How much money is left in MicroStrategy, the most important company in the Bitcoin industry, to buy Bitcoin, and how much interest needs to be paid
Auther：Wu Zhuocheng
Ammunition of Debt
On December 9, 2020, MicroStrategy (NASDAQ: MSTR) announced [1] the issuance of $650 million in aggregate principal amount of convertible senior notes, consisting of $550 million in convertible notes and $100 million in options, with a conversion date of December 15, 2025. Among them, the convertible bond coupon rate is 0.750%, semi-annual interest. The conversion price is approximately $397.99 per share, representing a premium of approximately 37.5% over the Closing price of the common stock on December 8 of $289.45. Net proceeds from the sale of the notes were approximately $635 million after deducting initial purchaser discounts and commissions and offering fees. Subsequently, MicroStrategy purchased 29,646 BTC for approximately $650 million in cash [2], with an average price of approximately $21,925. At this point, MicroStrategy holds 70,470 BTC at a total cost of about $1.125 billion and an average purchase price of about $15,964.
On February 17, 2021, MicroStrategy again announced [3] the issuance of $1.05 billion in aggregate principal amount of convertible senior notes, consisting of $900 million of non-interest-bearing convertible notes and $150 million of options, with a conversion date of December 15, 2027. The conversion price is approximately $1,432.46 per share, representing a premium of approximately 50% over the Closing price of the common stock on December 8 of $955.0. Net proceeds from the sale of the notes were approximately $1.03 billion after deducting initial purchaser discounts and commissions and issuance fees. Subsequently, MicroStrategy purchased 19,452 BTC for approximately $1,026 million in cash [4], with an average price of approximately $52,765. At this point, MicroStrategy holds 90,531 BTC at a total cost of about $2.171 billion, with an average purchase price of about $23,985.
On June 8, 2021, MicroStrategy announced [5] that it would issue junk bonds with a total principal of $500 million maturing in 2028, with a coupon rate of 6.125% and semi-annual interest payments, Therefore, interest payments of $1,5312,500 are due on June 15 and December 15 each year. Net proceeds from the sale of the notes were approximately $488 million after deducting initial purchaser discounts and commissions and issuance fees. Subsequently, MicroStrategy purchased 13,005 BTC for approximately $489 million in cash [6], with an average price of approximately $37,617. At this point, MicroStrategy holds 105,085 BTC at a total cost of about $2.741 billion, with an average purchase price of about $26,080.
Ammunition of Stock
On June 14, 2021, MicroStrategy entered into an open market sales agreement with agent Jefferies LLC [7] for an unscheduled offering of common stock through Jefferies for an aggregate price not exceeding $1 billion. As of September 30, 2021, MicroStrategy sold a total of 555,179 shares of common stock through Jefferies at an average price of approximately $727.64 per share, according to the third quarter earnings report [8]. After deducts sales commissions and expenses of $4.5 million, Net proceeds from the stock sale were approximately $399.5 million. The total cost of buying BTC in the third quarter was about $420 million, bringing MicroStrategy's total holdings to 114,042 BTC with a total cost of about $3.16 billion and an average purchase price of about $27,713.
On December 9, 2021, MicroStrategy announced that it had purchased an additional 8,436 BTC in the fourth quarter at a total cost of $496 million and an average price of approximately $58,748. At this point, MicroStrategy holds 122,478 BTC at a total cost of about $3.66 billion, with an average purchase price of about $29,861.
As of Dec. 9, about $100 million of the 1 billion common shares included in the sale agreement remained available for sale.
The ability to pay interest determines whether to sell
Since MicroStrategy's remaining $100 million ammunition is from the sale of shares, there is no interest cost, and the average cost of the total holdings is currently well above the market price, so there is no need for the $100 million to drive down the cost price. In other words, if BTC rises, MicroStrategy will not incur additional losses even if it does not sell the remaining $100 million in shares. And if BTC goes down, that $100 million would be a drop in the bucket. So the real concern is not how much BTC MicroStrategy can still buy, but when it will sell, depending on its ability to pay interest.
As of September 30, MicroStrategy had paid $17.52 million in interest for the year, including $2.0625 million on its interest on first bills, which was paid on June 15, according to its third-quarter earnings report. It is estimated that MicroStrategy will have to pay at least $50,207,500 ($17,520+$206.25+$30,625.5) per year from 2022 onwards.
Over the past two years, MicroStrategy's quarterly EBIT has remained at approximately $10 million (excluding BTC impairment losses) per quarter, $40 million per year. Thus, if revenue does not continue to grow, MicroStrategy's EBIT will not be able to cover interest in the next few years. At that point, the company will have to continue to raise capital or sell BTC to pay off its debt. On the bright side, however, the company currently has about $57 million in cash, which should keep it out of financial trouble until at least June 15 of next year.
Given the high probability of a Fed interest rate hike next June, it's also likely that MicroStrategy won't have enough cash to cover subsequent interest payments, and that the company will face liquidation if its debt becomes unpayable due to the plummeting price of the currency. At this point, the company is unlikely to be able to finance itself with debt over the next four years, as interest expenses have reached the upper limit of the company's operating income. So the only way to get cash flow.
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