How the STRC Price Stabilization Mechanism Works and Its Current Failure
According to an analysis by Farside Investors published on June 27, Strategy's (MSTR) preferred stock STRC has a so-called price stabilization mechanism that is inherently unstable. The product was issued at $100 and is designed with a mechanism to push the price toward $100: if STRC falls below $100, the company can increase dividends to raise the price; if it rises above $100, it can lower dividends to depress the price. However, this mechanism relies on the company's discretion rather than an automatic system, creating high uncertainty for investors evaluating STRC.
Currently, STRC trades at approximately $75, about 25% below the $100 target, and the company has not responded by raising the coupon. This means the price stabilization mechanism has largely failed, and there is no clear reason for STRC to return to $100 in the future.
The Flawed Financial Logic of Using High-Yield Coupons to Buy Bitcoin
From a basic financial perspective, Strategy's issuance of a perpetual instrument with an 11.5% yield and using the proceeds to buy Bitcoin is a poor trade. Even if Bitcoin's long-term average annual return reaches 10%, combined with 5% long-term inflation, Bitcoin could still be very successful, but it may not cover the 11.5% annualized cost. If Bitcoin's price falls at some point, the company may need to sell BTC at low prices to pay interest, resulting in net losses.
The analysis further notes that assuming the STRC coupon stays at 11.5%, with an 8% discount rate, the fair value of STRC would be approximately $144, significantly higher than the $100 issue price. Under this assumption, issuing STRC is a bad deal for Strategy but could be a good investment for buyers. However, STRC is not a fixed-rate perpetual bond—Strategy has the right to reduce the coupon by 25 basis points per month until it reaches the SOFR rate (currently around 3.6%). Taking this right into account, the estimated value of STRC drops to about $55.
Consequences of Failure and Possible Solutions
With the price stabilization mechanism largely ineffective, the most likely short-term move for Strategy is to maintain the 11.5% coupon and temporarily avoid addressing the discount, using new equity issuance or Bitcoin sales to continue paying the coupon. But this only postpones the problem. To truly resolve the issue, the company has two realistic options: start buying back STRC, or completely abandon the price stabilization mechanism and cut the coupon directly to SOFR.
From a market perspective, a buyback of STRC is the most likely outcome, but the company may need some time to succumb to pressure and face reality. If the market expects Strategy to gradually reduce the coupon to SOFR, STRC should trade near $55, meaning the current $75 level still has downside risk. Investors should be aware of this potential risk.