Strategy, formerly known as MicroStrategy, plans to issue more perpetual preferred shares to reduce investors' concerns about the common stock's fluctuations, according to the company's CEO.
The message comes as Strategy's stock, with the ticker MSTR, has fallen nearly 17% so far this year.
The CEO says that preferred shares could become an important tool for financing the strategy.
In an interview with Bloomberg, Strategy's CEO Phong Le talked about the price fluctuations of Bitcoin. He said that the volatility is due to the digital characteristics. When BTC goes up, Strategy's plan for digital assets provides greater profits in the common stock.
But during downturns, stocks often lose even more value. He pointed out that Digital Asset Treasuries (DATs), which include Strategy, are designed to track the leading cryptocurrency.
To address this, the company wants to highlight its perpetual preferred shares, named “Stretch.”
“We have developed something to protect investors who want digital capital without the same volatility, and that is Stretch,” said Le to Bloomberg. “I think today’s news is that Stretch closed at 100 USD, just as we had planned.”
The preferred shares provide a floating dividend, now set at 11.25%. The interest changes every month to attract trading around the nominal value of 100 USD.
It is important to know that preferred shares have so far been a small part of Strategy's way of raising capital. The company has sold approximately 370 million USD in common shares and around 7 million USD in perpetual preferred shares to finance its three most recent weekly purchases of Bitcoin.
But Le said that Strategy is now actively educating investors on what preferred shares can do.
“It takes time. It takes marketing,” he said. “This year we have seen very high liquidity with our preferred shares, about 150 times other preferences, and during the year we hope that Stretch becomes a big product for us. We will start to transition from equity to preferred capital.”
MicroStrategy's bet on bitcoin is under pressure as the stock trades below net asset value.
The change could become important when Strategy's regular funding model faces challenges. Strategy continues to buy more Bitcoin and purchased more than 1,000 BTC earlier this week. The latest figure shows that the company owns 714,644 BTC.
But the recent decline in Bitcoin has negatively affected the company’s balance sheet. The current market price is around 67,422 USD per coin, which is far below Strategy's average price of around 76,056 USD. Therefore, the company’s holdings show an unrealized loss of about 6.1 billion USD.
The company's common shares have followed this decline and dropped 5% just on Wednesday. MSTR has overall declined by about 17% this year. At the same time, Bitcoin has lost more than 22% during the same period.
As mentioned earlier, Strategy's strategy for accumulating Bitcoin has been more based on issuing shares. An important figure here is “multiple to net asset value” or mNAV, which shows how the stock is trading compared to the value of Bitcoin per share.
According to SaylorTracker, the diluted mNAV for Strategy is approximately 0.95x. This means that the stock is trading at a discount compared to the Bitcoin backing each share.
The discount makes Strategy’s strategy harder. When shares trade above net asset value, Strategy can issue more shares, buy more Bitcoin, and possibly create increased value for shareholders. When shares trade below net asset value, new issuance risks diluting shareholders.
By using more perpetual preferred shares, Strategy is changing its capital structure to continue buying Bitcoin while trying to reduce investor concerns about volatility and value depreciation.
For MSTR's shareholders, the transition to perpetual preferred shares can reduce the risk of dilution. If Strategy issues fewer common shares, they protect the number of Bitcoin per share and reduce the pressure from sell-offs at a discount.
But the change also brings fixed dividend requirements, so financial commitments increase if Bitcoin continues to be pressured. The plan thus changes the risk profile but does not remove the underlying volatility associated with the digital asset.
