STRC Preferred Stock: Why Is it Struggling to Return to $100?

Original Author: @100y_eth

Original Compilation: AididiaoJP, Foresight News

Under current conditions, there is no reason for STRC to return to $100.

The mechanism originally designed to maintain STRC trading near $100 is as follows: If the STRC price falls below $100, the dividend yield would increase due to the price drop, and Strategy may also raise the nominal dividend rate above 11.5%. Since Strategy has the right to buy MSTR at $101 per share, price increases beyond that level are capped. If Strategy goes bankrupt, STRC holders have a claim to $100 per share plus accumulated unpaid dividends. For STRC to return to $100, the aforementioned mechanism needs to function properly.

Dividend Rate Adjustment Cannot Be a Fundamental Solution

First, raising the dividend rate is unlikely to be effective for two reasons. A higher dividend rate would become a financial burden for Strategy, potentially worsening its financial condition. From an investor's perspective, offering a high dividend rate in an unfavorable environment could also become a negative psychological factor.

The adjustment and payment of dividend rates are not obligations of STRC but depend on board decisions, thus creating significant uncertainty from an investor's perspective.

Since STRC pays dividends as a fixed amount per share, rather than as a percentage of principal, it is designed to be a product where dividend investors do not have to worry too much about principal. Nevertheless, there remains high uncertainty as to whether Strategy can continue to pay dividends to STRC investors at current levels.

Of course, Strategy's current dollar reserves can cover bond interest and preferred stock dividends for approximately 9.8 months; if it sells its Bitcoin holdings, it could sustain for up to about 30 years. However, this does not completely resolve the uncertainty surrounding dividends.

Dollar reserves covering only 9.8 months is far from a long-term solution. To extend this period using dollar reserves, Strategy would need to continue issuing MSTR through an ATM offering. However, at current mNAV levels, this would inevitably dilute book value per share, which is entirely unsustainable for Strategy.

Even if dollar reserves are exhausted, selling Bitcoin to prolong the lifespan of Strategy and STRC fundamentally contradicts Strategy's corporate purpose and essence. It would diminish the attractiveness of STRC and MSTR as investment products and accelerate a negative feedback loop.

The $100 Per Share Claim Is Meaningless Unless Redeemed

If STRC price is guided solely through dividend rate adjustments, then the $100 figure has no practical significance. The fundamental reason STRC can be guided to trade near $100 is that, in the event of Strategy's bankruptcy, STRC has a claim on residual assets of $100 per share plus accumulated unpaid dividends.

Simply put, STRC currently trading at $75 appears to be offered at a massive 25% discount to its regular $100 face value. But is that truly the case?

The key point is that STRC is not a bond; it is a preferred stock. Bonds have a maturity date. If STRC were a bond, investors would receive $100 per share upon maturity, and such a significant discount would likely not emerge.

Unless Strategy independently announces a buyback of STRC, the only way for STRC investors to recoup their principal is through Strategy's failure.

There are two issues here. Contrary to the prevailing view in the community, Strategy is not easily prone to bankruptcy. The company's net leverage ratio is only 11%, and its amplification multiple (bonds and preferred stock versus Bitcoin reserves) is merely 44%. For the company to truly go bankrupt, the leveraged positions from its bonds must collapse. This would be difficult to achieve unless Bitcoin's price falls to about 11% of its current level (around $6,600). Even considering price drops from selling, this is unlikely unless Bitcoin approaches approximately $10,000.

Even if bankruptcy does occur, it remains a problem. If Strategy goes bankrupt, it means that only an 11% leverage position has already collapsed. In such dire circumstances, preferred stock investors (including STRC holders), whose claims are subordinate to bondholders, would likely struggle to fully recover the residual assets.

In other words, for STRC investors to receive $100 per share, two conditions must be met simultaneously: 1) Strategy must go bankrupt; 2) If the bankruptcy scenario actually occurs, they would likely find it difficult to receive the full $100.

There Is No Reason for STRC to Trade Near $100

Strategy sets the STRC dividend rate at 11.50% based on the $100 price. However, the STRC price is determined by the market. The residual asset claim of $100 per share seems of little value in a worst-case scenario, and the long-term sustainability of dividend rate adjustments and payments is questionable.

STRC is currently trading around $75. At this price, the effective annualized dividend yield reaches 15.3%. This means investors are demanding an additional yield of approximately 3.8% over the original 11.5% dividend rate to account for factors such as bankruptcy risk and dividend payment uncertainty.

If investors believe a 20% dividend yield is reasonable given STRC's risks, then STRC might trade at $57.50. Since the fair price depends on market uncertainty and investor psychology, no one can definitively know where it should be.

Under current conditions, there is no reason for STRC to trade near $100; its price will converge to the market price assigned to it by investors.