1. ๐Ÿšจ๐ŸšจAnother $MSTR thread because its too amazing not to - this time from the beginning ๐Ÿ‘‡๐Ÿ‘‡:
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

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More from @TheLastBearSta1

8 Jun
TLDR: MSTR offering today is a lesson in getting PRIMED. Once the 2025 converts go out of the money (which they will), the notes will drop from 135 now to ~70 as they will be forced to price as a zero coupon with a ~7% rate. This is the easiest short in the world.
Math: Current MSTR share price implies $53k BTC price. The conversion on the 2025s implies a $48k BTC price. If the conversion is not in the money, those notes will price as an (almost) zero coupon bond with a ~5% yield. That is 40% down from its current price.
*Not investment advice* (most of us can't short converts anyway)

For a neutral trade, you could short / buy puts on $MSTR paired with long BTC to squeeze the arbitrage.

For directional exposure deep OTM puts could print on further BTC breakdown
Read 4 tweets
8 Jun
1/ Explaining the MSTR BTC bonds thread ๐Ÿ‘‡๐Ÿ‘‡:
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
Read 9 tweets
1 Jun
1. The biggest tail risk to equities IMO is contagion in the Chinese credit market. Here's a quick summary thread:
2. Since the GFC China has seen massive credit expansion, with the majority at the local government (LGFV) or state owned enterprise (SOE) level. This credit expansion is mostly related to property and infrastructure development and is critical to reaching top-down GDP targets
3. This investment is not necessarily productive, particularly in lower tier cities. This massive debt is often short term and so huge quantum's constantly needs to be refi'd.
Read 20 tweets
6 Apr
The Robotaxi Repo - Part 2: A theory of how Tesla utilizes lease accounting and Robotaxis to turn collateralized borrowings into sales and achieve paper profitability. $TSLA $TSLAQ (1/25)
Disclaimer: I have no claim of actual knowledge, all information is sourced from public information. This is not investment advice and all opinions are my own. (2/25)
The Robotaxi Repo Theory: Tesla overstated S/X sales in 2018 using new lease accounting methods, however this led to large 1Q19 writeoff. To avoid further writeoffs, TSLA declares cars appreciating assets in 2Q19, allowing collateralized borrowing to be considered sales. (3/25)
Read 27 tweets
1 Apr
The Robotaxi Repo: How Lease Accounting and Robotaxis allowed Tesla to turn collateralized borrowings into sales, overstate revenues by billions and achieve paper profitability. $TSLA $TSLAQ (1/13)
Tesla reaches scale production of Model 3 in mid-2018, leading to huge Model 3 sales as it worked through pre-sale backlog (2/13)
But by 2019, production capacity outstripped domestic demand, leaving Tesla with excess Model 3s it needed to sell - so it started exporting Fremont production despite its own overseas factories already under construction. (3/13)
Read 14 tweets

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