Strategy Unveils Digital Credit Capital Framework, Allows Bitcoin Sales

In brief

Strategy unveiled a "Digital Credit Capital Framework" detailing conditions under which the firm could sell Bitcoin moving forward.

Under a "BTC Monetization Program" approved by the board, the firm "may sell BTC from time to time" to generate up to $1.25 billion for its cash reserve.

The program would also allow for Bitcoin sales to fund preferred stock dividends and repurchases of securities such as common stock when appropriate.

Strategy introduced a "Digital Credit Capital Framework" on Monday detailing conditions under which the Bitcoin treasury firm could sell the digital asset moving forward, offering an updated look at how it plans to balance resources as its flagship preferred stock has come under pressure.

The firm’s board has approved a program allowing Strategy to sell as much as $1.25 billion in Bitcoin to fund its cash reserves, make payouts on products such as Stretch (STRC), or repurchase securities including common stock when deemed appropriate.

“Strategy remains committed to Bitcoin as its primary treasury reserve asset,” co-founder and Executive Chairman Michael Saylor said in a statement. “At the same time, Digital Credit requires liquidity, discipline, and active capital management.”

Saylor noted that the framework is intended to “strengthen credit quality” and enable Strategy to “reduce expected preferred stock dividend payments when accretive.”

Not long after the company’s announcement, Bitcoin changed hands around $59,800, down 0.5% over the past day, per CoinGecko data. Strategy’s shares advanced 5% during pre-market trading to $86.52, according to Yahoo Finance.

In the announcement, Strategy did not unveil a Bitcoin purchase, but rather noted that its so-called USD Reserve had been rebuilt to $2.55 billion. The company had earmarked $2.25 billion at the start of this year for managing dividends and debt.

Strategy indicated that, at its current level, the company’s cash stockpile could cover roughly a year and a half’s worth of dividends. In the event that it sold $1.25 billion worth of Bitcoin, the company said it had enough resources to cover around 26 months of dividend costs.

Analysts had called on the firm to shore up more cash after Strategy’s stockpile had slimmed to cover just 14 months’ worth of recurring costs. Moving forward, Strategy said that it would maintain enough cash to cover dividends for at least a full year.

The company indicated that STRC’s dividend had been raised 50 basis points to 12%, hiking the product’s dividend rate for an eighth time. In recent weeks, STRC has drifted more than 25% from its $100 par value, the level at which it was engineered to trade.

“The actions announced today are intended to support that objective by strengthening preferred dividend liquidity, improving market confidence in Strategy’s Digital Credit Securities, and providing the Company with additional capital allocation tools,” the firm underscored.

STRC jumped as high as $82.50 before the opening bell, according to Yahoo Finance. On Friday, the preferred stock marketed as low-volatility fell as low as $71.25, indicating that market conditions were weighing on investors’ faith in the dividend-paying product.

Strategy noted on Monday that it might not increase STRC’s dividend “solely because” the product traded below par. As STRC set record lows, analysts grew to expect that the Bitcoin-buying firm would raise the product’s dividend in response.

As part of its framework, Strategy said that it could repurchase as much as $1 billion worth of preferred stock, including alternatives such as Strife (STRF), and $1 billion worth of common stock to capitalize on “market dislocations” with funds separate from its USD Reserve.

Strategy said the buyback program was expected to focus on STRC initially, noting purchases at a discount to par might reduce the product’s recurring costs. In less than a year, Strategy has issued more than $10 billion worth of the preferred stock.

As Strategy had moved to rebuild its cash reserves in recent weeks, some onlookers had noted that the activity chipped away at the Bitcoin that the company owns per share, which has long served as the company’s North Star in terms of shareholder value.

Moving forward, the firm indicated that it would not issue more common shares to purchase Bitcoin unless the company were valued at a premium to its holdings. On Monday, the company’s so-called mNAV stood at 0.99, representing a slight discount.

Meanwhile, the firm’s Bitcoin stockpile stood unchanged at 847,363 Bitcoin. At the digital asset’s current level, the company’s holdings were valued at nearly $51 billion. That meant Strategy’s Bitcoin stash showed around $13.1 billion in losses on paper.