Andrew Bary

The first Bitcoin-related convertible security readily available to individual investors should begin trading on Friday.

MicroStrategy plans to price $250 million of new 8% convertible preferred stock late Thursday. It is expected to begin trading on the Nasdaq Stock Market under the ticker STRK on Friday.

The deal, consisting of 2.5 million shares, is likely to be priced at around $100 per share.

Barron's wrote favorably on the deal Tuesday, given that its yield is some two percentage points better than the less than 6% available on preferreds from major banks. The largest preferred exchange-traded fund, the iShares Preferred & Income Securities, pays 6.2%. Like other preferreds, the MicroStrategy deal will be perpetual, meaning that there is no maturity date.

Why is MicroStrategy issuing the preferred?

The company, the largest corporate Bitcoin holder with nearly $50 billion of the cryptocurrency, wants to diversify its funding sources to buy Bitcoin. It wants a second exchange-traded equity security, in addition to its stock, one with a fixed-income orientation.

"It's an opportunity to attract a new class of investors," said Chairman and controlling shareholder Michael Saylor, who made a roughly 20-minute p resentation on the deal available on retailroadshow.com.

What are the terms of the deal?

The preferred will carry an 8% annual dividend and convert into MicroStrategy stock at $1,000 a share, almost triple the stock price of $341.25 as of the close on Wednesday.

What are the pluses?

Investors will get an 8% dividend yield and a perpetual right to swap their shares for a tenth of a share of MicroStrategy stock. It amounts to an effective perpetual call option on MicroStrategy stock and is valuable even though the stock is now far from $1,000. The STRK securities will have less upside than MicroStrategy common stock but more protection from losses, given the 8% yield.

What kind of backing is there for the preferred?

The company has minimal free cash flow from its software business -- it totaled $15 million last year -- but it has some 471,000 Bitcoins, worth nearly $50 billion. The value of the Bitcoins way exceeds the company's $6 billion of debt plus the value of the new preferred stock.

The annual preferred dividends will be $20 million, assuming a deal size of $250 million. In theory, the company could sell Bitcoin to pay off it debt and support the preferred dividend.

How can I buy it?

Individual investors can buy it through Fidelity if they are customers of the firm, or through a member of underwriting group, which is led by Barclays and Moelis. Once the deal is priced, it will trade on the Nasdaq.

What are the negatives?

The company won't cover the dividends from the current profits of its software business, and the Bitcoin holdings now throw off no income. The company expects to pay the dividends in cash, but can pay them in MicroStrategy stock. There are no credit ratings now on MicroStrategy from Moody's, S&P, or Fitch, three leading credit-rating companies. Moody's had rated MicroStrategy debt at single-B3, a low junk rating, before discontinuing coverage in October.

What is preferred stock?

Preferred is a senior form of equity, and subordinate to debt. MicroStrategy could omit preferred dividends without precipitating a default on them. Dividends should be taxed favorably at a top federal rate of 20%, just like those on common shares.

New York accounting expert Robert Willens says the payout will be "qualified dividend income" since the payer is a domestic company. The dividends would be taxed similarly if they were paid in stock.

What is a convertible security?

A convertible preferred can be swapped for the company's common stock at the holder's option. Investors will be able to swap the preferred for a tenth of a share of MicroStrategy stock. There is no incentive to do so now, but if the stock tops $1,000, it would be profitable. The value of the preferreds could rise if MicroStrategy stock appreciates significantly, even if it stays below $1,000.

How does the new deal compare with MicroStrategy's other convertibles?

The company's other convertibles, including a $3 billion deal priced in late 2024, are debt issues with low rates. The November deal carried a zero interest rate, against 8% on the new preferred.

The debt convertibles have lower conversion prices, meaning it would take less appreciation in MicroStrategy stock to make conversion profitable for holders. That is a favorable feature and is a key reason buyers accepted such a low rate. Those deals were sold as private placements and aren't easy for individual investors to buy.

How will the deal be priced?

The price is expected to be around $100 a share. Some Wall Street convertible-pricing models suggest that fair value is below $100 a share, but that may be too pessimistic. Retail investors generally don't buy based on models.

Could the deal be increased in size?

That is possible. MicroStrategy also may issue more of the preferred in the future, according to Saylor's presentation. That could mean that a lot more than $250 million of the preferred will be outstanding by year-end.

Write to Andrew Bary at andrew.bary@barrons.com

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January 29, 2025 16:05 ET (21:05 GMT)

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