MicroStrategy's Bitcoin Bet Spurs Convertible Bond Rush
Summary:
Michael Saylor's MicroStrategy has amassed a massive Bitcoin hoard, funded in part by issuing convertible bonds. These bonds have attracted significant interest from insurance companies, mutual funds, and other conservative investors, despite their zero-coupon rate and high conversion threshold.
Reasons for Bond Purchases:
* Some investors see the bonds as a less risky way to gain exposure to Bitcoin.
* Others engage in convertible arbitrage, profiting from MicroStrategy's stock volatility.
* Certain investors simply track the ICE BofA All US Convertibles Index, which includes MicroStrategy.
MicroStrategy's Debt Strategy:
* The company plans to issue $18 billion more in debt to fund its Bitcoin purchases.
* It is expected to raise $42 billion over three years.
* Some investors who previously purchased MicroStrategy convertible bonds have realized substantial gains.
Industry Trends:
* Other crypto companies have followed MicroStrategy's lead, issuing over $14 billion in convertible bonds last year.
* Wall Street firms are exploring new ways to capitalize on the popularity of "Bitcoin bonds."
Skepticism and Concerns:
* Critics warn of the risks associated with MicroStrategy's Bitcoin bet and question the sustainability of its convertible bond strategy.
* The company's heavy reliance on volatile assets and history of comparable convertible bond issuers raise concerns.
Convertible Arbitrage Strategy:
* Investors buy MicroStrategy convertible bonds while shorting its stock, benefiting from the stock's volatility.
* This strategy is enabled by the convertible bond's hybrid nature, which includes both a bond and a call option to convert into stock.
Market Outlook:
* Bitcoin's recent price decline has impacted the value of MicroStrategy's convertible bonds.
* While the convertible bond market is experiencing "crypto indigestion," there remains a demand for appropriately priced deals.