Alex Thorn, head of enterprise-wide research at Galaxy Research, shared Galaxy’s analysis of X, adding his voice to the debate surrounding the new digital credit capital framework announced by Strategy.
The new rules have sparked debate over whether or not they will solve the company’s capital structure problems or simply delay them.
How does the Strategy’s new capital framework work?
Strategy (Nasdaq: MSTR) recently disclosed a new “Digital Credit Capital Framework” in an 8-K regulatory filing.
Cryptopolite reported that the framework grants the company formal permission to sell up to $1.25 billion worth of Bitcoin. In particular, the company is faced with a massive unrealized loss of approximately $14 billion from its assets of 847,363 $BTC.
The framework creates a formal USD reserve policy that introduces revised dividend requirements for its STRC preferred stock and authorizes separate repurchase programs for MSTR preferred stock and common stock at $1 billion each.
The board set aside the company’s $2.55 billion cash reserve, limiting its use to preferred dividends and debt interest.
If current spending rates of approximately $1.76 billion per year are maintained, this reserve is expected to last approximately 17 months. If the fully authorized sale of Bitcoin were to be executed, the total liquidity would amount to approximately $3.8 billion, an amount that would cover approximately 26 months of obligations.
Alex Thorn of Galaxy Research underlines that the heart of the debate is whether these new rules actually solve Strategy’s capital structure problems or simply delay them.
The company sold 32 $BTC for around $2.5 million during its first-ever Bitcoin sale in late May to cover a dividend payment. JPMorgan recommended this strategy sells its shares to raise funds rather than selling Bitcoin.
Are investors buying MSTR stock?
MSTR shares rose 12.6% to $92.68 the Monday after the filing was disclosed, and by Wednesday the value had risen. exceeded $100. This figure represents a 27% increase from the previous Friday’s close. THE STRC Preferred Stock also rose, closing at $87.87 on July 3.
Benchmark Equity Research considers this framework a good thing. The company retained its Buy rating on MSTR and set a price target of $570.
Strategy executives, including Chairman Michael Saylor, say the overhaul is necessary to bolster the company’s credit. Saylor said “digital credit requires liquidity, discipline and active capital management.”
Strive, another company pursuing a Bitcoin-backed capital structure, told investors on July 2 that they should not assume the company would automatically issue new SATA preferred shares at a par value of $100, citing abnormal market conditions.
Jeff Walton, Strive’s chief risk officer, shared figures showing that short interest in SATA increased by about 1 million shares in the 30 days to June 30, with borrowing costs increasing from 6.1% to 68.6% APR over the same period.
