Strategy, formerly known as MicroStrategy, plans to issue more perpetual preferred stock to alleviate investors' concerns about the price volatility of common shares, according to the CEO.
The announcement comes as Strategy's stock, identified by the ticker MSTR, has dropped nearly 17% this year.
CEO: preferred shares can become a significant financial instrument for the strategy
In a recent Bloomberg interview, Strategy's CEO Phong Le addressed the price volatility of Bitcoin. He stated that the volatility stems from its digital characteristics. As the price of BTC rises, Strategy's digital asset strategy significantly boosts its stock returns.
On the other hand, in a downturn, the price of the stock usually declines even more steeply. He noted that Digital Asset Treasuries (DAT), including Strategy, are built to track the leading cryptocurrency.
Due to this dynamic, the company is marketing its perpetual preferred share, named 'Stretch'.
"We have developed a product that protects investors who want access to digital assets without significant volatility – and that is Stretch," Le told Bloomberg. "I think the most important thing of the day is that Stretch settles at a price of $100 – just as planned."
Preferred shares have a variable dividend, currently set at 11.25%. The dividend rate is reviewed monthly, incentivizing trading near a par value of $100.
It is worth noting that preferred shares have so far constituted only a small portion of Strategy's fundraising. The company sold about $370 million in common stock and approximately $7 million in perpetual preferred equity to finance its three previous Bitcoin purchase units weekly.
However, Le noted that Strategy is actively educating investors about what preferred shares can do.
"The matter requires some acclimatization. Marketing is also needed," he stated. "This year we have seen extremely high liquidity in our preferred shares – about 150 times compared to other preferred shares, and over the year we believe Stretch will play a significant role. We intend to gradually transition from equity-based capital to preferred equity capital."
MicroStrategy's bitcoin investment under pressure, with shares trading below net assets.
The change may prove significant as Strategy's traditional funding model is now under pressure. Strategy continues to expand its Bitcoin holdings and bought over 1,000 BTC this week. According to the latest data, the company holds 714,644 BTC.
The recent decline in Bitcoin prices has weighed on the company's balance sheet. At the current market price of approximately $67,422 per coin, Bitcoin is trading well below Strategy's average purchase price of about $76,056. As a result, the company's holdings are currently experiencing an unrealized loss of about $6.1 billion.
The value of the company's common stock has followed this decline, falling alone by 5% on Wednesday. MSTR has decreased about 17% this year. During the same period, the price of Bitcoin has fallen over 22%.
As previously mentioned, Strategy's Bitcoin accumulation has been more reliant on equity shares. A key metric in this model is the ratio to net assets, namely mNAV, which measures how the company's stock is priced relative to its Bitcoin value per share.
According to SaylorTracker's data, Strategy's diluted mNAV was approximately 0.95x, indicating that the stock is trading at a discount relative to the amount of Bitcoin per share.
This discount makes the company's approach more challenging. When the share price is above net assets, Strategy can issue shares, buy more Bitcoin, and potentially create additional value for shareholders. Conversely, if shares trade below net assets, new issuances risk diluting ownership stakes.
By increasing the number of perpetual preferred shares, Strategy appears to be adjusting its capital structure to maintain its Bitcoin purchasing strategy while aiming to meet investor volatility and valuation pressures.
The transition for MSTR shareholders to perpetual preferred shares may reduce dilution risk. As the company utilizes fewer common equity shares, there is more Bitcoin per share, and the pressure from discounts can be limited.
However, the change also increases fixed dividend commitments, meaning financial obligations grow. This could strain the company if Bitcoin prices remain low. Ultimately, the plan alters the risk profile but does not eliminate the volatility associated with Bitcoin treasury.
