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@ 343PG
2025-02-14 12:00:36
Thinking out loud here on the new #MSTR #STRK preference share offering.
These preference shares pay a fixed $8 dividend based on every $100 nominal per share. The current market price is $90, meaning for someone who buys now they yield approx 9% per year.
They convert to 1/10 of MSTR equity, on the request of the holder only, and not the company. The company has no rights to redeem them unless certain circumstances are met (I think it's something like less than 20% of shares are outstanding).
Hence at the moment with MSTR around $325, noone will convert - your $90 market price would only be worth 325/10 = $32.5. This is why you may see the strike price said to be $1,000 - once the share price gets above this then the value of the shares if converted would be $100, so could start to be worth it versus the market value of the STRK preference shares (currently $90). Bear in mind these will move up and down, so it's non trivial.
What I've been struggling with though - why would anyone ever convert when you can continue to pocket the $8 per $100 nominal a year, and always have the option to convert to an ever rising share price?
The answer I've come down with is two fold. Firstly, you may want to sell the investment, and if the share price keeps rising, conversion to normal shares may maximise the value of your investment on selling. Let's say the share price rises to $2,000 - the equity if converted is then worth $200. With that said, we can't say for sure that's more than the market value of STRK at that point, as the market value of $STRK itself will take into account the value of possible conversion! Markets normally remove artibrage, so it's unlikely you could buy STRK and immediately convert to normal equity and sell for an immediate profit. Or maybe a small incentive would be priced into it, as you're sacrificing optionality? Struggling to get my head around this.
The second potential for conversion relates to the fixed dividend. If the share price is at $2,000, and the market value of $STRK is above $200 (as would be logical), you're no longer realising 8% plus on the current value of your investment - you're being paid effectively 4%. So the incentive may exist to convert/sell, and reinvest that money to achieve a higher income stream than the $8.
Let's say there was a $STRK2 issued by #strategy at that point, that paid $8 per $100 starting price, and converted to 1 in 40 MSTR shares.. by selling $STRK at $200, and buying this instead you could double your income stream - so there's your incentive.
I'm no expert here - would love to hear thoughts on this if anyone has them. If anyone reads this let me know you're out here. NOSTR doesn't generally love Saylor / MSTR, but I'd rather have this conversation on here rather than X.
#asknostr
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