a move could potentially lead to MicroStrategy's downfall, which he believes might be bullish for the markets. This is because a concentration of assets, particularly in a publicly traded entity, can mute upsides, and a short-term wipe could usher in long-term gains.

In a follow-up query by David Miranda, Cochran noted that although corporate debt refinancing usually starts a year in advance, Saylor's outlier status might push negotiations to the last minute, making the year end a crucial period for MicroStrategy's financial strategies heading into 2024.

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