MicroStrategy forces conversion of convertible bonds, saving nearly $7 million in interest.

The software development company MicroStrategy, MSTR, whose primary business is Bitcoin, announced that it has issued a full redemption notice to the trustee of its 0.750% convertible senior notes due 2025, with a total principal amount of $650 million.

Forced Conversion Could Save Nearly $7 Million in Interest

MicroStrategy's 2025 convertible bond CUSIP: 594972 AC5, issued as early as 2020, has a total principal amount of $650 million, an interest rate of 0.75%, and a conversion price of $398. Starting from April 1, 2021, it was open for conversion into common stock.

Now, MicroStrategy has notified a "Soft Call" for mandatory redemption, requiring investors to convert their existing notes into MicroStrategy's Class A common stock at approximately $398 per note by July 11, 2024. For every $1,000 principal amount, they can exchange for 2.5126 shares of Class A common stock. Failure to convert will result in MicroStrategy's forced redemption of all outstanding notes on July 15, 2024, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued but unpaid interest up to the redemption date.

Under these conditions, investors are likely to convert their notes into stocks. The notes require an annual interest payment of $4.875 million, with a maturity date of December 15, 2025. Early redemption will save the company over $7 million by avoiding the remaining 0.75% interest for more than a year.

Forced Redemption through "Soft Call"

MicroStrategy's ability to take this action stems from the "Soft Call" provision set when the convertible bonds were issued initially. This provision allows the issuing company to redeem the bonds early under specific conditions, often related to the price of the company's stock. For instance, if the stock price exceeds a certain percentage of the conversion price, such as 130% as set by MicroStrategy at $517, the company can opt for early redemption.

MicroStrategy's decision to opt for forced redemption through "Soft Call" at this time will also save the company over $7 million by avoiding the remaining 0.75% interest for more than a year.

MicroStrategy Issues an Additional $700 Million in Convertible Bonds

On the same day as announcing the redemption, MicroStrategy also revealed the issuance of an additional $500 million, increasing to $700 million, in convertible bonds due in 2032 with an interest rate of 2.25% and a conversion price of $2,043.

MicroStrategy Issues an Additional $500 Million in Convertible Bonds with a High Conversion Price of $2,327, JPMorgan Concerned About Bubble Risk

The breakdown of the convertible bonds issued is as follows:

Understanding the operational principles behind MicroStrategy's issuance of convertible bonds: What is the operating principle when MicroStrategy issues convertible bonds with low interest rates and high stock conversion prices?

Stock Conversion Leading to Dilution, Possible Stock Price Decline

Converting convertible bonds into stocks will necessitate MicroStrategy to issue new shares, which could potentially lead to early stock dilution in some cases. While issuing new shares benefits the company by avoiding interest expenses, it dilutes existing shareholders' equity and reduces earnings per share (EPS) for them. For instance, if a company earns $100 annually and used to distribute it among 10 shareholders, but now has to distribute it among 14 shareholders, it is disadvantageous to the existing shareholders. This directly impacts the evaluation of the stock price by investors based on earnings per share (EPS). A decrease in EPS could affect market expectations and result in a decline in stock price.

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