Last Monday, Michael Saylor, executive chairman of Strategy (formerly MicroStrategy), heralded what he termed a historic milestone for a bitcoin treasury company: Standard & Poor’s (S&P) assigned the firm a formal credit rating. This announcement ignited jubilation among Strategy’s online supporters. Management, during the recent third-quarter earnings call, focused extensively on their various preferred instruments while glossing over the troubling decline in the company’s stock price, which has not only decreased sharply but has also lagged behind bitcoin’s performance markedly.
Strategy’s excitement about the S&P rating seems perplexing. While the company eagerly celebrates this credit rating, S&P bestowed a B- rating, which is significantly entrenched in junk status—six notches deep, to be precise. The rating agency’s report did not deliver a robust commendation, highlighting several weaknesses: a high concentration in bitcoin holdings, a narrow business scope, weak risk-adjusted capital, and low liquidity in U.S. dollars. These issues were only slightly mitigated by the firm’s commendable access to capital markets and prudent capital structure management. Notably, the company has no imminent maturities in the next 12 months and is financing its operations primarily with equity. However, S&P indicated that upgrades to the rating are unlikely in the near future.
Compounding the situation, Strategy was already assigned a B- rating back in June 2024 before S&P withdrew it at the company’s request six months later. This current rating pertains solely to the company itself; its four types of perpetual preferred instruments remain unrated. Insights from a senior debt capital markets banker suggest these preferreds might receive ratings two or three notches lower, placing them around CCC.
What stands out in this scenario is Strategy’s evident yearning for validation from traditional financial institutions, despite its self-alleged stance against the fiat currency system’s flaws. The firm seeks legitimacy from established institutions and analysts while pursuing a coveted membership in the S&P 500. This public pursuit hints at a degree of self-doubt regarding Strategy’s disruptive claims within the cryptocurrency field.
The reinstated junk rating serves as a stark reminder that merely acquiring a larger bitcoin treasury has not improved the company’s credit standing. S&P’s analysis stipulates significant operational challenges, stating that Strategy’s legacy software segment barely breaks even, with negative cash flow from operations amounting to $37 million in the first half of 2020. This financial strain is critical, given the firm’s annual dividend and interest commitments of $689 million, alongside $8 billion in convertible debt—$5 billion of which is out-of-the-money.
To address these liabilities, the firm reportedly plans to continue issuing securities, whether they be preferred or common shares. This cyclical financial dependency leads to a situation where one obligation is funded by creating another, further diluting existing shareholders’ equity. Should there be any impairment to Strategy’s access to capital markets—either through a downturn in bitcoin’s valuation or other unforeseen events—S&P suggests a likely downgrade.
The company posits that its $71 billion bitcoin treasury serves as ample collateral for its obligations; however, this poses a “currency mismatch” challenge, where dollar-denominated liabilities conflict with bitcoin-denominated assets. This situation puts fixed-income investors at significant risk without providing them with the potential rewards associated with bitcoin’s upside. The report hints that should Strategy need to liquidate its bitcoin holdings to meet its obligations, such a sale would likely occur in a downturn when asset values are depressed.
Ultimately, the renewed junk rating should be viewed as a recognition of necessity rather than a celebratory accomplishment. Saylor’s primary method of acquiring additional bitcoin through the issuance of new common shares may be nearing its limit, as continued dilution has adversely affected stock prices. With Strategy’s shares falling even as bitcoin has gained approximately 15% this year, the contrast has been startling.
Investor sentiment is visibly waning, reflected in the decline of Strategy’s premium over net asset value, which has plummeted from over three times to below 1.3 times. The introduction of new preferred stock issues signifies an attempt to seek fresh funding flows that are less dilutive; however, this avenue is faltering. Since the launch of the “Stretch” preferred instrument three months ago, the company has raised the coupon rate thrice, increasing the yield from 9% to 10.5% to lure buyers.
In conclusion, the restoration of the junk rating is not a badge of honour for Strategy. Instead, it reinforces the reality that the firm’s strategy of accumulating bitcoin through the issuance of various securities has failed to enhance its financial foundation, leaving it reliant on ongoing access to capital markets to manage its existing obligations.
