Author: TVBee
┈➤ Preferred stocks are both genius and rogue
Preferred stocks are a very special financing tool; their legal status is equity, but they have a strong debt attribute economically.
In terms of financial treatment, some are treated as liabilities, while others are treated as equity.
╰✦ The debt-like aspect
Preferred shareholders do not receive high dividends because the company makes a lot of money; instead, they receive dividends at a certain rate periodically, similar to a debt instrument.
Except for STRC, the dividend rate for STRC is floating, but within a certain period, its dividend rate is also fixed.
On the other hand, the dividend direction of STRC is exactly opposite to that of common ordinary shares.
When a normal business performs well, ordinary shares may distribute more dividends. However, when BTC rises, the dividend rate for STRC does not need to increase.
Conversely, when BTC falls, MicroStrategy may need to raise the dividend rate for STRC to facilitate the sale of STRC for financing.
Thus, STRC, like other preferred stocks with fixed dividend rates from MicroStrategy, presents itself as equity on the surface while possessing a strong debt attribute underneath.
╰✦ The equity-like aspect
Unless there are some rigid redemption and payment conditions or other debt-related clauses (these types of preferred stocks are classified as liabilities financially), preferred stocks are usually accounted for under equity items: there is no pressure to repay before the bankruptcy liquidation of the company, and preferred stock dividends are not mandatory liabilities.
This is the magic of Saylor's use of preferred stock for financing; there are no rigid redemption and payment clauses, so these types of preferred stocks from MicroStrategy, financially speaking, are not liabilities in the traditional sense.
Therefore, MicroStrategy's preferred stocks:
Do not count as traditional liabilities → principal will not trigger insolvency, → stopping dividends will not lead to debt default → will not cause bankruptcy liquidation → no repayment pressure
Equity-based preferred stocks form a self-contradictory virtuous cycle, which is somewhat genius.
Thus, preferred stocks are humorously referred to as "perpetual rogue leverage."
┈➤ Can't pay dividends on preferred stocks? They can be accumulated.
If, for a short time, MicroStrategy does not have enough funds to pay the preferred stock dividends, then it can be deferred. STRD does not accumulate dividends; in fact, it’s acceptable to skip them entirely.
Once BTC recovers and rises, MicroStrategy can continue to issue ordinary shares to raise funds to cover the preferred stock dividends.
┈➤ The key to MicroStrategy's bankruptcy lies in convertible bonds
Unless BTC remains in a prolonged bearish state, and the market becomes very pessimistic, making it difficult for MicroStrategy to finance through issuing MSTR over a long time, until the convertible bonds mature, if the stock conversion conditions are not met, MicroStrategy will need to repay the convertible bonds. At this point, MicroStrategy might be forced to sell BTC, creating a cyclical cascade effect.
When the convertible bonds trigger a cyclical cascade, the preferred stock dividends will exacerbate this death spiral.
Thus, stopping the payment of preferred stock dividends can trigger emotional panic in the BTC market. However, convertible bonds will lead to a real crisis.
However, the earliest date for MicroStrategy's convertible bonds to face repayment is September 16, 2027. By that time, it is highly probable that the bear market has ended.
┈➤ MicroStrategy's U.S. dollar reserves
From June 15 to 21, MicroStrategy raised $335.5 million, all from the issuance of MSTR, without increasing the preferred stock.
They purchased 520 BTC, increasing U.S. dollar reserves from $1.1 billion to $1.4 billion.
The preferred stock dividends can cover all up until February 2027, and about half of March 2027.
First, in the last four weeks, MicroStrategy has not issued any additional preferred stock, meaning there is no increase in future dividend expenses and no expansion of risk.
Second, in the last four weeks, MicroStrategy raised financing through issuing common stock $MSTR in the amounts of $128.3 million, $181 million, $209 million, and $333.5 million, strengthening its financing capacity.
Third, in the last four weeks, the purchased BTC amounts were -32, 1550, 1587, and 520 respectively. While the financing amount increased, the purchase of BTC did not increase; thus, it is somewhat unfavorable for $MSTR in the short term but has increased the safety of MicroStrategy’s system in the long term.
By March next year, it is highly likely that the BTC bear market will have ended. Once BTC and MSTR enter an upward channel, MicroStrategy can continue to issue MSTR for financing and use part of those funds to replenish U.S. dollar reserves to pay future preferred stock dividends.
As BTC and MSTR rise, the expenses and pressures from preferred stock dividends will gradually decrease.
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