This article will focus on the structure of MicroStrategy's bonds and analyze whether MicroStrategy might be forced to sell Bitcoin to repay bondholders in the event of a cash redemption request from creditors. Based on the current debt structure, we believe the likelihood of forced liquidation is extremely low. However, given the extreme volatility of Bitcoin prices, anything is possible.
MicroStrategy, a business intelligence software firm, has become a prominent player in the Bitcoin market since announcing its strategy to allocate its treasury to the cryptocurrency in August 2020. As of March 8, 2023, the company holds over 250,000 Bitcoins, making it one of the largest institutional holders. However, this strategy has raised concerns among some analysts, particularly regarding whether MicroStrategy might be forced to sell Bitcoin to repay bondholders in the event of a cash redemption request from creditors.
To assess this scenario, we must first understand the structure of MicroStrategy's bonds. According to our knowledge, the company has issued seven rounds of publicly traded convertible bonds since announcing its Bitcoin strategy. Two of these bonds have been fully redeemed, leaving five outstanding bonds with a principal value of $4.25 billion.
These bonds have varying terms and conditions, but they generally offer holders the option to convert their bonds into a specified number of shares of MicroStrategy common stock at a predetermined price before maturity. Additionally, some bonds also provide holders with the right to redeem their bonds for cash at specified intervals before maturity.
The following table summarizes the key cash redemption dates for the five outstanding bonds:
Source: Bond issuance documents
Note: The stock must trade at a price more than 30% above the conversion price for 20 out of any 30-day rolling trading window, whether consecutively or not.
For example, the 0.625% 2028 bonds can be redeemed for cash on March 15, 2027, if the average closing price of MicroStrategy's common stock exceeds $186.23 per share for 20 out of any 30-day rolling trading window. As of March 8, 2023, MicroStrategy's stock price is trading around $214, which is above the cash redemption price. However, the stock has only been above this price for 11 out of the past 30 trading days, which means that the cash redemption option is not yet available.
It is important to note that these bonds also have a zero-coupon structure, which means that no interest payments are made until maturity. However, the conversion price adjusts over time to account for the lack of interest payments.
Given the structure of these bonds and the current market conditions, we believe that MicroStrategy is unlikely to be forced to sell Bitcoin to repay bondholders in the near term. However, if Bitcoin prices were to drop significantly, for example, to around $15,000, and MicroStrategy could not incur further debt, analysts might need to reconsider this scenario.
