The stock of Bloomberg- MicroStrategy Inc. rebounded on Friday, recovering a bit from its recent routs. The ups and downs are not much of a surprise. Chief Executive Officer Michael Saylor has tied his software maker to inexorably, tracking the rises and falls ofBitcoin.
In a single day, none more than $200 billion Wiped Off The Cryptocurrency Market was wiped off in a single day.
MicroStrategy has been on a two-year, debt-fueled Bitcoin buying spree, accumulating billions of dollars worth of them, shifting its focus from developing software to being a proxy for the price of Bitcoin.
There are rules with regards to borrowing. When debt matures, you have to pay back sometimes-giant principal balances to get back some of the collateral you need to pay back. MicroStrategy faces both of those obligations. This week, the price ofBitcoin fell below $26,000, putting within reach price levels that increase the pressure on MicroStrategy.
More than half of the company's shares have lost half their value in the past few weeks due to a rout of the digital currency. Its junk bonds have fallen, too, falling at one point Thursday below 72 cents on the dollar nearing distressed levels. Both of the stocks have rebounded Friday, with the bond up as much as 29% and the junk bonds back above 82 cents.
MicroStrategy borrowed $205 million through a three-year term loan in March, which the company then used to buy more of the criptocurrency. Thousands ofBitcoin are pledged as collateral, which must be valued at $410 million. The earnings conference call early this month said that if the price of Bitcoin drops to $21,000, the company would need to pledge more collateral.
On Tuesday, Saylor took to Twitter to assure investors that MicroStrategy has an additional 115,109Bitcoin that the company can pledge to the loan. If the price of Bitcoin fell below $3,562, the company could post other collateral, he wrote.
That includes $2.2 billion of debt from two convertible bonds and a junk bond. MicroStrategy owned 129,218Bitcoin at the end of March. To be able to fully pay off the principal in a firesale scenario, a token would have to be trading above $18,600 each, which is not necessarily what looms ahead for MicroStrategy.
The company can ride out the ups and downs because the notes have no immediate triggers tied to the price ofBitcoin. The first maturity for the $205 million loan will be in March 2025. The $650 million convertible notes that are due in December 2025 will need to be repaid if the stock price doesn't recover. If those are still outstanding, the $500 million high-yield bond springs ahead to September 2025 - giving MicroStrategy a large debt to pay back at once.
MicroStrategy is essentially a leveredBitcoin play business that doesn't generate enough earnings to repay all the debt. The company needs to depend onBitcoin's value to make its strategy work.
The company s positive cash flow and software intellectual property plus the Bitcoin it helped purchase makes risk-averse debt investors more comfortable with buying the debt.
Even that business is experiencing a hiccup. Revenue fell 2.9% to $119.3 million in the first quarter of 2022, the lowest quarterly revenue since MicroStrategy started its investment strategy in August 2020. Revenue gains were modest in the fourth quarter of 2021, according to a report by the company.
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