STRC Preferred Stock: Why Is a Return to $100 So Elusive?

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 was as follows: If the STRC price falls below $100, the dividend yield would increase due to the price decline, and Strategy could also potentially raise the nominal dividend rate above 11.5%. Since Strategy has the right to buy MSTR at $101 per share, price increases above that level would be capped. If Strategy goes bankrupt, STRC holders have a claim for $100 per share plus accumulated unpaid dividends. For STRC to return to $100, the aforementioned mechanism would need 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.

Adjustments and payments of the dividend rate are not an obligation of STRC, but rather depend on board decisions, thus creating significant uncertainty from an investor's perspective.

Since STRC pays dividends on a fixed per-share basis, rather than as a percentage of principal, it was intended to be a product where dividend investors wouldn't need to worry too much about principal. Nevertheless, there remains high uncertainty about whether Strategy can continue paying dividends to STRC investors at current levels.

Of course, Strategy can currently cover bond interest and preferred stock dividend payments for approximately 9.8 months using its dollar reserves; if it sells the Bitcoin it holds, this could extend to roughly 30 years. However, this does not fundamentally resolve the dividend uncertainty issue.

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 the ATM. But at current mNAV levels, this would inevitably dilute book value per share, which is absolutely unsustainable for Strategy.

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

Without Redemption, the $100 Per Share Claim is Meaningless

If STRC's price is guided solely through dividend rate adjustments, the $100 figure has no practical significance. The fundamental reason STRC can be guided to trade near $100 is: once Strategy goes bankrupt, STRC has a claim of $100 per share plus accumulated unpaid dividends on remaining assets.

Simply put, STRC currently trading at $75 appears to be a huge discount of 25% below its conventional $100 face value. But is that really the case?

The key point is that STRC is not a bond, but a preferred stock. Bonds have maturity dates; if STRC were a bond, investors would receive $100 per share at maturity, and such a discount would likely not occur.

Unless Strategy separately announces a buyback of STRC, the only way for STRC investors to get their principal back is through Strategy's bankruptcy.

There are two issues here. Contrary to the prevailing view in the community, Strategy is not easy to bankrupt. The company's net leverage is only 11%, and its magnification ratio (bonds and preferred stock relative to Bitcoin reserves) is also only 44%. For the company to truly go bankrupt, the leveraged position from its bonds must collapse. This is unlikely to happen unless Bitcoin's price drops to around 11% of its current level (approximately $6,600). Even considering price declines from selling, it's unlikely to occur unless Bitcoin approaches around $10,000.

Even if bankruptcy does occur, there is still a problem. If Strategy goes bankrupt, it means that only an 11% leveraged position has collapsed. In such a severe scenario, preferred stock investors (including STRC holders), whose claims are subordinate to bondholders, are likely to struggle to receive sufficient remaining 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 are unlikely to get the full $100.

There is No Reason for STRC to Trade Near $100

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

STRC is currently trading around $75. At this price, the effective annualized dividend yield reaches 15.3%. In other words, investors are demanding an extra ~3.8% yield above the original 11.5% dividend rate due to factors such as bankruptcy risk and dividend payment uncertainty.

If investors believe a 20% dividend yield is reasonable given STRC's risk, STRC could trade at $57.5. Since the fair price depends on market uncertainty and investor psychology, nobody can know exactly where it should be.

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