Strategy, formerly known as MicroStrategy, plans to issue additional perpetual preferred shares to alleviate investor concerns about the volatility of its common stock, according to the company's CEO.
The announcement comes at a time when the share of Strategy, traded under the ticker symbol MSTR, has nearly dropped 17% since the beginning of the year.
CEO: preferred shares can become an important financing tool for Strategy
In a recent interview with Bloomberg, Strategy CEO Phong Le spoke about the fluctuations in the Bitcoin price. He attributed this volatility to the digital characteristics of Bitcoin. When BTC rises, Strategy's digital asset reserve plan provides greater profits for the common stock.
Conversely, the shares tend to decline faster during a downturn. Le indicated that Digital Asset Treasuries (DATs), like Strategy, are designed to track the largest cryptocurrency.
To address this dynamic, the company is promoting its perpetual preferred shares, which have been named “Stretch.”
“We have designed something to protect investors who want access to digital capital without that volatility, and that is Stretch,” Le told Bloomberg. “For me, the story of the day is that Stretch ends exactly at $100, as intended.”
The preferred shares offer a variable dividend, currently set at 11.25%. This percentage is adjusted every month to keep the price around $100.
Remarkably, preferred shares have so far formed only a small part of Strategy's capital raising. The company sold about $370 million in common shares and approximately $7 million in perpetual preferred shares to finance the last three weekly Bitcoin purchases.
Still, Le indicates that Strategy is actively working to explain to investors what preferred shares can mean.
“It takes time to mature. It requires some marketing,” he said. “This year we are seeing extremely high liquidity with our preferred shares, about 150 times more than other preferred shares, and throughout this year we expect Stretch to become a major product for us. We will gradually transition from common shares to preferred shares.”
Strategy's Bitcoin gamble under pressure with shares below net asset value
This change could be significant now that Strategy's traditional financing model is under pressure. Strategy is increasing its Bitcoin reserve and bought more than 1,000 BTC earlier this week. According to the latest data, the company holds 714,644 BTC.
However, the recent decline in the Bitcoin price is putting significant pressure on the company's balance sheet. At the current market price of around $67,422 per coin, the Bitcoin price is significantly lower than the average purchase amount of about $76,056 per Bitcoin. This has resulted in an unrealized loss of around $6.1 billion for the company.
The company's common share follows this decline and lost 5% just on Wednesday. MSTR is down about 17% since the beginning of the year. In comparison, Bitcoin has fallen by more than 22% in the same period.
As previously mentioned, Strategy's Bitcoin accumulation plan primarily relies on issuing shares. An important metric here is the multiple relative to net asset value, or mNAV, which measures how the share relates to the value of Bitcoin per share.
According to data from SaylorTracker, Strategy's diluted mNAV was around 0.95x. This means that the share was trading at a discount relative to the underlying Bitcoin per share.
This discount makes the company’s strategy more challenging. If the shares trade above the net asset value, then Strategy can issue new shares, buy additional Bitcoin, and possibly create extra value for shareholders. But if the share trades below the net asset value, a new issuance risks diluting shareholders.
By relying more on perpetual preferred shares, Strategy appears to be adjusting its capital structure to maintain the Bitcoin purchase strategy while trying to address investors' concerns about volatility and value pressure.
For MSTR shareholders, the shift towards perpetual preferred shares may reduce the dilution risk. As the company becomes less reliant on common share issuance, Strategy may hold more Bitcoin per share and face less pressure from cheap share sales.
However, this step does lead to higher fixed dividend obligations, which can increase financial pressure if Bitcoin continues to be under pressure. Ultimately, the plan changes the risk profile, but the underlying volatility does not disappear due to the Bitcoin reserve plan.
