Strategy CEO Phong Le acknowledges that the firm failed to anticipate the sheer volume of borrowed funds that would pour into STRC, its $9.3 billion preferred stock that plummeted by 25% over the summer.
Offering a 12% annual dividend, STRC is engineered to hover around its $100 par value. The asset dropped to approximately $75 near the end of June and currently trades near $99.
How Borrowed Money Sank STRC Below $100
During an interview with Natalie Brunell, Le detailed the mechanics behind the crash. He noted that STRC’s price stability encouraged investors to borrow against their Bitcoin (BTC) at roughly a 6% interest rate to capture the 12% yield offered by STRC.
As the price of Bitcoin declined, those leveraged positions faced distress. Investors were forced to either supply additional Bitcoin collateral or liquidate their STRC holdings, causing forced selling that pushed the price downward, according to Le.
“We did not expect the amount of leverage that came into the system,” Le explained.
Le added that opportunistic traders subsequently scooped up STRC shares in the $75 to $90 range, mentioning that he personally purchased some as well.
Why Strategy Chose Buybacks Over a Higher Dividend
Strategy introduced a comprehensive strategy in late June incorporating cash reserves, buyback authorizations, and the flexibility to sell Bitcoin if necessary. The company initiated STRC repurchases in late July.
According to Le, prior efforts to boost the dividend toward 12% failed to elevate the share price. Furthermore, a larger payout would deplete cash reserves and disadvantage common shareholders, whereas buybacks reduce upcoming dividend obligations.
Strategy currently maintains approximately $5.1 billion in its cash reserve, which Le stated is sufficient to cover roughly three years’ worth of dividend payments. These funds are strictly earmarked for preferred dividends and interest on Strategy’s convertible debt.
What It Means for MSTR Shareholders
To finance the recent STRC buybacks, Strategy is utilizing proceeds from common stock (MSTR) sales and potentially Bitcoin liquidations. Pointing out that 95% of his compensation is linked to MSTR’s performance, Le advised investors to maintain a three-year outlook.
Institutional ownership of STRC has climbed from 20% to roughly 30%, Le reported. He anticipates that the asset will recover its $100 valuation as leveraged speculators are supplanted by long-term investors.
“$STRC is a passenger jet. $BTC is a fighter jet. $MSTR is a rocket ship. Buckle up,” Le remarked in a recent social media post.
Strategy announced that the upcoming STRC dividend will be distributed to shareholders of record as of September 30, with payouts scheduled for October 15.