Strategy Inc., listed on NASDAQ under the ticker MSTR, recently made a significant investment by purchasing approximately $3.38 billion in Bitcoin over a span of two weeks. While this sizeable acquisition drew considerable attention, financial analyst Dylan LeClair highlights that an equally important and strategic financial adjustment took place quietly in tandem: a restructuring of Strategy’s balance sheet liabilities.
The key financial milestone reached through this restructuring is that perpetual preferred stock now represents a larger portion of the company’s liabilities compared to convertible bonds — a first in Strategy Inc.'s recent financial history.
Convertible bonds, which previously formed a higher percentage of total debt relative to perpetual preferred stock, have decreased from 9.67% to 9.18% of the company's Bitcoin holdings ratio since the start of the year. In contrast, perpetual preferred shares such as STRC rose slightly from 9.19% to 9.36%. This shift may appear incremental but has important implications for Strategy’s financial flexibility and risk profile.
The fundamental distinction between these two types of liabilities lies in their maturity and repayment obligations. Convertible bonds come with fixed expiration dates. When these bonds mature, Strategy must either repay the principal amount or refinance the debt. This scenario can become challenging if Bitcoin’s value declines sharply around the maturity date, placing pressure on the company to meet cash obligations potentially under unfavorable market conditions.
In contrast, perpetual preferred shares do not have a maturity date. Strategy commits to paying dividends on these shares but is not required to repay principal nor does it face any looming refinancing deadlines. This absence of a repayment timeline reduces the risk of forced asset liquidation, particularly Bitcoin sales during volatile market downturns.
Evidence of convertible bonds becoming problematic emerges notably when MSTR stock experiences sharp declines. For example, when the stock traded near $400 per share, the $8.2 billion of convertible bonds essentially functioned similarly to equity. Bondholders anticipated eventually exchanging their bonds for stock and were therefore not concerned about cash repayment demands.
However, in November, a notable downturn in both MSTR stock, which fell to approximately $150, and Bitcoin prices changed this dynamic. Under these conditions, convertible bonds began to be perceived by investors as genuine debt that Strategy might have to repay in cash before preferred shareholders receive any payment. LeClair's analysis estimates that bond investors viewed an additional $2.5 billion of exposure in debt terms—hence increasing the perceived financial risk.
For holders of STRC perpetual preferred shares, this presents an elevated risk profile because the increased convertible debt ranks ahead of their claims in payment priority. This heightened risk demands higher returns on these preferred shares to compensate investors, which subsequently raises borrowing costs for Strategy. In extreme circumstances, risk-averse investors may opt to avoid STRC entirely, potentially limiting Strategy Inc.'s access to capital precisely when it would be most critical.
To address these challenges, Strategy Inc. aims to phase out convertible debt in favor of raising funds through perpetual preferred shares alone. Over the preceding two weeks, the company successfully issued $119 million, followed by an additional $294 million, in STRC preferred shares. These fundraising efforts coincided with the issuance of common stock, which together provided the necessary capital for the recent Bitcoin purchases.
This coordinated capital strategy effectively accomplished two objectives simultaneously: enabling substantial Bitcoin acquisition and initiating the intended debt restructuring. Eliminating convertible debt diminishes the liabilities sensitive to MSTR’s stock fluctuations, thereby stabilizing credit spreads on perpetual preferred shares.
With fewer convertible bonds outstanding, permanently issued preferred shares hold a steadier market credit profile, leading to potentially lower borrowing costs and improving Strategy’s ability to issue preferred shares even amid Bitcoin market downturns.
LeClair also notes the establishment of a U.S. dollar cash reserve by Strategy. This reserve mitigates concerns associated with dividend coverage and alleviates additional investor anxieties tied to the STRC preferred shares, contributing to a more robust and flexible financial position.
Currently, Strategy Inc. has amassed approximately 709,715 Bitcoins, valued collectively at around $62 billion. This asset base is financed through a blend of common stock, convertible bonds, and preferred shares. The company’s immediate objective is further reducing the convertible debt share and increasing the proportion of preferred share issuance.
Analysts like LeClair suggest that if credit spreads on the STRC preferred shares narrow as the restructuring progresses, Strategy Inc. will benefit from access to cheaper capital. This would facilitate accelerated Bitcoin acquisitions and enhance financial stability. However, this anticipated reduction in borrowing costs appears not to be fully reflected in market valuations yet.
In summary, while the headline of Strategy Inc.'s recent $3.38 billion Bitcoin purchase is significant, the accompanying and largely unnoticed balance sheet restructuring could prove equally important. By shifting debt composition from convertible bonds to perpetual preferred shares, Strategy is positioning itself to navigate future market volatility more effectively and sustain its investment strategy in digital assets.