Corporate bonds

Bitcoin: MicroStrategy sells corporate bonds to buy Bitcoin

MicroStrategy Inc. is borrowing $ 400 million to buy more Bitcoin while reducing the value of its existing holdings. This is the very first sale of junk bonds used to fund purchases of the volatile cryptocurrency.

The Tysons Corner, Va.-Based enterprise software company said in a document Monday that senior secure tickets would be available to qualified institutional buyers. The private placement is $ 23 million higher than the company’s total operating cash flow since 2016, according to Bloomberg data. MicroStrategy, in a separate filing, said it is taking a charge of around $ 284.5 million in its next earnings report thanks to losses from fluctuations in the price of the digital asset. This represents more than his cumulative gains since 2011.

MicroStrategy, with Michael Saylor at the helm, has become one of the most bullish public companies on cryptocurrencies. It has already issued convertible bonds worth around $ 1 billion in its quest to collect more coins, despite this being the first-ever corporate bond sale to have proceeds affected. to such purchases. Saylor’s focus on Bitcoin, including making it an official business strategy, has aroused the wrath of critics.

“The $ 400 million in debt is not being used to fund an acquisition or growth. It’s used to speculate on a volatile asset, ”said Marc Lichtenfeld, chief income strategist at the Oxford Club. “Does MicroStrategy still have a business or is it just a proxy for Bitcoin – with borrowed money?” ”

Accounting rules likely forced the company to depreciate Bitcoin once the market value fell below the price at which it acquired the coin. This means that any Bitcoin bought this year could be depreciated when the cryptocurrency briefly touched $ 30,000 last month, unless some of the buying took place during the few days it traded below. this point at the beginning of the year.

Prior to today’s write-downs announcement, MicroStrategy had already taken approximately $ 265 million in charges. That brings the total amount of write-downs to more than $ 500 million, according to its documents and data compiled by Bloomberg.

The company is marketing the offer until Tuesday, with pricing expected thereafter, according to a person with knowledge of the matter. The Notes will mature in seven years and cannot be redeemed for another three. Jefferies Financial Group Inc. is the sole bookrunner in the transaction, said the person, who asked not to be identified as the details are private.

MicroStrategy is in preliminary talks with investors on pricing for a return of 6.25% to 6.5% on its first junk-bond sale, according to separate people with knowledge of the matter, who have asked not to be identified because the transaction is private. By comparison, the junk bond earns an average of 4.01%, according to data from the Bloomberg Barclays Index.

Saylor has been a leading advocate for converting company cash into Bitcoin, saying the Federal Reserve’s easing of inflation policy helped convince him to invest MicroStrategy’s reserves. . The company’s disclosures around Bitcoin and its foray into the digital asset space were one of the catalysts for the coin’s scorching rally in 2020 and early 2021, before it collapsed last month. . The coin traded around $ 35,500 on Monday, down nearly $ 30,000 from its mid-April high.

Earlier this year, Tesla Inc. emerged as one of the few mainstream companies to follow MicroStrategy’s decision to buy Bitcoin, but its CEO, Elon Musk, has since raised questions about the coin’s environmental impact. . Since then, the two CEOs have said they have been working with major North American Bitcoin miners to discuss “transparency in energy use.” The group agreed to form the Bitcoin Mining Council “to standardize energy reports.”

In mid-May, MicroStrategy revealed that it held around 92,079 Bitcoins, which it said were acquired for around $ 2.25 billion at an average of around $ 24,450 per token. Monday’s filing shows that the company’s existing Bitcoin cache will be held by a newly formed subsidiary called MacroStrategy LLC. MicroStrategy did not respond to questions about the new subsidiary.

MicroStrategy’s shares fell 3.1% to $ 469.72 at 2:59 p.m. in New York City. They have almost quadrupled in the past year.