1/ Explaining the MSTR BTC bonds thread 👇👇:
2/ In December MSTR issues $650M 2025 convertible unsecured notes with a $400/sh conversion price. MSTR is unlevered, and makes ~$80M in EBITDA. So the notes are basically a loan for BTC with shared upside, and collateralized by both BTC and the MSTR biz at ~50% LTV. Nice trade!
3/ BTC and MSTR promptly rip higher, putting the conversion deep in the money and the converts which sold for $100 in Dec trade up to $320 by February - everyone looks like genius
4/ FOMO kicks in hard! MSTR goes out and issues $1050M 2027 convertible notes at conversion price of $1400/sh with zero coupon! This paper is tragically worse than the original convertible given the conversion strike and dilution of original notes, and impairment of collateral
5/ Now MSTR has $1.7bn of senior capital in front of the common, so the converts is likely not covered by the value of the biz on a LTV, and is more and more a straight BTC loan.
6/ At this point, original converts still trading north of 140 as the strike is in the money, but the second round of converts trade at 70 since the strike is deep OTM, there is no coupon and much less collateral coverage - FOMO chasers getting screwed for doing a bad deal
7/ Now MSTR looks to reload, the problem is they can't do these cheeky converts after the second one flopped. The only way they get new money is if it comes in at the front of the capital stack, SENIOR SECURED in the actual MSTR business which primes all the other debt and equity
8/ So converts wake up realizing their key underlying collateral (the MSTR biz ex BTC purchases) is getting sold out from under them, their strike price effectively increased by $400M, at the same time that BTC and MSTR are selling off.
9/ If MSTR can pull off these senior secured notes, I expect both common & converts to trade off substantially further. The 2025 converts will go out of money causing a massive selloff. Whoever looked like a genius in February is about to go under water if they don't cash out
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