Analysis: STRC price stability mechanism largely fails, Strategy may need to repurchase STRC to solve the problem.

Mars Finance News. On June 27, Farside Investors published an analysis of Strategy (MSTR) preferred stock STRC, saying that STRC’s so-called price stabilization mechanism is essentially unstable. The product was issued at $100 and designed with a mechanism to push the price toward $100: if STRC falls below $100, the company can increase dividends to push the price up; if it is above $100, it can reduce dividends to push the price down. If investors believe Strategy’s credit risk is rising, the STRC price should fall, and if the company then increases the dividend rate, it may further weaken the company’s credit standing and lead to a “death spiral.” In addition, the coupon is determined at the company’s discretion and is not an automatic stabilization system, which creates significant uncertainty for investors when evaluating STRC.

From a basic financial logic standpoint, Strategy’s issuance of a perpetual instrument with an 11.5% yield and using the proceeds to buy Bitcoin is a bad trade. Even if Bitcoin’s long-term average annual growth reaches 10%, and combined with long-term inflation of 5%, Bitcoin could still be very successful, but it may not cover the 11.5% annualized cost. If the price of Bitcoin declines periodically, the company may also need to sell BTC at lower prices to pay interest, resulting in net losses. If we assume the STRC coupon remains at 11.5% and use an 8% discount rate, its fair value is $144, significantly higher than the $100 issue price. Under this assumption, issuing STRC is a bad trade for Strategy, but investing in STRC could be a good investment.

However, STRC is not a fixed-rate perpetual bond. Strategy has the right to reduce the coupon by 25 basis points each month, down to the SOFR rate (currently about 3.6%). Considering this right, the estimated value of STRC is about $55. STRC is currently around $75, roughly 25% below the $100 target. The price stabilization mechanism is currently not working, and the company has not responded by increasing the coupon. This means the mechanism has largely failed, and in the future there is no clear reason for STRC to return to $100. If the market expects Strategy to gradually lower the coupon to SOFR, STRC should be closer to $55.

Strategy’s most likely short-term choice is to maintain the 11.5% coupon and temporarily not address the STRC discount issue, continuing to pay the coupon by issuing new shares or selling Bitcoin. However, it believes this only postpones the problem. If the company wants to truly solve the issue, there are mainly two realistic options: first, start repurchasing STRC; second, completely abandon the price stabilization mechanism and cut the coupon to SOFR. Repurchasing STRC may be the most likely outcome, but the company may need some time before it yields to pressure and faces reality.