Thu 01/19/2023 13:54 PM
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Relevant Items:
Covenants Tear Sheet, Debt Document Overviews
MicroStrategy’s Debt Documents

MicroStrategy Inc. pursues two corporate strategies in the operation of its business. One strategy is to acquire and hold bitcoin, and the other is to expand its enterprise analytics software business. The company’s bitcoin acquisition strategy involves acquiring bitcoin with liquid assets that exceed working capital requirements, and issuing debt or equity securities or engaging in other capital raising transactions with the objective of using the proceeds to purchase bitcoin. The core offering of the company’s enterprise analytics software business is its software platform.

The company has $2.2 billion of debt issued by MicroStrategy, the parent company, consisting of $500 million of 6.125% senior secured notes due 2028 (the “secured notes”) and two series of convertible notes, one maturing in 2025 and the other in 2027 (together, the “convertible notes”). The secured notes are guaranteed by MicroStrategy’s subsidiaries (other than MacroStrategy and its subsidiaries) and are secured by substantially all of MicroStrategy’s assets, which include its software business and, as of Sept. 30, 2022, a total of 14,890 bitcoin. The secured notes spring to maturity 91 days before the maturity of the convertible notes unless certain conditions are met, however the company’s ability to repay the convertible notes is limited under the secured notes indenture. The company’s ability to repay or refinance the convertible notes is discussed in more detail below.

MicroStrategy’s subsidiary MacroStrategy is the borrower under a $205 million term loan. The term loan was secured by 30,051 bitcoin as of Sept. 30. MacroStrategy also held an additional 85,059 bitcoin as of that date that do not secure any debt.

The company’s two-tier capital structure, in particular the treatment of MacroStrategy’s additional bitcoin holdings, is discussed below.

The company’s consolidated capital structure as of Sept. 30 is shown below for reference:
MicroStrategy/MacroStrategy Debt Structure

Although MacroStrategy and its subsidiaries are technically restricted subsidiaries under MicroStrategy’s secured notes, in many ways they have the freedom of an unrestricted subsidiary, including their ability to incur debt secured by their bitcoin holdings. MacroStrategy is carved out from the limitations of the debt covenant, so it can incur unlimited debt. In addition, any crypto assets held by MacroStrategy at the time the secured notes were issued are carved out of the liens covenant; as a result, MacroStrategy may incur unlimited debt secured by the bitcoin that it held on the date the secured notes were issued.

In addition, MacroStrategy is not subject to the secured notes’ asset sale covenant; as a result, it could sell its bitcoin holdings without being required to use proceeds to repay the secured notes. MacroStrategy’s financial results and debt are carved out from the secured notes’ financial calculations, so the incurrence of additional debt and related income expense will not affect any incurrence-based test under the secured notes.

MacroStrategy’s term loan prohibits it from putting additional liens on the 30,051 bitcoin that secure it. However, the loan does not prohibit MacroStrategy from incurring debt secured by its bitcoin holdings that do not secure the loan. The only limitation that the loan places on MacroStrategy’s ability to put liens on its other bitcoin is that if it is unable to maintain certain loan-to-value ratios, it must put up additional bitcoin as collateral; this has already happened once during the term of the loan. If the company’s loan-to-value ratio goes above 50%, the company is required to put additional collateral into the collateral account until the ratio reaches 25% (or, if the company agrees to pay additional interest, 35%). As a result, MacroStrategy must be sure it has sufficient unencumbered bitcoin in the event bitcoin prices decrease and it is required to pledge additional collateral.
Maturity of Convertible Notes

A $650 million tranche of MicroStrategy’s convertible notes matures in 2025. Under the secured notes, the maturity of the secured notes will spring to the date that is 91 days prior to the maturity of the 2025 convertible notes unless on that date either (i) MicroStrategy has liquidity greater than 130% of the amount needed pay off the 2025 convertible notes in full or (ii) less than $100,000 of the 2025 convertible notes are outstanding. As of Sept. 30, MicroStrategy’s liquidity consisted solely of cash of approximately $60 million, so the company is unlikely to satisfy prong (i). This means the company must pay down the convertible notes prior to the day that is 91 days before they mature, or the secured notes will spring to maturity.

However, the secured notes also prohibit the payment, including at maturity, of the convertible notes. While it is typical for a restricted payments definition to prohibit the prepayment of certain types of debt, the secured notes prohibit not only prepayment but any payment of either tranche of the convertible notes. However, there are carve-outs to the prohibition, which will permit the company to refinance the convertible notes with later-maturing debt or to equitize the notes.
Other Covenant Conclusions

Significant issues under the company’s debt documents include the following:
  • Liquidity - As mentioned above, the company’s only liquidity is its cash, which as of Sept. 30 was approximately $60.4 million. The company does not have a revolving debt facility.
  • Debt and liens - At the MicroStrategy level, the company may incur up to $80 million of debt secured by the secured notes collateral, and may incur $50 million of structurally senior debt and $80 million of unsecured debt. At the MacroStrategy level, the company may incur uncapped debt secured by its assets that do not secure its term loan, and may incur uncapped structurally senior debt and unsecured debt.
  • Dividends and investments - MicroStrategy has $30 million of dividend capacity and $90 million of capacity for transfers to unrestricted subsidiaries. MacroStrategy is essentially treated as an unrestricted subsidiary for purposes of dividends and investments and is not limited in its ability to transfer its bitcoin holdings (other than term loan collateral).
  • Prepayments - The company may prepay $30 million of subordinated debt, the convertible notes, new debt that is similar in nature to the convertible notes or any debt incurred under a secured notes debt covenant carve-out by MacroStrategy or its subsidiaries. Issues with payment of the convertible notes are discussed in more detail above.

--Jeff Brenner
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