Its latest purchase was completed following an upsized $1.01 billion private offering of convertible senior notes due 2028, with a 0.625% coupon and a 40% conversion premium. The company had said it planned to use the proceeds to fully redeem its $500 million senior secured notes due 2028, expected to be completed on Sept. 26, and to use any balance of the net proceeds “to acquire additional bitcoin and for general corporate purposes.”
The latest move demonstrates how MicroStrategy's balance sheet and financial profile could become stronger as it issues convertible notes to raise proceeds for adding to its bitcoin holdings, according to the investment bank and research firm Benchmark.
MicroStrategy Executive Chairman Michael Saylor has occasionally mentioned the idea of lending part of MicroStrategy's bitcoin to generate yield, but he has deemed it unfeasible due to the lack of counterparties with the financial strength and solid balance sheets needed to make him comfortable with such a move, noted Benchmark's Mark Palmer. That could change soon.
During a public hearing last week, the general counsel for Sen. Cynthia Lummis (R-Wyo.) disclosed that the SEC had given BNY Mellon a conditional exemption to the agency’s SAB 121 guidance, which requires entities that choose to custody crypto assets to list them on their balance sheet and to create a corresponding liability equal to the value of the crypto.
BNY Mellon, the largest U.S. custodian, appears to have received approval to custody crypto. Should the SEC's relaxed stance on digital assets and rising institutional interest extend beyond a financial institution like BNY Mellon and on to corporates, MicroStrategy may soon have access to large institutional counterparties for lending its bitcoin with greater confidence in loan repayment, according to Palmer.
"The yield that MSTR could generate by lending a portion of its bitcoin holdings could offset the annual interest on its debt, and if the company were to become comfortable lending larger amounts, then it could use the associated yield as another means of adding to its holdings, one that would not involve any qualms about leverage or dilution," Palmer wrote in Tuesday's note.
In August, MicroStrategy introduced a measure that they termed "BTC yield," which is the percentage change over time in the ratio of MicroStrategy's bitcoin holdings to its diluted shares outstanding. It stood at 12.2% as of Aug. 1, and it will target 4% to 8% annually over each of the next three years.
Palmer noted that after issuing convertible bonds and retiring senior notes, MicroStrategy likely gained more flexibility in accessing capital markets due to its reduced interest expenses and larger reserves of unencumbered bitcoin.
"And while the premium to MSTR’s net asset value (NAV) at which its shares trade is the subject of much debate among investors, we believe the flywheel effect seen in its bitcoin acquisition strategy helps to support the argument that the premium is justified, and that it is a feature of that strategy rather than a bug," he wrote.
The Benchmark analyst reiterated his "buy" rating and $215 price target on MicroStrategy's stock. MSTR is up more than 115% year to date, trading around $147 at publication time.
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