Original author: Lian News Florence
Original source: abmedia
MicroStrategy (MSTR), a software development company whose main business is Bitcoin, 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 long-term bond? What about convertible bonds with a coupon rate of only 0.625% in six years? And what is the operation method of micro strategy?
MicroStrategy issues convertible bonds again after three years
MicroStrategy announced that it will issue an aggregate principal amount of US$700 million in convertible senior notes due in 2030 in a private placement to qualified institutional buyers. The issuance conditions are as follows:
●Expiration date: Expires on March 15, 2030
● Coupon interest rate: 0.625%
● Interest payment date: Interest is paid every half year (March 15 and September 15 every year)
● Conversion price: $1,498
● Convertible days: 2024/7/1~2030/3/13
● The right to sell back: the bill can be sold back at the original price (100) after 2028/9/15
The so-called convertible bonds are bonds with additional clauses. When the stock price is higher than a certain price, the bonds can be converted into stocks at an agreed price. The pricing principle is the corporate bond plus the option to buy the stock.
Based on the MicroStrategy stock price of $1,246 on the pricing day, the conversion price to $1,498 represents a premium of up to 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 micro-strategy issuance of convertible bonds
Let’s first review the three convertible bonds currently issued by MicroStrategy. The coupon rates are extremely low or even zero, and the conversion price and price on the pricing date also have a premium of more than 20%. The list is as follows:
MicroStrategy started buying Bitcoin in September 2020. Based on this starting period, we compared the stock price of MicroStrategy with the price of Bitcoin (orange line) in the table below. Three purple arrows mark the transferability of MicroStrategy issuance. Regarding the time of debt, we found that the issuance time is when the stock price of MicroStrategy is significantly higher than the price of Bitcoin. We can speculate:
Pricing options at the same time as the stock price is high can set the conversion price at a relatively high point. Under the enthusiastic market sentiment, the price of options will also rise. In this way, funds can be obtained at almost zero cost.
Considerations for investors when buying convertible bonds
So for investors, why should they spend money to buy a product that earns little interest and whose conversion price is 20% higher than now? 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:
● Low risk, you can get your principal back even if there is no conversion after six years (unless the micro strategy goes bankrupt)
● With a six-year option, the stock exchange can be executed once the MicroStrategy stock price rises above $1,498, which is very cheap in the option market.
● There is an early redemption mechanism: after 2028/9/15, the bonds can be sold back at the original price (100) (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 MicroStrategy's stock price, but they don't want to take too much risk, so they choose to invest funds in this way.
Although it is uncertain 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.
