Strategy had their earnings call today and I was one of the analysts able to participate in the Q&A with the executive team.
Although most people are focused on bull market stuff, I decided to aim my question more toward bear market scenarios and stress testing.
Here's the transcript for that portion if you're interested:
________
Lyn Alden, Research Analyst: So, thank you for the opportunity. So, Strategy navigated the 2022 bear market successfully. And so my question is going to relate to stress testing as it relates to these mid-term BTC ratings. Given that Strategyâs credit products are backed more by assets and capital access than operating cash flows, are there certain bitcoin bear market assumptions or thresholds, either such as in terms of drawdown magnitudes or lengths of time where capital markets might become inconducive for new capital issuance, that youâre planning for as you design these forward leverage ratios, and for your overall capital structure? Thank you.
Michael Saylor, Executive Chairman, Strategy: You know, I think that if we if we equitize the convertible bonds and we go to all preferreds, you can imagine, for example, you have a $100 billion of Bitcoin. You have $50 billion of preferred in an extreme like, the extreme case of 50% leverage case. And if that $50 billion was a debt liability coming due in three years, that would be a lot of risk. And if it was a debt liability coming due in twenty five years, itâd be less risk, but itâll still be something. But if itâs an if itâs actually equity, if if itâs $50 billion preferred equity, it never comes due.
And so now you have a different kind of risk. In that particular case, Bitcoin can draw down 80%, and youâre fine. It can draw down 90%. So I actually think if you look at our our structure, as we migrate to preferreds, we end up with this clock, you know, very, very robust antifragile capital structure where the principal never comes due. And then you have to ask the question, well, where is the liability?
And the liability is in the dividend. You notice when Andrew showed the the liabilities, he showed you three tranches. He showed you the interest liability, the cumulative liabilities, and the noncumulative liabilities. Thatâs because the interest has gotta be paid or youâre in default. The cumulative doesnât have to be paid, but if you donât if you suspended, it accumulates, so itâs still a liability.
And then the noncumulative, you could suspend it, and it isnât a liability. So when you add all that up, you know, you you imagine that youâve got $50,000,000,000 and you have even if you had a 10% dividend, that means youâre down to $5 billion. So on a $100 billion of assets, youâve got $5,000,000,000 of dividend liabilities, but some of them are more collapsible than others of them. But so you say to yourself, well, what happens if Bitcoin falls 95%? Youâd still make youâd still meet those liabilities most likely.
You you might in you know, you might in a 95% drawdown, you might suspend something. But you can see, you know, for the most part, no one really contemplates, you know, more than the 80% extreme craze case of the crypto well, I guess the crypto winter is, like, 75% or something. You would know. $66,000 to 16,000, I guess, was, like, the peak to trough. Call it 80%.
I think that our structure is is smooth, and we wouldnât miss a single dividend payment on an 80% drawdown. On a 90% to 95% drawdown, in theory, you might suspend something for a little bit of time, but you would eventually get back current on it. So, you know, so I think in terms of robustness, itâs itâs pretty robust. And if you compare it to the fragility of a credit conventional bank, you know, weâre think about the leverage weâve got in order to generate our earnings. Weâve got maybe 1.2 leverage.
Typical banks got ten, twenty x leverage to get their earnings. So this model is is orders of magnitude less less risky than a conventional banking model. Phong, Andrew, do you guys have anything to add on that?
Phong Le, President & Chief Executive Officer, Strategy: I can add, Lyn. We we we weâve had the benefit of being a Bitcoin treasury company for five years. We went through a crypto winter in 2022 with a much more fragile debt structure and capital structure. We had a Silvergate margin loan, that was Bitcoin backed. We had a secured note that had onerous, you know, clauses, and and and so, we learned a lot from that.
You know? And and at that point in time, our most pristine debt were our convertible notes. And now I think weâre much more prepared for a Bitcoin drawdown because over time, we wonât have we already donât have, secured notes. We donât have a margin loan. Over time, we may not have convertible notes.
And to Mikeâs point, we we will be relying on perpetual preferred notes that donât ever, come due. So, I think we learned a lot, during this period of time, and and we hope to to share that with everybody out there.
Lyn Alden, Research Analyst: Thank you.
Michael Saylor, Executive Chairman, Strategy: And, of course, the point is we did survive the 80% drawdown with a much weaker capital structure. So, so this capital structure is is bulletproof compared to that one. So, so I think weâre good to 90%. And if it goes below 90%, then weâll shuffle a few things around. Itâll be colorful.
