Thread by @LastBearStandng

1. 🚨🚨Another $MSTR thread because its too amazing not to - this time from the beginning 👇👇:

2. $MSTR is a no-growth software business that generally makes decent cash flow. The company had been totally unlevered as accumulated significant cash balances. Historically, the market implied asset value of the business has been $0.7 - $1.5bn, on average ~15x EBITDA

3. Having built up over $600M cash balance by mid-2020, $MSTR decides to invest $250M in BTC at $11k and offer a $250M tender offer on its common with a cap price of $140/sh. $MSTR runs to $140 in a day, capping the tender offer at ~$60m shares

4. $MSTR uses the remaining $175 left from the tender to buy MORE bitcoin at $10k

5. By December, BTC has started to run, and so they issue a $650M unsecured convert with a 0.75% coupon to buy even more BTC. HF's see the convert as well capitalized by the core business, with BTC/MSTR participation on the upside. BTC rockets, $MSTR rockets, the coverts rocket.

6. February: FOMO kicks in and with $MSTR over $1000/sh, they issue $1050M more converts to buy even more BTC. At this point, they have put $1.7bn of senior capital in front of the common, but BTC gains + software asset value show good coverage of the converts

7. By May, with BTC crashing off its highs, and $1.7bn of unsecured debt, no one is willing to provide unsecured debt for $MSTR to gamble on Bitcoin, so $MSTR carves out its software business and maxes out its leverage on underlying business at ~ 7x EV/EBITDA

8. This secured debt is basically a max-leverage HY LBO style loan (naturally its Jeffries leading the deal). So after taking out $1.7bn of unsecured, Saylor puts max secured leverage on his company to buy even more BTC

9. Now that Secured and Unsecured leverage are totally tapped out, the only way to get more capital to dollar average down on BTC is through straight equity offering

10. Since $MSTR common trades at a huge premium to intrinsic value, Saylor takes my recommendation last week and sells $1bn of overpriced equity to go even longer BTC. Basically shorting $MSTR and long BTC. Keep in mind $1bn of equity at $500/sh represents ~20% dilution

11. They will continue to issue equity so long as $MSTR common is overvalued, as its is an arbitrage opportunity to average down on his BTC cost. This only ends when the premium on $MSTR common equity collapses.

12. The converts are getting squeezed from both ends - dilution to their equity upside and huge impairment of their collateral with secured debt priming them. And $MSTR fair value is below their conversion price. $MSTR common is too stupid to realize how over valued it is

13. Meanwhile, with the $1.5bn of new BTC purchases from the secured debt and equity offering $MSTR will have accumulated approximately an entire days worth of actual BTC volume on the blockchain - if prices drop that liquidation will be very ugly

14. The parallels to Archegos are obvious - the providers of each tranche of the $3.2b in new capital made sense in isolation, but did not account for the fact that many others willing would provide even more leverage for BTC effectively creating huge exposure for all of them

15. The only part of the capital stack that is safe is the senior secured on the underlying software business. The rest is a ticking time bomb unless BTC rallies hard

UPDATE 16: Dug into the 2025 converts docs. Noteholders can convert into common if the common equity trades below the 98% x $397/sh strike price for at least five days. In other words, if the equity option goes out of the money, the noteholders can liquidate in $MSTR common...

17. This could explain why the notes have traded very close to the implied equity conversion price despite the credit risk in the structure - they have an escape valve if the equity option goes out of the money. TBD how effective that will be if they all have they same idea

18: UPDATE: $MSTR announcement this morning indicates they just finished investing the $500M senior secured proceeds. Next source of capital is the equity offering. Issuing equity is accretive to the extent $MSTR trades above intrinsic, which is over 50% down from current price.

19: This means any rally will be sold by Saylor himself. Dangerous game as the liquidity escape valve on the 2025 converts is 5 days trading below $390/sh, which was narrowly defended in both May and June.

Update: some smart friends corrected me on the mechanism. Rather than being a fixed price conversion ability, it protects convert holders from deviations between convert price and common price such that the bond holder can sell for an “as converted” value

The conversion option is still relevant though if you consider the “as converted” value to be greater than the underlying asset value as a zero coupon creditor. converts should probably at 80. Currently at 130. Whoever figures that out should liquidate and take gains in common