Issuing new stocks for capital increase to repay debts! Is MicroStrategy finally going to restructure its financial situation?

MicroStrategy submitted a supplemental filing to the U.S. Securities and Exchange Commission (SEC) on Friday (2/17) regarding its additional offering of Class A shares, intending to issue and sell more of its Class A shares. The company mentioned that the funds raised may be used not only to purchase Bitcoin but also to repay debts, including the term loan agreement with Silvergate Bank.

MicroStrategy, in addition to issuing bonds, also raised funds by issuing new shares. In 2021, through Jefferies LLC, the company issued 1,413,767 Class A shares at a price of $727.64 per share, raising nearly $1 billion. In 2022, MicroStrategy signed new stock sales agreements with Cowen and Company LLC and BTIG, LLC, and issued 218,575 Class A shares at an average price of $213.16 per share, raising $46.4 million. According to the sales agreement, MicroStrategy can issue up to $500 million in new shares. The company apparently intends to utilize the remaining balance of over $400 million, taking advantage of the recent rebound in Bitcoin and stock prices to make more flexible financial applications.

According to the annual report released by MicroStrategy, we have summarized their debt as shown in the table below.

MicroStrategy's filings with the SEC indicate that the company plans to repurchase its 0.750% convertible bonds due in 2025, 0% convertible bonds due in 2027, and secured loans due in 2025.

The secured loan due in 2025 is with Silvergate Bank and is a loan secured by Bitcoin. The interest rate is the average interest rate on secured overnight financing announced by the Federal Reserve Bank of New York plus 3.70% (as of February 15, 2023, the rate is 4.42%, currently totaling 8.12%), with a floor rate of 3.75%, maturing on March 23, 2025.

If early repayment is made, a prepayment premium of 0.50% before March 23, 2023, or 0.25% after March 23, 2023, of the remaining principal balance is required. Due to the continuous rate hikes by the Federal Reserve, the interest burden of this loan is increasing. The annual report mentions that the interest for 2022 was $7.7 million. Therefore, despite the penalty for early repayment, MicroStrategy may consider prioritizing the repayment of this loan after March.

As previously reported, MicroStrategy is clearly in a situation of insolvency, as evidenced by the recent annual report. The company's issuance of new shares for capital increase and potential prioritization for debt repayment can be seen as a necessary move in the current uncertain economic environment.