Cash-Rich Software Company Mints No-Lose Bitcoin Trade

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MicroStrategy Inc.’s bet on Bitcoin is paying off -- for its bond holders.

When the enterprise software maker issued convertible debt in December with the intention of using the proceeds to add to its Bitcoin pile, the company opened a backdoor for bond investors to play the crypto craze.

To outsiders, the offering seemed “strange” or “a head-slapping moment.” Mature, cash-flow-generating companies rarely tap this corner of capital markets, especially for the risky purpose of funding Bitcoin purchases. Yet those who bought MicroStrategy’s Bitcoin-linked bonds at issuance are sitting pretty -- even though the momentum behind the cryptocurrency’s breathtaking rally has broken.

“This is a classic ‘heads I win, tails we tie’ play,” Dave King, portfolio manager of the $2.6 billion Columbia Convertible Securities Fund, said in an interview. “We win if Bitcoin goes up a lot. And if Bitcoin goes down and stays down, we get our money back.”

What King describes can be applied across the convertible-bond asset class. The securities derive a part of their value from the embedded stock option, which tracks with common shares of the company that sold the debt.

MicroStrategy’s widely broadcast bullish bet on Bitcoin in July 2020, detailing a shift in its cash strategy, tied its shares to crypto. So when the price of Bitcoin doubled, so did MicroStrategy’s shares, pushing the convertible deep into the money. The initial conversion price was $397.99, a level the common stock zoomed past in early January. It now sits above $587. MicroStrategy reports fourth-quarter earnings after the market close on Thursday.

Cash-Rich Software Company Mints No-Lose Bitcoin Trade

For the crypto purist, the bond’s paper gains might look paltry. For the bond investor, however, there’s certain level of comfort in a Bitcoin play backed by debt: If they don’t trade out of it or convert the securities to stock, they’ll get paid back when the notes mature, assuming the company remains operational.

King estimates the value of the company’s Bitcoin in the range of $800 million to $1.4 billion, assuming proceeds of the convertible offering were used to fund more buying. The midpoint of that range would imply an estimated Bitcoin stash worth around 22% of its $5 billion market capitalization.

“The founder had become a big bull on Bitcoin and invested its very large cash pile in it,” he said. “Even if Bitcoin goes down 30% to 40%, the company still has enough to pay this bond off easily.”

Cash-Rich Software Company Mints No-Lose Bitcoin Trade

The upsized $650 million offering had other takers. State Street’s SPDR and BlackRock’s iShares exchange traded funds, First Trust’s actively managed ETF, as well as Westwood Management and Lazard Asset Management funds hold the notes, according to data compiled by Bloomberg. King says he is maintaining his position.

The offering is emblematic of the times, according to Craig Manchuck, a portfolio manager of the $5 billion Osterweis Strategic Income fund, who says the firm passed on the bond.

“It’s a barometer of how speculative markets are now,” he said. “There’s a great fear of missing out, like how teenagers feel when they sit out a party. We are just not in the business of investing in Bitcoin.”

©2021 Bloomberg L.P.

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