MicroStrategy (MSTR), a Bitcoin-based software development company, announced that it issued a full redemption notice to the trustee of MicroStrategy’s issued 0.750% convertible senior bonds. The total principal amount of the redeemed notes is 6.5 One hundred million U.S. dollars.
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ToggleForced conversion saves nearly $7 million in interest
MicroStrategy first issued convertible bonds due in 2025 in 2020 (CUSIP: 594972 AC5). The total principal amount is US$650 million, the interest rate is 0.75%, and the conversion price is US$398. It will be open for conversion into ordinary shares on April 1, 2021.
Now MicroStrategy notifies the mandatory redemption of "Soft Call", requiring investors to convert the original notes into MicroStrategy's Class A ordinary shares at a price of approximately US$398 before July 11, 2024 (every US$1,000 principal can be redeemed) exchange for 2.5126 shares of Class A common stock). If not converted, MicroStrategy will forcefully redeem all issued notes on July 15, 2024, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest up to the redemption date.
Under these conditions, investors are bound to convert the notes into shares. The note pays annual interest of US$4.875 million, with a maturity date of December 15, 2025. Early redemption now will save the company nearly US$7 million in interest of 0.75% for more than one year.
Compulsory redemption of "Soft Call"
MicroStrategy can do this because there was a "Soft Call" clause when the convertible bonds were originally issued, which allowed the issuing company to redeem the bonds early under certain conditions. These conditions are usually related to the price of the company's stock. For example, if the price of the company's stock exceeds a certain percentage of the conversion price (for example, the price set by the micro strategy is 130% of the conversion price, in this case $517), the company can choose Early redemption of bonds.
At this time, MicroStrategy chooses to compulsorily redeem the "Soft Call", which can also save the company 0.75% interest for more than one year, which is nearly 7 million US dollars.
MicroStrategy issues another 700 million convertible bonds
On the same day as the redemption announcement, MicroStrategy also announced the issuance of US$500 million (later increased to US$700 million) of convertible bonds, which will mature in 2032, with an interest rate of 2.25% and a conversion price of US$2,043.
ABMedia compiled the details of the convertible bonds issued by it as follows.
(In-depth understanding of the operating principle of MicroStrategy’s issuance of convertible bonds: MicroStrategy issues convertible bonds with low interest rates and high stock price conversion prices. What is the operating principle?)
Conversion of shares results in expansion of share capital, which may cause the stock price to fall.
When convertible bonds are converted into stocks, MicroStrategy is bound to issue new shares (in some cases the company may issue them in advance). The biggest benefit to a company from issuing new shares is that it does not have to pay interest fees. But for original shareholders, it will dilute shareholders' equity and reduce earnings per share. To give a simple example, if the company can earn 100 yuan per year, it only needs to be distributed to 10 shareholders in the past, but now it has to be distributed to 14 shareholders, which is naturally detrimental to the original shareholders. This will also directly affect earnings per share (EPS), which is most commonly used by investors to evaluate stock prices. If EPS declines, it may affect everyone's expectations of its stock price, causing the stock price to fall.
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