MicroStrategy, which is crazy about buying Bitcoin, issues convertible bonds. What is the operating principle?

Author: Chain News Florence

Source: https://abmedia.io/microstrategy-convertible-note-financial-leverage

Based on Bitcoin MicroStrategy (MSTR), a professional software development company, has issued convertible bonds again after three years. The conversion price represents a premium of up to 20% compared to the current stock price. What incentives are there to attract investors to subscribe for this six-year bond with a coupon rate? What about convertible bonds at just 0.625%? And what is the operation method of micro strategy?

MicroStrategy issued convertible bonds again after three years

MicroStrategy announced that it plans to issue a total of US$700 million of convertible senior notes due in 2030. , this issuance will be a private placement for qualified institutional buyers.

●Maturity date: Maturity on March 15, 2030

●Coupon interest rate: 0.625%

●Interest payment date: Interest is paid every half year (3 months per year September 15th and September 15th)

●Conversion price: USD 1,498

●Convertible days: 2024/7/1~2030/3/13

●● Right to sell back: The note can be sold back at the original price (100) after 2028/9/15

The so-called convertible bond means that the bond has additional terms. When the stock price is higher than a certain price, it can be used The bond is converted into stock at an agreed price, and the pricing principle is the corporate bond plus the right to buy the stock option.

Based on the pricing of MicroStrategy’s share price on the day of US$1,246, to the conversion price of US$1,498, the premium is as high as 20%. The coupon rate is only 0.625%. Compared with the current risk-free U.S. ten-year Treasury bond yield of 4.1%, the interest rate is almost negligible. Why are investors willing to buy it?

The timing of MicroStrategy’s issuance of convertible bonds

Let’s first review the three levels of convertible bonds currently issued by MicroStrategy, all with extremely low or even zero coupon rates , the conversion price and the price on the pricing date also have a premium of more than 20%. The list is as follows:

Micro-Strategy began to purchase Bitcoin in September 2020. This is the basis for the starting period. We compare the stock price of MicroStrategy with the price of Bitcoin (orange line) in the following table. Three purple arrows mark the time when MicroStrategy issues convertible bonds. It is found that the issuance time is all within the stock price of MicroStrategy. When the price is significantly higher than the price of Bitcoin, we can speculate:

#Using option pricing while the stock price is high can allow the conversion price to be set at a relatively high point, and the market's Under the enthusiasm, the price of options also rises, so that funds can be obtained at almost zero cost.

Investors’ considerations when buying convertible bonds

So for investors, why should they spend money to buy one where they can’t receive much interest and the conversion price is higher than What about products that are now 20% higher? If you are so optimistic about the micro strategy, wouldn't it be better to just buy it at the current price? We analyze the reasons as follows:

●The risk is low. Even if there is no conversion after six years, you can get back the principal (unless the micro-strategy goes bankrupt)

●Having the option for a six-year period, once the micro-strategy The stock exchange can be executed when the strategic stock price rises above US$1,498, which is very cheap in the option market

●There is an early redemption mechanism: you can sell it back at the original price (100) after 2028/9/15 Bonds (this is the unique redemption mechanism of this convertible bond)

I believe that investors who will buy MicroStrategy convertible bonds should be very optimistic about the stock price of MicroStrategy, but they do not want to take too much risk , so I choose to invest funds in this way.

Although it is not certain how liquid these convertible bonds are, based on Bloomberg’s current quotation, the price of this new convertible bond is US$109, which is still a premium! The price of the previous convertible bond due in 2025, which had a conversion price of US$398, soared to US$258, which shows the clever means of micro-strategy fundraising.

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