Galaxy Research: Strategy must find ways to monetize its Bitcoin after digital credit framework stopgap

The new rules have sparked a debate about whether or not they will solve the company’s capital-structure problems or simply delay them. 

How does Strategy’s new capital framework operate? 

Strategy (Nasdaq: MSTR) recently disclosed a new “Digital Credit Capital Framework” in a 8-K regulatory filing. 

The framework grants the company formal permission to sell up to $1.25 billion worth of Bitcoin. Notably, the firm is facing a massive unrealized loss of roughly $14 billion on its holdings of 847,363 BTC. 

The framework creates a formal USD reserve policy that introduces revised dividend terms for its STRC preferred shares, and authorizes separate repurchase programs for both preferred stock and MSTR common shares at $1 billion each. 

The board has kept aside the company’s $2.55 billion cash reserve, restricting its use to preferred dividends and debt interest. 

If the current spending rates of roughly $1.76 billion annually are retained, this reserve is expected to last for about 17 months. If the full authorized sale of Bitcoin were to be executed, total liquidity would stretch to approximately $3.8 billion, an amount that would cover about 26 months of obligations.

Alex Thorn of Galaxy Research pointed out that the core of the debate is whether these new rules actually solve Strategy’s capital-structure issues or simply delay them. 

The company sold 32 BTC for about $2.5 million in its first-ever Bitcoin sale in late May to cover a dividend payment. JPMorgan recommends that Strategy sell its shares to raise money rather than sell Bitcoin.

Are investors buying MSTR shares?

MSTR shares climbed 12.6% to $92.68 on the Monday after the filing was disclosed, and then by Wednesday, the value had soared past $100. This figure represents a 27% increase from the prior Friday’s close. The STRC preferred shares also increased, closing at $87.87 on July 3.

Benchmark Equity Research sees the framework as a good thing. The firm kept its Buy rating on MSTR and set a price target of $570. 

Strategy’s leaders, including Chairman Michael Saylor, say the overhaul is needed to strengthen the company’s credit. Saylor said that “digital credit requires liquidity, discipline, and active capital management.”

Strive, another firm pursuing a Bitcoin-backed capital structure, told investors on July 2 that they should not assume the company will automatically issue new shares of its SATA preferred stock at $100 par value, citing abnormal market conditions. 

Strive’s chief risk officer Jeff Walton shared figures showing that short interest in SATA rose by about 1 million shares over the 30 days to June 30, with borrow costs spiking from 6.1% to 68.6% APR over the same period.