As if the week for Strategy investors wasn’t already bad enough, their capital stack has hit another, new low. Unfortunately, 100% of the company’s convertible debt is now “out-of-the-money.”
With the firm’s 2030A convertible bond notes, the final holdout from last week, joining the other five series in reaching out-of-the-money territory, all six series now have a conversion price above the price of MSTR, Strategy’s common stock.
In plain English, it’s now worse for bondholders to convert into common stock rather than just keeping their bonds as bonds.
As a result, Strategy will need to continue servicing their coupons, and principal cash repayments.
While all bondholders are out-of-the-money, in other words, these convertibles will not convert into MSTR and will, instead, continue to drag on the cash obligations of the company going forward.
These creditors will demand on-time interest payouts and principal repayment through June 2032, unless the price of MSTR starts to rally and sufficiently motivate them to exercise their convertible options.
Strategy’s bonds pay interest coupons of 2.25%, 0.625%, and 0%, depending on their upcoming maturities. The company has $8.2 billion worth of notional debt outstanding.
Read more: Michael Saylor missed out on a $33 billion profit at Strategy
Strategy must service its out-of-the-money debts
Bonds, in capital stack seniority, rank even higher than preferred shares in terms of the company’s cash obligations.
Unlike common stock at the bottom of the stack or preferred dividends which the company’s board of directors may suspend at any time, Strategy must service its debts unless it wants to default.
Defaulting is normally a catastrophic decision from a financial perspective, risking downgrades by credit analysts, uncertainty in pricing listed securities, and possible legal action by the bondholders.
Whereas an in-the-money cushion above the company’s convertibles is widely viewed as a sign of financial strength, all convertibles issued by Strategy have punctured through that safety net.
Sure, they helped the company raise money to buy bitcoin in the past, but now they have long-lasting consequences.
No longer able to convert them into MSTR — unless MSTR rallies substantially — founder Michael Saylor must continue to repay bonds with cash or drum up more demand for MSTR so that its price rallies above bondholders’ conversion price.
Conversion prices for Strategy bonds range from a low of $149.77 to a high of $672.40.
Options traders coined the term out-of-the-money when “the money” simply meant the actual, realizable, current cash value of a position.
Traders used out-of-the-money as a shorthand reference to having no immediate cash worth by exercising a right like an option or warrant.
An option whose strike, or conversion, price was already favorable relative to prevailing prices of the underlying was “in the money” because there was real money on the table.
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