MicroStrategy (MSTR) crypto loan margin call ‘blown out of proportion’
20:04, 15 June 2022
MicroStrategy (MSTR) shares traded up to 12% higher Wednesday, after losing more than 27% this week on fears it would be forced to liquidate some of its Bitcoin (BTC/USD) holdings to cover a margin call on a crypto-backed loan it issued in March. The margin call would need to be re-collateralized in the event Bitcoin traded below $21,000, the company had previously stated.
MicroStrategy CEO Saylor still bullish on Bitcoin - Photo: TwitterEarlier on Wednesday, MicroStrategy CEO Michael Saylor downplayed the potential margin call, saying in an interview on CNBC that “[t]he margin call is much ado about nothing,” and adding the Tyson’s Corner, Virginia, business software developer has the assets to re-collateralise the loan.
MicroStrategy stock moved as high as $176.88 per share, up 12.7% from Tuesday’s $156.99 closing share price on 1.26 million in trading volume, versus a monthly 912,958 trading average. MicroStrategy stock trades on the Nasdaq exchange under the ticker MSTR.
MicroStrategy Inc. (Nasdaq: MSTR) price chart
“Both the mainstream financial press and social media have been abuzz over the potential for MSTR to face a margin call on its bitcoin-backed term loan after the price of bitcoin fell overnight below the price of $21,000, the level that could result in such a call,” said BTIG analyst Mark Palmer in a note to clients.
“[A] margin call would not trigger the kinds of dire consequences that media reports are implying, and, as such, we believe the matter has been blown out of proportion.”
Silvergate, the leading fintech bank behind the venture, would not comment on customer activity or whether MicroStrategy has added Bitcoin to the collateral pool, and MicroStrategy did not return an email seeking comment.
BTIG remains bullish on MicroStrategy, maintaining its ‘Buy’ recommendation with a $950 per share 12-month base-case price target. BTIG has a $1,200 per-share upside scenario on the stock, should Bitcoin prices surpass assumptions and its software business generates greater-than-expected cashflow, allowing it to buy additional Bitcoin.
BTIG’s downside scenario, in the event Bitcoin value declines below assumptions and its transition to a software-as-a-service model stall, is $100 per share.
MicroStrategy stock is 82.3% off its $891 52-week high share price from 9 November, coinciding with Bitcoin reaching a $67,553 all-time high. Bitcoin has lost 70% of its value since reaching the all-time-high price. As of 31 March, MicroStrategy owned 129,218 total Bitcoin, at an average purchase price of $32,000 per Bitcoin, the company reported.
MSTR (blue) vs BTC (red) 2021-YTD - Photo: TradingView
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MicroStrategy stock trades in line with Bitcoin
As part of its treasury cash-management strategy, MicroStrategy routinely buys bitcoin with cash exceeding $50m. BTIG expects MicroStrategy’s subscription-based software revenue will increase 40% and drive EBITDA margins over 20%.
In March, MicroStrategy issued a $205m (£169.8m) three-year interest-only term loan backed by a portion of its Bitcoin holdings via Silvergate Capital (SI) to yield 370 basis points, or 3.70%, over the Secured Overnight Financing Rate (SOFR), which was set at 0.69% as of Tuesday’s market close.
At issue is a loan covenant mandating MicroStrategy maintain a minimum 50% loan-to-value ratio in the reserve account backing the loan. As a result, the margin call would be triggered if Bitcoin lost half its value from the 29 March loan issue date. During MicroStrategy’s 3 May first-quarter earnings conference call, MicroStrategy CFO Phoneg Le confirmed the trigger price for the margin call was “around $21,000.”
Bitcoin traded as low as $20,087 overnight before rebounding to just over $21,000 in mid-day trading.
Bitcoin (BTC/USD) price chart
“[T]he company’s detractors on social media latched onto [the $21,000 margin-call covenant] and falsely described as the level at which the company would face some sort of imagined reckoning,” added BTIG’s Palmer. “The reality is that 95,643 of the 129,218 bitcoins held by [MicroStrategy] are unencumbered and available to the company to post as additional collateral to avoid or address a margin call.”
Additionally, BTIG pointed out the margin call for the Silvergate loan is the “only trigger in [the] company’s capital structure.”
MicroStrategy has adequate excess cashflow to cover current debt service payments, according to BTIG, with an expected $91m in cash flow generated by its business intelligence software business, and a $41m annual interest expense. MicroStrategy has $2.40bn in outstanding debt, including the Silvergate Bitcoin-backed loan, with maturities scheduled through June 2028.
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