(Bloomberg) — Crypto investor MicroStrategy Inc. is caught in a bind, as Bitcoin’s recent rally has lifted not only its shares, but also its convertible bonds. With the cost of refinancing up by 280%, investors are bracing for the firm to convert the bonds into stock instead.
Most Read from Bloomberg
MicroStrategy’s $650 million convertible bonds due 2025 now trade at around 3.8 times par value as the underlying share price trades well above the conversion price of $397.99, even though the bonds offer just a 0.75% coupon. Convertible bonds are a form of debt that under certain conditions can be paid back with new shares.
The jump in investor interest comes as MicroStrategy’s stock has increased about 390% since the debt was issued in late 2020. With shares closing at $1,512.99 each on Monday, a $1,000 investment in the convertibles is worth nearly $4,000 — what traders would refer to as deep in the money.
That poses a tricky question for a company viewed as a Bitcoin proxy: Should it withdraw the convertible by buying it back for approximately $2.5 billion before it matures in 2025, or allow it to convert into stock, resulting in as much as 1.63 million new shares .
“It’s more likely that a deep in-the-money convertible bond is ultimately converted into shares rather than being bought back by the issuer,” said Michael Youngworth, Bank of America Corp.’s head of global convertibles and preferreds strategy.
Rising Borrowing Costs
Converting bonds into shares causes dilution and drives down the stock, so companies often prefer to refinance their convertibles with debt rather than issue new shares. But that option has become more expensive as borrowing costs have arisen. Issuing stock or a new convertible with a lower coupon can be more appealing.
Story continues
To be sure, whether the company will convert its bond or not remains to be seen. MicroStrategy said at the time of the issue that the convertibles could be converted into cash, shares or a combination of their choosing at a rate of 2.5126 shares per $1,000 principal amounts of notes.
MicroStrategy last year said that it doesn’t have enough cash to redeem the convertible and other long-term secured debt. It held $46.8 million in cash and cash equivalents at the end of 2023, according to a filing.
The company issued $1.4 billion worth of convertibles across two offerings in March, but proceeds were immediately used to buy more Bitcoin. A representative for MicroStrategy didn’t immediately respond to requests for comments.
Read More: MicroStrategy’s 150% Rally Has Room to Run on Bitcoin Halving
Uncertainty about potential equity conversion hasn’t prevented investors from buying MicroStrategy’s and other convertibles that are in the money — including those issued by Palo Alto Networks Inc. and Insight Enterprises Inc. — although it remains to be seen whether they hold on to them.
In one case at least, dilution of a company’s share price didn’t prove fatal. Nvidia Corp., which has seen a strong run-up in its share price, faced a similar challenge about a decade ago. It took less than three years for the company’s $1.5 billion convertible bonds — issued in 2013 with a 1% coupon — to rise well above the adjusted conversion price of $20.02.
With its convertibles trading as much as 5.5 times par value, Nvidia opted to settle the principal amount in cash, funded with $2 billion in regular debt, and the difference above the conversion price with 56.7 million in new shares, according to calculations by Bloomberg.
Most Read from Bloomberg Businessweek
©2024 Bloomberg LP
