If the price of Bitcoin sinks to less than $21,000, Michael Saylor’s software company MicroStrategy could face the “margin call from hell” and be forced to start selling its stockpile of the world’s No. 1 cryptocurrency.
With his risky gambling, Saylor has been accused of turning his software company into a hedge fund.
SEC filings show MicroStrategy owns 129,218 Bitcoins for which it paid $3.97 billion, or $30,700 per coin.
Bitcoin was trading at $35,717 as of 7:29 a.m. EDT, putting the company’s holdings at worth $4.2 billion. The company’s market cap, however, is about $4 billion.
CEO Saylor started buying Bitcoin in August 2020 and keeps buying more, borrowing millions to do so and putting up Bitcoin as the collateral. In the first quarter, Saylor added $215 million worth of Bitcoin at an average purchase price of $44,645 per coin, according to SEC filings.
Saylor has remained bullish about Bitcoin even when it showed signs of slowing down. He once asked investors to sell all their earthly possessions and buy Bitcoin.
“Take all your money and buy Bitcoin,” Saylor said during a debate with Frank Guistra, CEO of the Fiore Group, a private firm managing private equity investments and companies.
But with more than $2.3 billion in long-term debt, MicroStrategy’s stock is down 20+ percent in the past month and close to 65 percent from its February 2021 high of $1,034-plus per share.
In MicroStrategy’s first-quarter earnings call on Tuesday May 4, CFO Phong Le said that if the price of Bitcoin drops below $21,000, the company will be forced to pony up more cryptocurrency to back its $205 million Bitcoin-collateralized loan with Silvergate Bank that was used to buy Bitcoin in the first place.
MicroStrategy still holds “quite a bit” of uncollateralized Bitcoin that it could use to answer any potential margin call, Le noted.
MicroStrategy has recorded declining revenue from its core software-making business since 2014.
One of the largest publicly traded corporate holders of Bitcoin, MicroStrategy has been accused by some traders of trying to pump Bitcoin and manipulate its price to avoid going underwater and being forced to sell.
Michael Kao, a Los Angeles-based investment analyst, broke down MicroStrategy’s debt structure and posed the question: “Re: $MSTR-The Tail Wagging The $BTC Dog?”
“BTC represents ~77% of MSTR’s TEV and 125% of its equity mkt cap,” Kao tweeted on May 3. “Meanwhile, Interest Expense has more than 4x’d to about $44 mm annualized … My back-of-the-envelope indicates that Interest Expense now eats up >40% of EBITDA. After capex, FCF is down from ~$80 mm to about ~$35 mm which doesn’t leave a lot of room for execution error in a slowing growth environment, imho.”
Saylor has some time to pay off his debts, Kao observed. “The first maturity isn’t until 3/23/25. However, he now has $700 mm of SECURED INTEREST BEARING (some of which is FLOATING) DEBT that is eating up his FCF.”
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If business conditions deteriorate and Saylor “trips a covenant or misses his interest payments, ALL MATURITIES ACCELERATE IN BANKRUPTCY,” Kao added. “Rather than thinking about $BTC driving $MSTR’s fortunes, I think it might be the other way around.”
In May 2021, when Saylor bragged on Twitter that “Entities I control have now acquired 111,000 #BTC and have not sold a single satoshi,” Kao described Saylor as the “the Lord of Cyber Hornets” and the “poster-child for crypto-hubris.”
“Instead of $MSTR being dependent on the price of $BTC, what if the latter now depends on the former’s fundamentals to keep holding up in a slowing growth environment before the Lord of Cyber Hornets is forced to delever?” Kao tweeted on May 3, 2022.
Andrew Kang has been hired as MicroStrategy’s new chief financial officer, effective May 9 or thereabouts. Kang worked at home-improvement lender GreenSky Inc. and will replace Phong Le. Le has been the CFO for less than two years, and will stay on as president of the company, MicroStrategy said.
Photo: Michael Saylor, Keynote MicroStrategy World Barcelona 2013, Flickr, https://www.flickr.com/photos/microstrategy/9244288125 https://creativecommons.org/licenses/by/2.0/