Bonds for Bitcoin? Hope Michael Saylor Has Friends

(Bloomberg Opinion) -- MicroStrategy Inc. Chief Executive Officer Michael Saylor is going where no Bitcoin bull has dared to go before: to the fixed-rate bond market.

In a first for the fixed-income world, MicroStrategy said in a filing on Monday that it plans to offer $400 million of senior secured debt and will explicitly “use the net proceeds from the sale of the notes to acquire additional bitcoins.” Saylor, one of the most outspoken Bitcoin enthusiasts, already snapped up almost 20,000 tokens at an average price of $52,765 after issuing $1.05 billion in convertible bonds in February. But this latest gambit, with the cryptocurrency trading more than 30% below that price, is effectively asking potential buyers to forfeit much of the upside if Bitcoin rallies back to record highs while taking on the risk that the price drops more and further damages MicroStrategy’s finances.

In other words, Saylor had better have some wealthy and like-minded friends within the “qualified institutional buyer” space — a requirement to take part in MicroStrategy’s private placement. The company is marketing the deal through Tuesday, with Jefferies Financial Group Inc. serving as the sole bookrunner, a person familiar with the matter told Bloomberg News’s Vildana Hajric and Molly Smith.

Again, unless Saylor has a contact list full of fellow Bitcoin bulls in the corporate-bond market, he has a difficult pitch. At the same time as announcing the debt sale, MicroStrategy said it sees a second-quarter impairment loss of at least $284.5 million because of the sharp decline in Bitcoin’s price. The new securities would be backed by “security interests on substantially all of MicroStrategy’s and the guarantors’ assets, including any bitcoins or other digital assets acquired on or after the closing of the offering,” but not the roughly 92,079 tokens it already owns, according to the release. Those holdings, acquired for about $2.25 billion or an average of about $24,450, will be put into a new subsidiary, MacroStrategy LLC.

Of course, this kind of financing makes good sense from Saylor’s perspective. Given his view that companies should put their reserves in Bitcoin because it’s “the most liquid, scarce, uncorrelated asset you can buy,” it stands to reason that he expects the token’s price to soar in the coming years. That would make locking in a fixed-rate loan through 2028, when the proposed $400 million of notes mature, a lucrative arbitrage opportunity. It’s not all that different from states and cities that sell pension-obligation bonds, betting that the rate of return on their investments will exceed the interest rate on the securities. History shows it doesn’t always pay off, but it’s at least better to give it a shot when the market swoons.

For investors, and especially those without such conviction on Bitcoin, the calculus is more complicated. Fixed-rate debt certainly offers less upside potential than, say, MicroStrategy’s convertible bonds from earlier this year. However, those notes have fallen to 72.5 cents on the dollar as the company’s shares plunged to $474 from as high as $1,315 in early February, just a week before the offering. The convertible securities also don’t pay any interest. While it’s not yet clear what kind of yield MicroStrategy’s bonds will offer, it stands to reason that the company will have to pay a sizable premium given yet another impairment charge and the general volatility in Bitcoin’s price.

The corporate-bond market is nevertheless wide open for just about any company, even with the Fed starting to sell its stakes in exchange-traded funds, so it stands to reason that MicroStrategy’s offering will probably find receptive buyers at the right yield. Last month was the busiest May on record in the U.S. junk-bond market, yet the asset class still managed to post gains. In fact, yield spreads are so tight that some investors are specifically focused on buying in the new-issue market as a way to boost returns.

Still, Saylor should be nervous about this unprecedented financing attempt. If yield-starved investors balk at an offering that appears to solidify MicroStrategy as a Bitcoin proxy above all else, or even just demand a punitive interest rate, it would be a highly public rebuke to his worldview. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

©2021 Bloomberg L.P.