Strategy Buys Itself Time...But There's A Catch

Submitted by QTR's Fringe Finance

This morning Strategy unveiled what is easily its most comprehensive overhaul yet of how it intends to support its growing stack of preferred securities. On paper, it’s a meaningful step forward. The company is creating dedicated cash reserves, formalizing its dividend policy, authorizing billions in buybacks, and introducing a much more disciplined capital allocation framework.

If you’re a holder of Strategy’s preferred shares, there’s a lot to like. If you’re a Bitcoin bull, however, there’s one part of the announcement that should make you stop and think.

Bitcoin popped back over $60,000 on the news, and STRC is up $7 to about $81 per share as of the time of this writing. For the first time, Strategy appears to have explicitly authorized selling Bitcoin as part of its ongoing capital management strategy. That’s a much bigger deal than I think the market is appreciating.

For months, critics have argued that Strategy’s preferred securities relied too heavily on continuous access to capital markets. The company has now gone a long way toward addressing those concerns.

It has established a dedicated $2.55 billion USD Reserve that can only be used for preferred dividends and debt interest. Based on current obligations, that’s roughly 17 months of coverage. Management also says it intends to maintain at least 12 months of liquidity at all times and, when including authorized Bitcoin monetization capacity, estimates total dividend and interest coverage at nearly 26 months.

In other words, they’ve bought themselves time. That’s real progress. Especially if Bitcoin comes roaring back like many think it will.

The company also authorized up to $1 billion in preferred stock buybacks and another $1 billion in common stock buybacks, signaling a shift away from simply issuing new securities every time it needs capital. CEO Phong Le described the change as moving from “one-way capital issuance to active capital management,” and that’s probably the best summary of the entire release. Ostensibly, you’d want to be able to buy back both preferreds under par and common when it trades under mNAV.

Supporters will argue this is exactly what Strategy needed to do. The preferred securities now look more credible from a credit perspective than they did just a few weeks ago. Investors have a dedicated cash reserve backing dividend payments, a formal framework governing liquidity, and management has far more flexibility to opportunistically repurchase securities if they trade at discounts.

If you own STRC, STRF, STRD or STRK, this announcement is difficult to dismiss as anything but as constructive as the company could be right now, give Bitcoin’s price and its equity and preferred prices. But here’s the catch...(READ THIS FULL ARTICLE HERE).