MicroStrategy to Offer Juicy 8% Yield on New Preferred — Barrons.com

Andrew Bary MicroStrategy's coming offering of $250 million of convertible preferred securities is due to carry an attractive yield of 8% and could appeal to retail investors. The deal, unveiled Monday, should have good liquidity with a planned Nasdaq listing under the ticker STRK. The offering is expected to consist of 2.5 million shares of preferred with an offering price of $100 a share. The pricing is due after the close of trading on Thursday. The joint book-running managers are Barclays and Moelis. Retail clients of Fidelity should be able to access the deal. MicroStrategy, the largest corporate Bitcoin holder, has about $6 billion of convertible debt outstanding and the coming preferred deal to be known by its ticker STRK will be its first preferred offering. Preferreds are a form of equity senior to common stock and junior to corporate debt. As with most preferred, the MicroStrategy deal will be perpetual. The preferred will carry a much higher yield than the company's most recent convertible debt, which had an interest rate of zero. The two offsets are that the preferred is junior to the debt and that the conversion price is way out of the money. This means it will take a big move in MicroStrategy's common stock for it to make sense for preferred holders to convert. Holders won't be forced to convert into stock. The preferred could decline if Bitcoin drops but the ample yield could offset that. Specifically, the preferred will convert into common stock at $1,000 per share with investors entitled to convert into a tenth of a share of MicroStrategy stock. That is nearly triple the current price of MicroStrategy common shares, which ended Monday down 1.6% at $348. There would be no point in converting now because the current conversion value is around $35, a fraction of the expected offer price of $100. MicroStrategy stock is valued at nearly double the value of the company's Bitcoin holdings — some 471,000 coins worth $48 billion with Bitcoin around $101,000. MicroStrategy's market value is about $86 billion. This introduces risk to the stock if the Bitcoin premium contracts. MicroStrategy is selling the preferred to diversify its funding sources and bring in a new group of investors. MicroStrategy chairman and controlling shareholder Michael Saylor said in a presentation on Retail Roadshow.com that the preferred would appeal to investors who want "less volatility, and less leverage" to Bitcoin "but still some Bitcoin exposure." It will have less sensitivity to Bitcoin than the company's convertible debt due to the high conversion premium. The most recent $3 billion convertible, priced in November, has a zero percent rate and converts at $672 a share, a 55% premium above the MicroStrategy stock price at the time of the deal of $433. That deal now trades at around $88, a discount to its face value of $100 due to the drop in the stock price since then. The yield on the MicroStrategy preferred would exceed the yields of under 6% on NYSE-listed bank preferred with $25 par values from issuers like JPMorgan Chase and Wells Fargo. Citigroup has a preferred issue now yielding 6.75% traded over the counter. MicroStrategy doesn't have much earnings in a conventional sense. Its Bitcoin holdings throw off no cash now and its software business loses money on a GAAP basis but produced $1 million of cash flow in the latest quarter after stock compensation. Saylor suggested in the presentation that investors should look at the preferred as being supported by the company's huge Bitcoin investment, which dwarfs the debt and preferred outstanding. The company does have the option of paying the dividend in cash or stock. Saylor said that the annual dividend on the preferred of $20 million — 8% of $250 million — isn't burdensome for MicroStrategy. It will be interesting to see if the deal is boosted in size should strong demand materialize. While MicroStrategy is an unconventional company, it's planning to offer a nice 8% yield on its coming preferred deal that looks well secured by its huge Bitcoin holdings. The deal is worth considering for retail buyers. Write to Andrew Bary at [email protected] This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.