Michael Saylor's MicroStrategy Faces Risk If MSTR's 0% Convertible Bond Lenders Recall Non-Recourse Loans Due To Covenant Breach: Here's What It Means For Investors

Bitcoin‘s (CRYPTO: BTC) levered play MicroStrategy Inc (MSTR) could face the risk of redemption on its 0% convertible debt upon the occurrence of unforeseen events breaching the covenants governing these notes despite the bonds being an unsecured, senior obligation.

What Happened: Bitcoin prices have dropped over 8.63% in the last one-month and it’s approximately 17% below the all-time high of $108,319.87, as of Jan. 13.

The cryptocurrency is not collateral for the 0% convertible notes as these notes are unsecured. Despite this, any huge price swings could impact the company with the largest Bitcoin reserves.

CEO Michael Saylor‘s MicroStrategy (MSTR) holds 2.116% of the total BTC supply or a total of 444,262 coins, valued at $41.249 billion.

According to its regulatory filings and earnings reports, in the past five years, MicroStrategy (MSTR) has raised $7.27 billion through convertible debt offerings.

With a non-recourse loan, which is more beneficial to borrowers, a lender cannot pursue any of the borrower’s assets in the event of default, except the ones that have been used as collateral.

In the case of MSTR’s 0% convertible bonds, it has no collateral and the default trigger is solely contingent on other financial debt covenants.

See Also: Michael Saylor’s MicroStrategy Convertible Notes To Buy Bitcoin Offer No Interest, So Why Are Investors Rushing To Buy Them?

Why It Matters: If the BTC prices were to fall sharply, the shares of its levered play MSTR will decline too, leading to an erosion in its market capitalization.

Thus, such an event, despite Bitcoin’s not being a direct collateral for the company, could lead the lender to recover 100% of their principal.

In order to shield themselves from this, MicroStrategy (MSTR) has been rolling over their old debts by issuing new ones and also plans to raise monies via additional equity issuance, which could eventually help them with ample liquidity if any corporate event occurs.

MicroStrategy (MSTR) has plans to raise up to $2 billion through preferred stock offerings in the first quarter of 2025. This capital will fund additional Bitcoin purchases as part of its "21/21 Plan," which outlines a strategy to secure $21 billion in equity and $21 billion in fixed-income instruments over the next three years.

As a result, changes in bitcoin prices and the limited supply of the asset could create massive volatility for the company.

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