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Market Analysis
MicroStrategy Repaid its $205M Debt to a Collapsed Bank With a 21% Discount
Against naysayers, Saylor's macro-micro Bitcoin strategy is paying off.
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On Friday, Michael Saylor’s MicroStrategy filed an 8-K form to the SEC, showing the company paid off its $205 million loan to now-defunct Silvergate. Not only did MicroStrategy pay the loan two years ahead of maturity, but it also bought another round of bitcoins.
Prepaid Loan Discount
Just over two weeks following Silvergate’s voluntary liquidation announcement to pay off creditors, the bank’s last thread to Michael Saylor was cut last Friday. On March 23, 2022, Silvergate issued a $205 million loan to MacroStrategy, a subsidiary of MicroStrategy. The loan was collateralized by 34,619 BTC, tying the company’s fortune to Bitcoin’s performance.
After Silvergate went bust, MicroStrategy (MSTR) assured investors that Silvergate is not involved with Bitcoin’s collateral custody and has no other obligations with the bank. On March 24, 2023, such concerns were finally laid to rest officially.
According to the 8-K filing, MacroStrategy paid off the loan under a heavy discount at $161 million. This 21.46% discount was done under the Prepayment, Waiver, and Payoff to Credit and Security Agreement ahead of the loan’s maturity date on March 23, 2025. Such provision is typically included as beneficial to both parties.
On the one hand, the borrower doesn’t have to pay extra fees and prepayment penalties. And on the other hand, the lender has access to extra liquidity from the sooner-than-expected principal repayment.
MicroStrategy Buys More Bitcoins
In addition to favorable loan repayment, MicroStrategy added to its Bitcoin coffers. For $150 million in cash, MicroStrategy and subsidiaries bought another 6,455 BTC for $23,238 per Bitcoin.
This elevates MicroStrategy’s Bitcoin holdings to 138,955 BTC, at an aggregate purchase price of $4.14 billion. Of the total amount, the average Bitcoin purchase price is now $29,817. After last year’s underperformance of -57%, MSTR stock is now turning a new leaf in Bitcoin’s rallying footsteps.
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Saylor’s Debt Managing Strategy
In August 2022, Michael Saylor stepped down as MicroStrategy CEO, which he co-founded, following a ~$1 billion loss in impairment charges on Bitcoin holdings. In his present position as Executive Chairman, Saylor has been one of Bitcoin’s key evangelists.
In September 2022, despite the bearish cycle and the company’s downturn, Saylor forecasted Bitcoin’s price at $500,000 within a decade. He arrived at that number by framing Bitcoin as comparable to gold, in which gold’s ~$10.5 trillion market cap is divided by Bitcoin’s supply of 21 million BTC.
Saylor’s MicroStrategy became the first publicly traded company to go full-on Bitcoin within this framework. In August 2020, the company bought its first batch of 21,454 BTC at $250 million from its cash reserves.
In December of the same year, MSTR completed a $650 million convertible bonds offering due 2025. In February 2021, MSTR finalized a $1.05 billion convertible bond offering at 0% coupon and 50% conversion premium.
A convertible bond is a type of debt security that can be converted into shares later. This allowed the company to raise capital without diluting its existing shares. In the case of MicroStrategy, the proceeds were used to buy Bitcoin.
The debt-incurring strategy has a long-term outlook, extrapolating from Bitcoin’s ‘sound money’ pitch, specifically, as a hedge against the vulnerabilities of central banking, such as inflation, and fractional reserve banking, such as loss of access to one’s funds.
Although Bitcoin is volatile, Saylor counts on this double-edged sword to land on the positive edge. Between 2012 and 2023, Bitcoin outperformed other potential inflation hedges by a substantial margin.
Under former Goldman Sachs banker Gary Gensler, the Securities Exchange Commission (SEC) has gone to great lengths to prevent Bitcoin’s further appreciation. The regulatory watchdog rejected every single Bitcoin ETF application.
However, this may change soon after Grayscale gained some legal ground in its court case against the SEC. Despite the recent crypto crackdown and the shutdown of two crypto-facing banks (Silvergate and Signature), a Bitcoin ETF could open the floodgates to traditional investors less comfortable holding BTC directly.
Additionally, Bitcoin ETF could cover this digital asset with an aura of institutional legitimacy. Amid the US banking crisis, such an aura has already emerged organically.
Do you think Bitcoin’s gains will materialize per Saylor’s forecast? Let us know in the comments below.
Tim Fries
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.
