Strategy's Credit Risk Decreases: Preferred Stock Outweighs Convertible Debt

Strategy’s (MSTR) position in the digital asset market has been significantly strengthened by the strategic shift from traditional debt financing instruments to a more sustainable capital structure. This reduction in credit risk was due to the predominance of the denomination of perpetual preferred shares over outstanding convertible debt, signaling a fundamental change in the management of the company’s financial obligations.

Capitalization of perpetual preferred shares outweighs debt

The total nominal value of Strategy’s four series of perpetual preferred shares is $8.36 billion, exceeding the amount of outstanding convertible debt in the amount of $8.2 billion. This upheaval in the capital structure, confirmed by the company’s dashboard at the beginning of the week, demonstrates a fundamental difference in the management of credit obligations.

The four series of preferred shares are distributed as follows: STRD with a face value of $1.4 billion, STRK with a capitalization of $1.4 billion, STRC with a value of $3.4 billion, and STRF with a capital of $1.3 billion. The total annual dividend payments of these instruments are about $876 million.

How Rethinking Capital Structure Reduces Refinancing and Credit Risks

The key difference lies in the nature of these financial instruments. Convertible bonds create several points of risk: they provide for the mandatory repayment of the principal amount on a certain date, pay fixed interest rates, and have an option to convert into ordinary shares. In the case of Strategy, the first maturity date of the convertible note is at the end of the 2027 with a face value of about $1.2 billion, which creates a specific term for refinancing.

In contrast, perpetual preferred shares do not have maturities and do not require the return of share capital. They pay a fixed dividend and take a priority position over ordinary shares, but remain below ordinary debt obligations in the event of liquidation. As Dylan LeClair, head of bitcoin strategy at Metaplanet, noted, this change “should not only improve absolute credit spreads, but also reduce the volatility of credit spreads.”

Stability of dividends and reserves as a factor of risk minimization

The company is easing additional pressure on credit indicators due to the build-up of cash reserves. At the moment, Strategy holds a reserve of $2.25 billion, which provides reliable dividend coverage and reduces immediate financial risks in the short term. This buffer also reduces the balance sheet volatility that traditionally accompanies companies with significant convertible debt positions.

Capital Base Expansion and Stock Dilution

At the level of ordinary shares, the structure has changed significantly in recent years. The number of issued Class A shares increased to more than 310 million from 76 million in 2020, an almost fourfold increase. While this suggests a massive entry of stocks into the market to fund the expansion of Bitcoin’s portfolio, a larger base of issued shares potentially reduces future dilution pressures in the event of a final conversion of convertible bonds into equity.

Market Signals and Current Dynamics

Strategy shares showed mixed dynamics: they increased by 2.23% to $163.81 in the last trading session and rose by 0.14% on the eve of the main trade. These movements come amid broader trends in the crypto market, where digital assets remain under pressure. Bitcoin is currently trading at 83.69 thousand dollars USA.

Spot trading volumes in crypto assets have almost halved, from $1.7 trillion in the previous year to $900 billion, reflecting investor caution and macroeconomic uncertainty. In such an environment, reducing Strategy’s credit risk through structural reorientation becomes even more important for portfolio managers and analysts assessing exposure to digital asset companies.

Overall, the shift from convertible bonds to perpetual preferred stocks demonstrates how companies can actively manage credit risk even in the volatile sector of the crypto economy, creating a more predictable and sustainable capital structure for long-term growth.