mstr

My thoughts on MSTR (not fianancial advice)

I watched this video: https://youtu.be/P5LKZ1-6BWM?si=i8HtMc4QeGlg92gU a few days after it was released, but I'll post it here for the record.

I have never owned a single share of MSTR and I never will. At the end of the day I see the valuation of MSTR going to whatever amount of BTC they end up holding after the bubble pops. I wish the investors luck.

I asked grok what would be the outcome in case Microstrategy goes belly up due to excessive leverage, here is the output. Hint: Stock investors the the last in line to get repaid.

If MicroStrategy (MSTR) were to go bankrupt due to excessive leverage, the process would follow standard bankruptcy procedures, likely under Chapter 11 (reorganization) or Chapter 7 (liquidation) in the U.S. Here’s a breakdown of what would happen and the priority of repayment for stock investors:

What Happens if MSTR Goes Bankrupt?

1. Bankruptcy Filing: If MicroStrategy’s liabilities (e.g., $8.2 billion in debt as of late 2024) exceed its assets (primarily $43 billion in Bitcoin holdings) due to a sustained drop in Bitcoin prices, the company could face insolvency. For example, if Bitcoin falls below $16,500 for an extended period, its assets could dip below liabilities, potentially triggering financial distress or bankruptcy.

2. Asset Liquidation or Reorganization:

   • Chapter 7 (Liquidation): The company ceases operations, and its assets (Bitcoin, software business, etc.) are sold to repay creditors. A bankruptcy trustee oversees the process.
   • Chapter 11 (Reorganization): MicroStrategy could attempt to restructure its debt while continuing operations. This might involve selling some Bitcoin, renegotiating debt terms, or issuing new securities. The court approves major decisions, and management retains some control.

3. Impact of Leverage: MicroStrategy’s high-leverage strategy (19% leverage ratio, with $8.2 billion in debt against $43 billion in assets) relies on Bitcoin’s price stability or growth. A prolonged Bitcoin bear market could erode its asset value, making debt repayment difficult, especially for convertible bonds maturing by 2029 or senior secured notes. Posts on X highlight concerns about convertible notes requiring cash repayment if not converted to equity, which could strain liquidity if Bitcoin prices crash.

4. Michael Saylor’s Role: Michael Saylor, holding 46.8% of voting rights, could influence decisions like avoiding early debt repayment clauses tied to “significant changes” (e.g., shareholder-driven liquidation). However, in bankruptcy, court oversight limits his control.

Priority of Repayment in Bankruptcy

In a bankruptcy, creditors and investors are repaid according to the absolute priority rule, which establishes a clear hierarchy. Stock investors (equity holders) are at the bottom of this list. Here’s the typical order of repayment:

1. Secured Creditors: These include holders of senior secured notes (e.g., MicroStrategy’s $489 million 6.125% notes due 2028, which were repaid early). They have claims on specific assets (e.g., Bitcoin or other collateral) and are paid first, up to the value of their collateral. If undersecured, they join unsecured creditors for the shortfall.

2. Priority Unsecured Creditors: Certain unsecured claims, like employee wages (up to a limit), taxes, or debtor-in-possession (DIP) lenders (who provide funds during bankruptcy), have priority over other unsecured creditors. DIP lenders often get super-priority status, paid ahead of even secured creditors.

3. General Unsecured Creditors: These include bondholders (e.g., holders of MicroStrategy’s 0%–0.75% convertible senior notes due 2029), trade creditors, and others without collateral. They are paid only after secured and priority creditors, often receiving partial recovery. Convertible bondholders may convert to equity (becoming shareholders) or remain creditors, depending on terms and market conditions.

4. Preferred Stockholders: Holders of MicroStrategy’s Series A Perpetual Strike Preferred Stock (e.g., $250 million issued in January 2025) rank above common shareholders but below creditors. They receive priority for dividends or liquidation proceeds over common stock but are still subordinate to bondholders and secured noteholders.

5. Common Stockholders: Stock investors (common equity holders) are last in line. They only receive payment if all creditors and preferred stockholders are fully satisfied, which is rare in bankruptcy. In Chapter 7, shareholders often get nothing, as assets are typically insufficient. In Chapter 11, old shares may be canceled, and new shares issued, diluting or wiping out existing shareholders. Ownership of MicroStrategy’s Bitcoin does not directly translate to shareholder claims, as it’s a company asset subject to creditor claims first.

Specific Risks for MSTR Stock Investors

• Low Recovery Likelihood: Given MicroStrategy’s debt structure ($8.2 billion in liabilities, mostly low-interest convertible bonds), a significant Bitcoin price drop (e.g., to $12,000–$15,000) could push assets below liabilities, leaving little for shareholders after creditors are paid.
• Equity Dilution: MicroStrategy’s strategy of issuing equity (e.g., At-The-Market offerings) and convertible bonds risks diluting shareholders if bondholders convert to stock or new shares are issued in a reorganization.
• Volatility Amplification: MicroStrategy’s stock is highly sensitive to Bitcoin’s price, often falling more sharply (e.g., a 40% Bitcoin drop led to a 55% stock decline in early 2025). Bankruptcy speculation would further depress stock value, potentially to near zero.
• Sentiment on X: Some X users express skepticism about MicroStrategy’s sustainability, noting that bondholders have priority over Bitcoin assets and that equity holders may be unaware of their low claim priority. Others see bankruptcy as unlikely before debt maturities (e.g., 2029), given current asset-liability ratios.

Current Bankruptcy Probability

Recent analyses suggest a low near-term bankruptcy risk:

• Polymarket traders estimated a 2% chance of bankruptcy by May 31, 2025, down from 8% in December 2024, reflecting Bitcoin’s stability above $81,000.
• Macroaxis pegs the probability of financial distress at under 3% (November 2024) to 26% (February 2025), based on Z-Score models, indicating a slight but manageable risk over two years. However, these are probabilistic estimates, and a prolonged Bitcoin bear market could change the outlook.

Key Takeaways

• Stock Investors’ Position: Common stockholders are indeed last in line for repayment in a bankruptcy, behind secured creditors, priority unsecured creditors, general unsecured creditors (including bondholders), and preferred stockholders. They are likely to recover little or nothing if MicroStrategy goes bankrupt.
• Leverage Risk: MicroStrategy’s reliance on Bitcoin and low-cost debt (0%–0.75% convertible notes) amplifies risk. A Bitcoin price crash could trigger a debt crisis, forcing asset sales or bankruptcy.
• Mitigating Factors: MicroStrategy’s $43 billion in Bitcoin assets far exceeds its $8.2 billion debt, providing a buffer unless Bitcoin falls dramatically (e.g., below $16,500 for years). Saylor’s voting control and early debt repayment options (e.g., senior secured notes) reduce immediate risks.

For stock investors, the high-leverage strategy offers potential upside if Bitcoin rises but significant downside in a bankruptcy scenario, where they’d likely lose most or all of their investment. Always consult a financial advisor for personalized investment decisions, as bankruptcy outcomes depend on specific circumstances and court rulings.