Convertible bonds in transition: how Strategy reduces credit risk through capital restructuring

Strategy’s financial structure has undergone a significant transformation that moves the company away from traditional convertible bonds towards more stable instruments. The switch from convertible bonds to perpetual preferred shares is a strategic move to reduce refinancing risk and mitigate credit volatility in its portfolio.

Convertible bonds vs preferred shares: Strategy’s structural change

Strategy reached a major financial milestone: the notional value of its preferred perpetual equity exceeded $8.36 billion, surpassing the $8.2 billion of outstanding convertible bonds. This change in capital composition reflects a broader strategy aimed at building a resilient financial foundation to support its aggressive accumulation of bitcoin, which is currently trading around $85.32K.

Convertible bonds operate differently than perpetual preferred stock. Convertibles are debt instruments that provide for the payment of interest and a fixed maturity, with the possibility of conversion into ordinary shares under certain conditions. Their actual seniority varies based on fluctuations in the share price, introducing volatility into the overall balance sheet. The next critical maturity for Strategy’s convertible bonds will come in late 2027, involving about $1.2 billion of nominal debt.

Perpetual preferred shares, on the other hand, do not carry any obligation to repay capital and do not have an expiration date. They pay a fixed dividend and take priority over ordinary capital, while remaining subordinated to senior debt. This structure eliminates the refinancing risk associated with convertible bonds, stabilizing Strategy’s overall credit profile.

How the preponderance of preferred equity reduces volatility and refinancing risk

The increasing dominance of preferred stock creates a more stable capital structure with reduced credit volatility. As highlighted by Dylan LeClair, Bitcoin strategist at Metaplanet, in a recent post on X: “By not having convertible bonds with priority over preferred stock, this should not only improve absolute credit spreads but also decrease the volatility of credit spreads.”

Convertible bonds introduce complexity and risk because their actual credit rating depends on movements in the share price. In the context of Strategy’s bitcoin accumulation strategy, where price volatility can be significant, this dependency amplifies credit uncertainty. The shift to perpetual preferred stock decoupling the credit profile from stock fluctuations, providing investors with more predictability.

The composition of preferred capital: four tools for long-term stability

Strategy’s preferred equity portfolio includes four distinct instruments that together form a resilient capital structure:

• STRD: $1.4 billion in notional value
• STRK: $1.4 billion
• STRC (Stretch): $3.4 billion
• STRF (Strife): $1.3 billion

The combined annual dividends of these instruments amount to approximately $876 million, providing holders with a stable and predictable income stream independent of the underlying bitcoin price dynamics.

Equity dilution and conversion: the buffer that protects against risks

A further risk mitigation factor arising from a possible conversion of the remaining convertible bonds is the broadening of the ordinary equity base. Strategy has significantly increased the number of Class A shares outstanding, from 76 million in 2020 to over 310 million today. This increase reflects the use of stock markets to fund the purchase of bitcoin and represents a reduced dilutive effect in the event that convertible bonds turn into equities.

In addition, Strategy has built up a cash buffer of $2.25 billion. This substantial cash buffer improves dividend coverage, reduces short-term funding risk, and further mitigates the overall volatility of the capital structure.

Market On Edge: When Dogecoin Signals Turbulence

As Strategy implements its transition from convertible bonds to a more stable structure, broad crypto markets are showing signs of volatility. Dogecoin is down about 6.01% in the past 24 hours, underperforming bitcoin and other larger-cap cryptocurrencies amid broader risk aversion.

The token fell below the critical support level at $0.1218 on high volume, turning this level into a short-term resistance despite a brief bounce back towards $0.115. Traders are monitoring the zone between $0.115 and $0.12 as a crucial decision area, with the holding of $0.1218 suggesting a stabilization in the price.

A break below $0.115 would pave the way for a further decline towards lower supports between $0.108 and $0.10, signaling an extension of selling pressure in the memecoin space. This broader market behavior underscores the importance of a solid financial structure for bitcoin storage companies like Strategy, which depend on stability during market volatility cycles.

The significance of the transition from convertible bonds to structural stability

Strategy’s transition from convertible bonds to perpetual preferred shares represents an important evolution in the company’s risk profile. By reducing reliance on debt instruments with fixed maturities and equity-related volatility, Strategy is positioned for more sustainable long-term capital management. In a market environment where uncertainty remains high, this structuring offers both the company and investors greater predictability and reduced exposure to refinancing cycles.