(Bloomberg) – MicroStrategy Inc., already on its way from a software company to a Bitcoin repository, has just sold junk bonds that offer investors a new way to invest money in the cryptocurrency.
The question that worries Wall Street, however, is why there was so much demand for debt when there are simpler and potentially more lucrative ways to invest if Bitcoin ever manages to ‘go to the moon’ – like simply buying Bitcoin itself.
Nonetheless, MicroStrategy had it easy with its offer on Tuesday, the very first unwanted transaction to fund Bitcoin purchases. He originally planned to sell $ 400 million, but had orders for all of it even before officially launching the transaction with a strong hedge fund presence. He raised the offer to $ 500 million and locked in lower prices.
Part of that demand came from investors who want exposure to Bitcoin, but cannot purchase the digital coins directly due to their fund structure, according to a person with direct knowledge of the supply, who asked not to be. identified by discussing private details.
It’s not as wild as it sounds. For years, investors longed for access to crypto as prices skyrocketed, but Wall Street didn’t always make it easy as it struggled to figure out how to incorporate something so new into the old ones. investment frameworks.
And U.S. regulators continue to thwart efforts to list Bitcoin ETFs, which would trade on exchanges like any other stock and dramatically increase access.
Like ETFs, corporate debt is fair game for a wide range of institutional investors. So, for now, dipping a toe into Bitcoin may mean buying seven-year MicroStrategy debt with a yield above 6% – a pretty good yield for a junk bond issued by a company with a credit profile like MicroStrategy, but nothing like what Bitcoin has delivered historically. Over the past seven years, Bitcoin has climbed more than 5,500%.
“A bond has a fixed yield, so you will never have the advantage of Bitcoin, the issuer will,” said Christopher White, CEO of ViableMkts, a financial services company. For bullish cryptocurrency investors, “you might as well buy Bitcoin,” he said.
Buyers of the MicroStrategy deal were drawn to the downside protection inherent in covered bonds – provided by the company’s positive cash flow and intellectual property of the software as well as the Bitcoins that will be purchased – even if they do not have huge upside potential. Bitcoin has plunged since mid-April, losing almost half of its value since then, highlighting the risk of losses.
Investors will receive a 6.125% coupon on the bond, which cannot be redeemed early for the first three years. The new debt is secured by the Bitcoin it is supposed to buy, but not by the company’s current Bitcoin treasury. MicroStrategy has placed the existing 92,079 Bitcoins – with a current value of over $ 3 billion – in a newly formed subsidiary called MacroStrategy LLC, according to a press release.
The new junk bonds could make sense for a traditional high yield bond investor who believes in the fundamentals of the software industry, and even some sort of hedge for those already long on Bitcoin or company equity. . Rated Ba3 by Moody’s Investors Service, three steps in the junk, the deal offers a mark-up over the average yield of 3.22% on double-B-rated bonds, according to Bloomberg Barclays Index data, reflecting the additional risk of ‘be a Bitcoin proxy.
“In theory, you could underwrite this primarily by looking at operating activities and potentially making a decision without having too much of an opinion on Bitcoin,” said Bill Zox, high yield bond portfolio manager at Diamond Hill Capital Management. .
The company previously issued convertible bonds to buy Bitcoin. They have seen mixed results. Notes issued in December are trading well above par at around 131 cents on the dollar and have a lower conversion price than where the stock is currently trading. But those issued in February are trading at deeply distressed levels of just 66 cents on the dollar and have a conversion price of over $ 1,400. The MicroStrategy share price is around $ 480.
If Bitcoin drops too much, causing equity to fall below the two conversion prices, the company may one day have to refinance these two convertible notes with traditional debt. This would increase leverage up to about 19 times, based on a total debt of $ 2.2 billion and $ 115 million in EBITDA, a key measure of profitability, according to a memorandum by offer viewed by Bloomberg. Such leverage is rarely observed outside of situations of great distress.
If Bitcoin falls below $ 6,000, S&P Global Ratings predicts the company will need to swap distressed debt before the convertible debt matures, according to a report released Wednesday afternoon.
With each bond offering, MicroStrategy opens its Bitcoin backdoor even wider to institutional investors.
“Bitcoin has arrived on Wall Street,” CEO Michael Saylor said in a telephone interview. “My mission is to carve a channel between the ocean of $ 400 trillion of conventional assets and the pond of Bitcoin of $ 1000 billion.”
(Updates to the S&P Global Ratings report in the penultimate paragraph.)
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