MicroStrategy is Selling Debt to Buy More Bitcoin, Here’s What That Means

MicroStrategy intends to offer $500 million of senior secured notes with an annual interest rate of 6.125% in a private offering to qualified institutional buyers to finance the purchasing of more bitcoin. 

It is the first time ever junk bonds will be used to fund a cryptocurrency acquisition, the Virginia-based software company announced in a release Monday.

The straight debt being priced at 6.125% is a high coupon relative to the high-yield market, which trades at around 3% to 4%, said trader Greg Foss. The debt is being priced as a low Single B, or potentially Triple C type credit, even though MicroStrategy’s debt metrics and its balance sheet is much more healthy than that, Foss said. 

“The market is charging Michael Saylor a lot of money, but he’s okay to pay it,” said Foss. “This is what the US high-yield market does so well.”

Big for the risk

The notes are due 2028, making the tenor about 500 basis points over the seven-year treasury. MicroStrategy is paying more to issue debt due to bitcoin’s volatility and the inherent risk of this bond offering. 

“That’s big for the risk, and Saylor’s probably fine paying it,” said Foss. “And the people that are buying it are probably buying it because it’s got bitcoin exposure and it’s a juicy coupon relative to the market, so everyone’s happy.” 

MicroStrategy is only paying 6.125%, whereas to borrow in a stablecoin would generally be much higher. The firm is getting more advantageous terms in borrowing from the public debt markets than it would borrowing for leverage in the digital asset ecosystem.

“By tapping into a different lending group, secured debt lenders from institutions, Saylor has received more favorable terms,” said Jeff Dorman, chief investment officer at Arca. “The only reason rates are so high for stables is because there is a cash shortage in digital assets. That obviously doesn’t exist in the tradfi world where rates are 0% and reverse repo indicates a glut of cash.”

Deal or no deal?

While the terms may be lucrative for Saylor and his firm, for investors, it might not be a great deal. 

“From an investor standpoint, the first couple of deals that Michael Saylor did were investor-friendly,” said Dorman. “This was a company that had no debt on its balance sheet when it first started doing this, and they had fairly strong cash flows, at least plenty to cover any interest expense in a mild amount of debt.”

For the typical bond investor with no exposure to digital assets, MicroStrategy’s early offerings were a good backdoor way to get some bitcoin exposure expressed as a bond that at least was going to mature at par, ultimately, regardless of what bitcoin did, Dorman said. 

“But when you start to layer on even more debt, and you do it in a senior secured fashion here, ultimately, I find it very hard to believe this deal gets done,” said Dorman. “From an investor’s standpoint, you’re getting maybe a 6% to 7% yield, which looks attractive relative to other debt in the market. But you get none of the upside if bitcoin goes higher, and you get all of the downside if bitcoin goes lower since the debt is backed by the bitcoin, so you’re basically selling a call and selling a put, which is not what investors typically want to do.”

A crypto bull

The company also announced, in a separate statement, that it expects to take an estimated charge of $284.5 million for the quarter ended June 30, 2021. The charge is directly related to the losses in the firm’s bitcoin holdings. MicroStrategy reported $122.9 million in total revenue for the first quarter of 2021. 

The buyers of the secured note offering are not entitled to MicoStrategy’s current bitcoin holdings. The firm reportedly holds 92,079 bitcoin. The assets are now held in the firm’s subsidiary, MicoStrategy LLC, per the release. 

Under the leadership of Michael Saylor, MicroStrategy has emerged as one of the most crypto-bullish public companies in the world. 

“You’re a knucklehead if you’re not issuing fixed-term debt right now,” said Foss. “It’s the cheapest it’s ever been. Every single chief financial officer in the world should be issuing fixed term debt and using a portion of the proceeds to own bitcoin.”