What is the operational principle of MicroStrategy’s issuance of convertible bonds with low interest rates and high stock conversion prices?
MicroStrategy, a software development company specializing in Bitcoin, has issued convertible bonds for the first time in three years. The conversion price of the bonds has a premium of up to 20% compared to the current stock price. What incentives are attracting investors to subscribe to these six-year convertible bonds with a coupon rate of only 0.625%? And what is MicroStrategy’s strategy for this operation?
MicroStrategy has announced the issuance of $700 million in 2030 convertible senior notes, which will be privately placed with qualified institutional buyers. The issuance details are as follows:
Maturity Date: March 15, 2030
Coupon Rate: 0.625%
Interest Payment Dates: Semi-annually on March 15 and September 15 each year
Conversion Price: $1,498
Conversion Period: July 1, 2024 to March 13, 2030
Put Option: Bondholders can sell the notes at par value (100) after September 15, 2028
Convertible bonds have an additional clause that allows bondholders to convert the bonds into stocks at a predetermined price when the stock price exceeds a certain level. The pricing principle is based on the company’s debt plus the call option to buy stocks.
With a pricing date stock price of $1,246 and a conversion price of $1,498, the premium is as high as 20%. The coupon rate of 0.625% is almost negligible compared to the risk-free yield of 4.1% on the current 10-year U.S. Treasury bond. Why are investors willing to purchase these bonds?
Let’s first review the three convertible bonds currently issued by MicroStrategy. The coupon rates are extremely low, even zero, and the conversion prices have premiums of over 20% compared to the pricing dates. The summary is as follows:
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MicroStrategy started buying Bitcoin in September 2020. Based on this starting period, let’s compare the MicroStrategy stock price with the Bitcoin price (orange line) in the table below. The three purple arrows indicate the times when MicroStrategy issued convertible bonds. We can infer that:
By pricing the options during high stock prices, the conversion price can be set at a relatively high level. With the market’s enthusiasm, the option price also rises, allowing funds to be obtained at almost zero cost.
But why would investors spend money on a product that offers little interest and a conversion price that is 20% higher than the current price? If they are bullish on MicroStrategy, why not buy at the current price? The reasons for this analysis are as follows:
Zero risk – Even if there is no conversion, the principal can be redeemed after six years.
Having a six-year option – Once the MicroStrategy stock price exceeds $1,498, the conversion can be executed, which is considered very cheap based on the options market.
Early redemption mechanism – The bonds can be sold back at par value (100) after September 15, 2028.
Investors who buy MicroStrategy convertible bonds are likely very bullish on the company’s stock price but do not want to take on too much risk. Therefore, they choose to invest in this way.
Although the liquidity of these convertible bonds is uncertain, according to Bloomberg’s current quote, the price of the new bonds is $109, indicating an issuance premium. The previous 2025 convertible bonds with a conversion price of $398 have soared to $258. This demonstrates MicroStrategy’s astute fundraising methods.
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MicroStrategy
Convertible Bonds
MicroStrategy
