Re: MSTR-GOAT or Goat?

This is the first time I opined on the shenanigans of the Lord of Cyber Hornets.

Here is a compilation of early Tweets I wrote about MSTR levering up to buy BTC:

2/16/21:

I know the Lord of Cyber Hornets is a genius, but at some point I predict that someone is going BK by levering up to buy a hyper-beta risk asset.

When I was a convertible arbitrageur, I would sometimes negotiate with companies who had ITM convertibles to exchange their convertibles for equity early before their non-call windows were up. This allowed companies to deleverage early. This is what MSTR should be doing.

Most balance sheet implosions and even financial crises stem from a very simple issue: asset / liability mismatch.

Specifically, when short-term liabilities come due, and assets are longer-term and cannot be monetized to meet the liabilities. That’s insolvency.

When a company issues debt (finite maturity liability) to buy a long duration and extremely volatiles asset like BTC, it is fundamentally destabilizing to the cap structure.

The fact that MSTR is loathe to issue equity after a 7x run (which at least is duration matched to the asset he is buying) can only be explained by a bad case of Believing-Your-Own-Bullshit.

That he’s issuing convertible debt instead of straight debt is a tad better, because as I explained earlier, convertible debt offers an easier path to equitization (and therefore duration matching) even before callability (which forces conversion for ITM convertibles).

That said, I think the day will come when Johnny Icarus decides that even that is too dilutive to his funny money equity and decides to issue a 5-year bullet bond or pref to buy BTC. I can’t wait.

2/23/21:

I wonder if MSTR bought BTC yet from its newly issued convertible? Convertibles have a sneaky way of becoming DEBT when your equity declines.

I should clarify: they already ARE debt unless converted to equity, but the fact that they begin to ACT more debt-like upon an equity decline can have a pernicious effect on a company’s cap structure. It’s the “deteriorating credit->deteriorating equity->repeat” death spiral.

Saylor/MSTR is either gonna be GOAT or…

It’s kinda like the reverse of the AOL/TWX dynamic imho. Either way, this will make for some great HBS case studies.

3/4/21:

MicroStrategy recently priced a zero-coupon $1B convertible bond struck at $1432. I’m gonna don my convert arb hat and do a little quick & dirty to show you how dangerous this setup is for the Lord of Cyber Hornets.

The stock is currently trading at 46% of its conversion price, which makes it far OTM and technically a “busted convertible.” But because it’s a zero, it yields a measly 1.8% with a median expected life of 5.5 years.

Question: What yield will bond investors want to pay for a company that mortgaged its creditworthiness to a hyper-beta risk asset (BTC)? Hint: This bond would have to crater 30 points from here to yield ~8%.

Bigger question: If Cyber Hornets wind up being the stinging kind, how does MSTR cough up the cash to redeem a $1B convertible bond?

The Lord of Cyber Hornets basically shorted gamma in BTC in a HUGE way. Can’t believe @zerohedge isn’t all over this.

This is how the artificial supply inelasticity from the HODL effect reverses course very fast potentially.

Let’s not forget MSTR’s first convert struck at $398. It’s not inconceivable that another $650 mm of debt on top of the $1B becomes redeemable at some point.

So $1050 + $650 = $1.7B total DEBT if these convertibles wind up OTM. Total MSTR market cap BEFORE levering up to buy BTC was $1.4B!! Umm...

One thing is for certain: The Lord of Cyber Hornets will either be GOAT or Goat and nothing in between. I volunteer to write the HBS Case Study when this is over.