BenWerkman on Nostr: $MSTR Convertible Bond Early Conversions Trigger Warning - Long Post Alright, let's ...
$MSTR Convertible Bond Early Conversions
Trigger Warning - Long Post
Alright, let's get back to some educational MSTR content now that we've gotten plenty of fill of bull content over the past couple of days.
As of today, there are 2 of the convertible notes that are eligible for early conversion:
2027 Notes - $1.05B / 7,330,050 Shares
2030 Notes - $800M / 5,341,600 Shares
There is a difference between the two however. The 2030 notes are eligible to convert ONLY at the request of the bond holders.
The 2027 notes are in a more unique spot. Yes, they too can be converted by the bond holders. However, they also hold a cash redemption ability for MSTR due to the "no-call" period expiring on February 20, 2024 making MSTR also the beneficiary of the "130% Rule".
For the 2030 notes, their no-call period does not expire until March 22, 2027 which is why those notes are purely at the discretion of the bond holders.
Early Conversion by Bond Holders
So let's start with what they have in common. Now that they have both achieved the 20/30 days of the shares price trading 130% above the conversion price (i.e. the 130% rule), the bond holders have the ability to convert these bonds at any time now or in the future.
Yes, this does mean that they could call MSTR tomorrow and request their shares. It does not, however, mean that they will do this.
While the indenture documents do include language describing a "review process" MSTR will undertake at the beginning of each quarter to determine whether notes are eligible to convert, the holders to not need to wait that long. If they do, that review process just means that MSTR will determine eligibility and notify all the bond holders of their bonds right to convert early if they wish.
The only real delays in the conversion process when called by the bond holders will be the time between the request being made/validated and the settlement of the shares from MSTR to the bond holders.
So as you can see, with every single bond currently in countdown for early conversion eligibility, this makes things very interesting very quickly.
What if MSTR calls for Cash Redemption?
Right now, this is what applies to the 2027 bonds. Because they are beyond the "no-call" period, MSTR now has the ability to call for the redemption of the notes in cash.
However, they cannot force a cash redemption. If they do call for the cash redemption, the Bond holders have until up to 2 days before the redemption date that is set to instead request shares. That is certainly the most likely scenario.
But that is not as simple as it sounds, and there is a reason why MSTR may not call for redemption themselves.
A little discussed fact about these bonds is that there is essentially a "riser" clause which protects the bond holders. What it essentially does is increase the number of shares MSTR would need to deliver (beyond what is specified in the press releases when the offerings are closed). The change in amount of shares is a function of the date they are redeemed and the price the stock is trading at.
Here is what that table looks like for the 2027 notes (note this is all pre-split for the share prices, so divide by 10 in your head):
So let's take a look at the February 15, 2024 effective date since that is the last effective date we have passed.
Currently, MSTR is trading at $335 per share. That means that based on this table, MSTR would owe the bond holders an additional 0.253 shares per $1,000 in bonds on top of the 6.981 shares based on the initial conversion rate.
So that is essentially an increase in shares owed of ~3.6% from the initial assumption (which was used in the fully diluted share count metrics).
So as you can see, it is likely in MSTRs best interest to first see if the bond holders want to convert before they decide to call for cash redemption and potentially wind up owing an additional 265,650 shares.
But you can see the issue here, right? It's also in the bond holders best interest to wait just a little longer and hope MSTR calls the redemption even if they want to redeem themselves. After all, why not take some bonus shares if all else is equal? I mean they can just hedge out their current equity exposure if they don't want that risk and their best case is they get more shares, worst case is they get to convert and hopefully roll their capital into the next convertible offering.
So this is a little bit of a game of cat and mouse here. Also, as you see in the table if the share price goes above $350 per share that additional share issuance drops to ~1.6% additional and above $430 it drops to 0.67% additional. So you can see MSTRs incentive to hold off as the economics improve, particularly if they have balance sheet space to pre-issue more converts before they need to make this call anyways.
We are going to learn a lot in how these are handled over the next couple of months, so keep an eye out. We learn more every day with these bonds and with the current strength #Bitcoin is showing we are going to get lots of practice at evaluating these things.
Good luck out there!
Trigger Warning - Long Post
Alright, let's get back to some educational MSTR content now that we've gotten plenty of fill of bull content over the past couple of days.
As of today, there are 2 of the convertible notes that are eligible for early conversion:
2027 Notes - $1.05B / 7,330,050 Shares
2030 Notes - $800M / 5,341,600 Shares
There is a difference between the two however. The 2030 notes are eligible to convert ONLY at the request of the bond holders.
The 2027 notes are in a more unique spot. Yes, they too can be converted by the bond holders. However, they also hold a cash redemption ability for MSTR due to the "no-call" period expiring on February 20, 2024 making MSTR also the beneficiary of the "130% Rule".
For the 2030 notes, their no-call period does not expire until March 22, 2027 which is why those notes are purely at the discretion of the bond holders.
Early Conversion by Bond Holders
So let's start with what they have in common. Now that they have both achieved the 20/30 days of the shares price trading 130% above the conversion price (i.e. the 130% rule), the bond holders have the ability to convert these bonds at any time now or in the future.
Yes, this does mean that they could call MSTR tomorrow and request their shares. It does not, however, mean that they will do this.
While the indenture documents do include language describing a "review process" MSTR will undertake at the beginning of each quarter to determine whether notes are eligible to convert, the holders to not need to wait that long. If they do, that review process just means that MSTR will determine eligibility and notify all the bond holders of their bonds right to convert early if they wish.
The only real delays in the conversion process when called by the bond holders will be the time between the request being made/validated and the settlement of the shares from MSTR to the bond holders.
So as you can see, with every single bond currently in countdown for early conversion eligibility, this makes things very interesting very quickly.
What if MSTR calls for Cash Redemption?
Right now, this is what applies to the 2027 bonds. Because they are beyond the "no-call" period, MSTR now has the ability to call for the redemption of the notes in cash.
However, they cannot force a cash redemption. If they do call for the cash redemption, the Bond holders have until up to 2 days before the redemption date that is set to instead request shares. That is certainly the most likely scenario.
But that is not as simple as it sounds, and there is a reason why MSTR may not call for redemption themselves.
A little discussed fact about these bonds is that there is essentially a "riser" clause which protects the bond holders. What it essentially does is increase the number of shares MSTR would need to deliver (beyond what is specified in the press releases when the offerings are closed). The change in amount of shares is a function of the date they are redeemed and the price the stock is trading at.
Here is what that table looks like for the 2027 notes (note this is all pre-split for the share prices, so divide by 10 in your head):
So let's take a look at the February 15, 2024 effective date since that is the last effective date we have passed.
Currently, MSTR is trading at $335 per share. That means that based on this table, MSTR would owe the bond holders an additional 0.253 shares per $1,000 in bonds on top of the 6.981 shares based on the initial conversion rate.
So that is essentially an increase in shares owed of ~3.6% from the initial assumption (which was used in the fully diluted share count metrics).
So as you can see, it is likely in MSTRs best interest to first see if the bond holders want to convert before they decide to call for cash redemption and potentially wind up owing an additional 265,650 shares.
But you can see the issue here, right? It's also in the bond holders best interest to wait just a little longer and hope MSTR calls the redemption even if they want to redeem themselves. After all, why not take some bonus shares if all else is equal? I mean they can just hedge out their current equity exposure if they don't want that risk and their best case is they get more shares, worst case is they get to convert and hopefully roll their capital into the next convertible offering.
So this is a little bit of a game of cat and mouse here. Also, as you see in the table if the share price goes above $350 per share that additional share issuance drops to ~1.6% additional and above $430 it drops to 0.67% additional. So you can see MSTRs incentive to hold off as the economics improve, particularly if they have balance sheet space to pre-issue more converts before they need to make this call anyways.
We are going to learn a lot in how these are handled over the next couple of months, so keep an eye out. We learn more every day with these bonds and with the current strength #Bitcoin is showing we are going to get lots of practice at evaluating these things.
Good luck out there!