Bitcoin development company MicroStrategy is considering diluting shareholder value after the surge in the price of its stock and convertible bonds. The company’s convertible bonds, issued in late 2020 to raise $650 million, now trade for over three times their par value due to the rise in the price of MicroStrategy’s stock. These convertible bonds act like regular bonds but can also be paid back by the issuer in new shares if the value of their stock rises enough. Given the high interest rates, it is a very attractive option for MicroStrategy to raise money quickly to buy more Bitcoin, which is the company’s primary focus.
The convertible bonds issued by MicroStrategy carry a meager 0.75% interest rate and are due for maturity in December 2025. MicroStrategy now faces the decision of either retiring the convertible bond and paying back investors $2.5 billion in cash or allowing them to mature in 2025 and convert them into shares, potentially flooding the market with 1.63 million shares. Bank of America Corp.’s head of global convertibles and preferreds strategy believes that it is more likely for a deep in-the-money convertible bond to be converted into shares rather than being bought back by the issuer.
MicroStrategy’s plan to address the debt remains uncertain, but a cash payout seems unlikely given its low cash holdings of $46.8 million. The majority of the company’s wealth is held in Bitcoin, which amounts to 214,245 BTC worth $14.9 billion. The firm’s executive chairman, Michael Saylor, has indicated that MicroStrategy has no intentions of selling any of its coins and may potentially hold on to them for over 100 years. In the past month, MicroStrategy completed two separate convertible note sales totaling $1.4 billion, all of which was used to purchase more Bitcoin.
MicroStrategy’s stock has surged 110% since the beginning of the year to $1440 per share, reflecting the increasing investor interest in the company’s strategy of investing heavily in Bitcoin. The rise in the price of MicroStrategy’s stock and convertible bonds may lead the company to pursue options such as issuing new shares to raise capital. The company’s focus on acquiring Bitcoin has been a key driver of its financial decisions, as evidenced by its use of proceeds from convertible note sales to buy more of the cryptocurrency.
MicroStrategy’s decision on how to address its convertible bonds will have implications for its shareholders and the broader market. The potential conversion of the bonds into shares could impact MicroStrategy’s stock price and market dynamics. Despite the uncertainty surrounding the company’s debt repayment strategy, its commitment to holding Bitcoin for the long term remains unwavering. As one of the early corporate adopters of Bitcoin, MicroStrategy’s approach to managing its debt and investments will continue to be closely watched by industry observers and investors.
