Strategy strengthens its credit record by replacing convertible debt with preferred equity

Strategy has significantly improved its credit record through a debt reconfiguration strategy that prioritizes perpetual preferred shares over traditional convertible bonds. This move represents a fundamental change in the company’s capital structure, reducing refinancing risks and mitigating credit volatility on its balance sheet.

The notional value of Strategy’s perpetual preferred equity now reaches US$8.360 billion, surpassing the US$8.200 billion of outstanding convertible debt. This figure, recently disclosed by the corporate dashboard, marks an important milestone in the transformation of the company’s financial architecture, which accumulates bitcoin through share issuances.

A stronger credit record: preferred shares surpass convertible debt

The shift from convertible bonds to perpetual preferred shares is key to understanding how Strategy improves its credit record. While convertible bonds are debt instruments with fixed maturity and repayment obligations, perpetual preferred shares operate in a completely different manner.

Perpetual preferred shares have no maturity date and do not impose capital repayment obligations. Instead, they pay a fixed dividend and hold a senior position above common shares, although subordinate to senior debt. This structure eliminates refinancing risk, which characterizes convertible bonds, whose maturities can exert pressure on the balance during adverse market cycles.

Dylan LeClair, bitcoin strategy chief at Metaplanet, highlighted the positive impact of this move in a recent analysis: “By not having convertible bonds with seniority over preferred shares, not only should credit spreads improve in absolute terms, but also reduce the volatility of those spreads.” This observation underscores how Strategy’s credit record benefits from a less fluctuation-prone structure driven by movements in the share price.

Convertible debt vs preferred shares: why structure matters

Convertible bonds introduce complications in financial management. Besides paying interest and maturing on fixed dates, they include an option to convert into common shares under certain conditions. The nearest maturity in Strategy’s convertible bond portfolio is scheduled for the end of 2027, with approximately US$1.200 billion nominal maturing at that time.

The problem with these instruments is that their effective maturity fluctuates constantly with share price movements. This generates volatility on the balance sheet and complicates credit risk assessment. Perpetual preferred shares, on the other hand, offer predictable stability: fixed dividends, no maturity, and no refinancing pressure.

Strategy has issued four series of preferred shares to form its preferred stack: STRD with a nominal value of US$1.400 billion, Strike with US$1.400 billion, Stretch with US$3.400 billion, and Strife with US$1.300 billion. The combined annual dividends of these series amount to approximately US$876 million.

Cash reserve and dividends: stability that drives the credit record

Complementing this safer structure, Strategy has strengthened its cash position with a reserve of US$2.250 billion. This liquidity cushion serves multiple objectives: improving dividend coverage, reducing short-term financing risk, and dampening overall balance sheet volatility. These combined elements consolidate a more resilient credit record.

At the equity structure level, Strategy has significantly increased the number of common shares outstanding as part of its bitcoin accumulation strategy. There are now over 310 million Class A shares outstanding, compared to only 76 million in 2020. This expansion of the equity base could potentially reduce dilution impact if the pending convertible bonds are eventually converted into common shares.

The market has responded favorably to these structural changes. The stock rose 2.23% to US$163.81 during recent trading, reflecting investor confidence in the company’s improved credit trajectory. The price of bitcoin, a central asset in Strategy’s strategy, was trading around $87.67K in the current market.

This transformation of preferred capital demonstrates how financial structure decisions can enhance a company’s credit risk profile. By prioritizing instruments without maturity over traditional debt with repayment obligations, Strategy has built a more solid and predictable credit record, reducing the uncertainty that characterized its previous convertible debt mix.