Why Strategy Investors Are Starting to Worry About 2028

The MicroStrategy Inc. headquarters in Tysons Corner, Virginia. (Stefani Reynolds / Bloomberg)

Some debt issued by Strategy, formerly known as MicroStategy, now yields nearly 8% as investors show some concern about the company’s ability to pay off the bonds in 2028 when holders can redeem the convertible debt.

Strategy stock has come under pressure lately along with Bitcoin and the shares fell under 2% Monday after hitting a new 52-week low. The company’s $8 billion of preferred stock also extended recent declines Monday.

The stock fell 2.2% to $195.42, leaving it way below its 52-week high of $542 set last November.  The stock traded at $400 as recently as early August. Bitcoin fell 2% Monday to around $92,000.

Strategy has two big convertible bond issues totaling $5 billion that are “puttable,” or redeemable by holders, in 2028 at their face value of 100 cents on the dollar, or par value

A $3 billion zero-coupon bond deal sold a year ago can be put to the company for cash at on June 1, 2028. That issue is now trading at 82 cents on the dollar for a yield to the put date of 7.8%, Bloomberg data show. The yield is above the average rate of 7% in the junk-bond market.

The bonds traded at 90 a month ago. This issue was sold as private placement to institutional investors under rule 144A of the Securities Act of 1933. Yields are much higher on Strategy preferred in the 10% to 15% range. The convertible debt is senior to the preferred.

Strategy, the largest corporate Bitcoin holder, has financed its purchases of Bitcoin, now totaling about 650,000 coins worth about $60 billion, with a mix of equity sales, preferred stock and convertible bond. The company has been de-emphasizing debt sales this year, viewing preferred as a better financing option because it doesn’t need to be repaid.

The company has been counting on redeeming most of its convertible debt with equity under the terms of the offerings. But with the conversion prices out of the money on some of its larger deals, it faces the potential for a cash redemption barring a sharp rally in the common stock.

The $3 billion of converts can be swapped for common stock at $672 a share – which is way above the current stock price. There is another convertible totaling $2 billion that is redeemable at 100 in March 2028 that also has an out of the money conversion feature at $433 a share. That issue trades around 89 cents on the dollar.

Standard & Poor’s issued a junk-grade rating of B-minus to Strategy in October. In the rating release, S&P said: “We view Strategy’s high bitcoin concentration, narrow business focus, weak risk-adjusted capitalization, and low U.S. dollar liquidity as weaknesses. These are only partially offset by the company’s strong access to capital markets and prudent management of its capital structure, including maintaining no maturities in the next 12 months and financing its business primarily with equity.”

Strategy chairman and controlling shareholder Michael Saylor expressed confidence on the company third-quarter earnings conference call in late October about its ability to access the capital markets.

Saylor said the company could raise “$2 billion, $3 billion, $4 billion, $5 billion, $6 billion” in new debt over a weekend. He said Wall Street “would be licking their chops and delighted to give us the capital.” However, the company doesn’t want to sell senior debt because it would be senior to all its preferred, a favored financing source.

Wall Street, however, is concerned that if Bitcoin goes into a prolonged bear market, Strategy might not have such easy access to capital in 2028.

Investors however can take comfort in the company’s big Bitcoin holdings that could be sold to pay off the debt. That makes the convertibles effectively a form of asset-backed securities.

Write to Andrew Bary at andrew.bary@barrons.com

Write to Andrew Bary at andrew.bary@barrons.com