Software developer MicroStrategy (MSTR -5.45%) is buying Bitcoin (BTC -4.39%) by any means necessary. Among these fiscal tricks, the company took out a $205 million three-year-term loan backed by Bitcoin collateral almost precisely a year ago.
Unfortunately, the banking partner in that loan was a crypto-friendly bank named Silvergate Capital (SI 9.76%). Silvergate has experienced a brutal bank run over the last few months, which led to its shutting down operations and liquidating its banking assets.
So MicroStrategy had to raise some cash elsewhere in order to pay back its Silvergate loan two years early. That sounds scary at first blush, but there were some upsides to this forced maneuver.
MicroStrategy's repayment gravy
The silver lining of the Silvergate collapse is quite simple. As the failing bank struggles to raise whatever cash it can muster in its liquidation process, it agreed to lower MicroStrategy's repayment costs.
The bank forfeited a prepayment penalty of 0.25%, or roughly $1.3 million. Moreover, MicroStrategy's debt was paid in full with a cash deposit of just $161 million.
This loan was set up as an interest-only agreement. MicroStrategy would make only monthly interest payments at a floating interest rate. The rate was calculated by adding 3.70% to the Federal Reserve's Secured Overnight Financing Rate, which stood at just 0.099% when the loan terms were signed. The interest on MicroStrategy's loan soared as Federal rates were raised in an effort to tamp down skyrocketing inflation:
Secured Overnight Financing Rate data by YCharts
But MicroStrategy had no reason to pay down an interest-only loan with prepayment penalties any earlier than absolutely necessary. So no, the $44 million discount had nothing to do with early payments against the loan's principal balance. It's a straight-up discount that works in MicroStrategy's favor.
Market Reactions: Silvergate soars, MicroStrategy slips
Silvergate investors sure appreciated the news of some incoming cash, sending the bank's shares as much as 42% higher on Monday, when this arrangement was announced. You might expect MicroStrategy's stock price to follow suit, given the solid 21% discount it pocketed on the fully paid loan.
But you'd be wrong, as MicroStrategy's stock fell 6.9% instead.
There were two reasons for this price drop:
- First, Bitcoin prices decreased by 3% on Monday as the Commodity Futures and Trading Commission filed a complaint against Binance and its top executives, citing an "ineffective compliance program" that allegedly allowed Binance to solicit illegal crypto-trading investments from American users. MicroStrategy is sensitive to Bitcoin's price moves, due to its massive hoard of digital coins.
- Then MicroStrategy's investors noticed that the company had printed and sold 1.35 million new shares in order to finance the loan payment and even more Bitcoin buys. With 11.4 million shares outstanding at the start of the year, we're looking at nearly 12% of stock dilution here.
If anything, it's actually surprising that MicroStrategy's stock didn't dive deeper than 6.9% under these circumstances. The discount-rate loan payment may have made a difference to Monday's price moves after all.
As noted a second ago, MicroStrategy isn't exactly slamming the brakes on its Bitcoin-hoarding strategy right now. Stock sales over the last three months raised more than double the Silvergate payment, allowing the company to spend another $150 million on more Bitcoin.
MicroStrategy's unwavering Bitcoin strategy
A widespread banking collapse with close ties to the crypto market didn't scare MicroStrategy chairman Michael Saylor away from his Bitcoin-collecting agenda. Instead, the company continues to grab more of the leading cryptocurrency by hook or by crook.
Suppose you're comfortable with that strategy and convinced that Bitcoin will earn its "digital gold" moniker in the long run. In that case, MicroStrategy's stock could look like a spring-loaded portal into crypto investing. Otherwise, you should stay far away from this stock. MicroStrategy's profitable software business doesn't even enter into the pros-and-cons equation at this point, other than as a cash source for even more Bitcoin buys.
