Jeff Park explores Strategy's STRC preferred equity, its dynamic floating rate, alignment with Bitcoin treasury goals, and potential as a low-duration investment for shareholders.
Timestamped Overview
[00:00:00 - 00:03:18] Intro to Bitcoin Treasury Prefs
- Bitcoin treasury companies hold Bitcoin as a key asset, and leaders like Strategy issue special shares called preferred equities to raise money.
- These prefs are like a mix of stocks and bonds, but they can sometimes compete with regular shareholders for returns from Bitcoin holdings.
- Jeff discusses being cautious about prefs but sees MSTR’s new STRC as helpful for common shareholders.
- Authenticity in leadership, like being true to facts and ideals, is key when backing these companies.
- MSTR’s STRC is the biggest pref issuance yet, over $2.4 billion, marking a historic moment in finance.
[00:03:18 - 00:05:15] Overview of MSTR’s Pref Types
- MSTR has four prefs: STRF (bond-like for steady income), STRC (new floating-rate one), STRK (convertible with upside potential), and STRD (high-income but less protected).
- Prefs sit in a “waterfall” where higher ones get paid first if things go wrong, like in a bankruptcy.
- STRC is unique because its payout (dividend) changes monthly to keep its price stable at $100.
- Unlike fixed payouts in others, STRC adjusts based on market changes, making it experimental.
- This creates new ways to price and trade these shares tied to Bitcoin.
[00:05:15 - 00:10:10] How STRC Works Like a Floater
- STRC is compared to a money market fund (safe, short-term savings), but it’s not exactly that since its rate isn’t tied to a standard like SOFR.
- The payout adjusts if interest rates or credit risks change, but it’s fully up to MSTR’s discretion.
- If credit spreads widen (meaning higher risk), STRC pays more; if they tighten, it pays less—aligning it with stock performance.
- This can create a “doom loop” if things go bad (higher payouts drain resources) or a positive loop if good.
- It’s more like equity (stocks) in behavior than a traditional bond.
[00:10:10 - 00:15:44] Seniority and Market Oddities
- If STRC’s price moves alone, it could affect other prefs’ values through arbitrage (buying cheap, selling expensive).
- STRF is senior to STRC, meaning it gets paid first, which is unusual since floaters are often safer.
- None of these are true bonds; they’re junior to real debt and meant for Bitcoin exposure.
- MSTR promised STRF as the top pref, so STRC had to be below it, creating a puzzle in structure.
- This setup questions if STRC can truly act like safe cash despite its junior position.
[00:15:44 - 00:24:46] Alignment, Portfolios, and Outlook
- STRC is bullish for MSTR stock as it’s aligned: good equity performance means lower payouts, boosting upside.
- It enhances volatility, which helps Bitcoin treasuries grow by turning energy into income.
- Jeff suggests a portfolio: 30% STRF, 30% STRC, 40% Bitcoin for diversification over just STRK.
- STRC could attract new investors seeking yield without trading complexity.
- Despite FUD (fear, uncertainty, doubt), this innovation rejuvenates finance with Bitcoin.
Notable Quotes
Authenticity in Leadership
Professor Julie that Tim Kotzman had hosted on his Bitcoin Treasury Investor Day where she talked about the importance of authenticity as one of the markers as to how you find leaders and CEOs that you want to back in this space the qualities of being true to fact, true to self and true to ideal.
Jeff Park @dgt10011
Prefs as Adversarial
Because of the capital structure as a liability stack is a close bounded box, that at some level all these securities are somewhat adversarial, right? They're of the liability stack that are ranking through a waterfall for which they attach to the assets that are bitcoin.
Jeff Park @dgt10011
STRC Alignment
STRC stretched is maybe for the first time a pref equity insurance that I do feel very compelled is in fact equity aligned, unlike some of the other prep issuances that could otherwise have been understood to be a little bit more adversarial.
Jeff Park @dgt10011
Floating Nature
STRC actually has a dynamic dividend that adjusts monthly in a variable fashion with the entire goal to achieve the price of par at 100.
Jeff Park @dgt10011
Doom Loop Risk
In the worst case scenario, if this was the only debt instrument in the capital structure, you could imagine this is the kind of thing that would otherwise cause what is called a doom loop, right? The race to the bottom.
Jeff Park @dgt10011
Portfolio Idea
If we were to imagine a three asset portfolio for the first time, it's now possible to me to imagine that STRK could actually be split out into STRF and STRC. So in fact instead of owning 60, 40, you could own 30 STRF, 30 STRC and 40 BTC.
Jeff Park @dgt10011
Innovation Outlook
Just because these things are strange and unconventional doesn't mean it's wrong. It could also be exactly what we need to rejuvenate different kinds of financial innovation for people to understand what Bitcoin could look like a credit instrument in a way that hasn't been done before.
Jeff Park @dgt10011
Transcript
Jeff Park [00:00:00]: Of approaches as to understanding its utility or perhaps its lack of utilities. And first and foremost, it’s really exciting to kind of see everyone pick up and get involved where they’re forming their opinions. And at the same time, I think we’re just so early in having people understand what this category truly means. And I was reminded of Professor Julie that Tim Kotzman had hosted on his Bitcoin Treasury Investor Day where she talked about the importance of authenticity as one of the markers as to how you find leaders and CEOs that you want to back in this space the qualities of being true to fact, true to self and true to ideal the product category that is the Bitcoin treasury company. But here I think really the goal is to understand how to be true to the facts and having us level up and get smarter in the space where I think we’re all able to tolerate different kinds of views. I still people might be a little bit pessimistic about what’s happening and I think rightfully so to some extent that this is a new journey in financial engineering. But it’s really important that we get the facts correct so that we’re able to have a more robust and defensible discussion around what is happening. So that’s kind of the motivation here to kick it off with chatting through STRC MSTR’s stretch, which is at this point now the largest issuance of the pref universe to date, hitting over 2.4, I think close to $2.5 billion, which is historic.
Jeff Park [00:01:32]: So one thing I think some of the followers of my research would have appreciated is that I’ve been in general a little bit neutral or maybe even a little bit cautious about what is it means to have these pref equities in a way that might detract otherwise from the interest of the common shareholders. I think historically I hinted at the possibility that because of the capital structure as a liability stack is a close bounded box, that at some level all these securities are somewhat adversarial, right? They’re of the liability stack that are ranking through a waterfall for which they attach to the assets that are bitcoin. And so if you create a seniority junior waterfall, by definition there are going to be some adversarial dynamics. And the question had always been are the prefs really actually good for the common shareholders or is it not? And I think this experimentation has been really eye opening to see what kind of markets can open up in creating different kinds of pricing environments. But I do think STRC stretched is maybe for the first time a pref equity insurance that I do feel very compelled is in fact equity aligned, unlike some of the other prep issuances that could otherwise have been understood to be a little bit more adversarial. So I’m going to walk you through my thesis on that and why in fact we should be bullish for STRC as a common shareholder. But as a result of how I’m going to walk you through the mechanics, there may be some things that could also be a little bit unsettling as to how we think about the return opportunity itself. So just by quick refresh to go down, for those who are less Familiar, there are four preferred equity issuances today on MicroStrategy’s capital structure today.
Jeff Park [00:03:18]: The most senior piece is STRF, also known as Strife. And it is the most bond like high duration instrument that is meant to really be maximum interest rate exposure, mostly useful for the institutional credit world. Right below it is our newest note STRC which has been pitched as like a money market fund proxy due to its floating nature of its interest rate will come revisit this of course below STRC is STRK Strike, which was the very first issuance that entered the preferred universe, which is a convertible and it therefore has a lower yield but also has potentially tremendous equity upside. And the last of course of this series is Stride, which is the retail friendly junk bond version of a preferred stock offering which is meant to be high income but maybe has the least amount of protection. So that’s the universe and we’re here to really talk about STRC stretched. So what is stretched for those who have been following it is essentially strategies experiment to issue a preferred equity in which the interest rate slash the dividend that it pays is actually a dynamically floating rate. So unlike the other instruments which has a fixed coupon and the price of the bonds or the profs would adjust based on the interest rate environment of the credit spread, STRC actually has a dynamic dividend that adjusts monthly in a variable fashion with the entire goal to achieve the price of par at 100. So this is really in a way unique because it’s the only one of its kind where the rate is variable and there are some implications that are being made of it and we have to now digest what does this really mean in the context of financial engineering that is possible.
Jeff Park [00:05:15]: The first thing that I hear is a lot of people are comparing this to then be like a money market fund because in fact it sounds like it has low duration, actually maybe no interest rate duration because of this nature of a floating rate and therefore feels like a cash substitute. Which means that if interest rate goes up, the bond, the prefs will pay more and interest rate goes down, the press would pay less. And so it has this kind of floating nature. And I think while that could be possibly true, it’s really important to pay attention to the details. And the first thing that I would note for everybody here is that actually is not based off of a benchmark like a typical floater would be. Most loans, when you see the pricing and the loan docs would make a reference to a benchmark rate such as sofr and then add a spread on top of it as a way to explicitly communicate there’s a pass through nature in which the rate adjusts by the changing of the benchmark rate itself. So usually you’ll see something to say the dividend or rate that it pays is SOFR plus X spread. So in this case SOFR today is around 4.3%, 4.4%.
Jeff Park [00:06:34]: So you might say the pricing is SOFR plus 4.5% to effectively get to the 9% target, but that’s actually not how the document is written, which means there’s actually no reset in the formula that allows a pass through pricing. This lack of stated linkage is in itself different. And even though we might think there’s an effective linkage, because that’s the intention of what strategy intends to do with it, it’s really important to note it’s actually fully discretionary. So that’s the most important thing that has then some profound implications. Which means that ultimately it is true that it might be low duration, but it also means that it’s 100% credit duration because the total premium in which the rates are moving by is not just based on the interest rate, but embedded in the price of any of bonds is the aspect of the credit spread. So we can walk through some examples to think this through. So in the first case scenario, let’s say interest rate goes higher, lower and it floats. In the first case of interest rate going higher, you could imagine then STRC would actually have to go down in price and so the rate would actually have to go up to compensate for that.
Jeff Park [00:07:54]: That makes sense. What if interest rate goes down? Well, if rates go down, then the price of STRC would actually go up based on that duration and then they can dynamically adjust the interest rate to go down. Okay, that all makes sense. That’s actually what I think people expect it to be. But let’s say now interest rate actually stays Flat, that’s actually not the piece that is moving. What is instead moving is the credit spread. If the credit spread goes down, that means STRC would actually have to pay more. And if the credit spread, sorry, if the, if STRSD goes down in price because of credit spread going up, then it would actually have to pay more.
Jeff Park [00:08:36]: And if credit spread goes down, then the price of STRC would go up and STRC can actually then pay less. I think this is the part that’s really important to understand because effectively this is equity. This is basically taking the same directional risk as the equity, meaning if the credit spread is going up, you are in fact having a situation where the equity is potentially being impaired and STRC would have to adjust the rate higher to compensate for that and vice versa, if the equity is doing well and the credit spread goes down, then strc, the price would go up. And so now the interest rate or the dividend, sorry, that it pays, can go less. Which means again, it’s effectively aligned with the equity embedded in here, I think is also a construct in which we have to understand then there’s a correlation to which that this reflexivity is actually positive. And in the worst case scenario, if this was the only debt instrument in the capital structure, you could imagine this is the kind of thing that would otherwise cause what is called a doom loop, right? The race to the bottom. Because in the moment that equity goes down is exactly the moment when STRC has to pay more in dividends, which then creates a recursive death loop of sorts and the whole financing mechanism would break. And on the other side, if actually MSTR does really well and the stock goes up, then STRC actually doesn’t have to pay as much anymore.
Jeff Park [00:10:10]: And that in itself can also create some reflexivity to the upside. But the point here I’m making is that they’re more aligned to the equity in its behavior than almost any of the preferred instruments. So we talked about what happens if the rate moves or what happens if the credit spread moves. But the third thing we haven’t talked about is what if the price itself just moves, right? Let’s actually assume nothing changed about the interest rate and the credit spread didn’t change either, right? Meaning that the rest of the preferred aren’t moving, the convertible bond isn’t moving, and like only the price of STRC is moving. This is the experiment. I think that we have to now envision what could happen if the price goes higher. In this scenario of STRC by itself, that means effectively that they can pay less. Than and the implied credit spread would go down.
Jeff Park [00:11:00]: But the question is, does that then actually trickle down to the credit spreads of the other instruments? And here I think is where it gets really interesting in its context to strf. STRF as we discussed, is the most senior piece of the capital structure. And in theory they are therefore more likely to be paid than the other prefers in the event of a bankruptcy to a liquidation. So the STRF credit spread in theory has to be inside strc. And if you saw a scenario where STRC credit spread implied was below STRF because the price moved up higher based on technical demand, there is definitely relative value arbitrage. The question is, do you actually then buy STRF because it’s too cheap, or do you actually short STRC because it’s in fact too rich? And the dynamic here that we have to really appreciate is that STRF is the price setter, because by definition it is more senior STRF today, if you look at the price yields, about 420bps over the 30 year. And so that is the ceiling. And that is precisely why CRC came at the pricing that it did at 90 cents, which is that it has to be at a premium above the total 9.2% interest rate on top.
Jeff Park [00:12:28]: I think this is the key thing that is really interesting to understand because there’s a version of a world where if the STRC demand is so high because people actually do believe it’s a money market fund, you could imagine the credit spread actually does tighten it to a level where it is actually more senior than strf. But the reality is STRF is in fact the more senior note. So I think this is the time then to go into some of these things about what is possible and the reality and the myth of these preferred issuances. The first thing to address is none of these prefs that we’re talking about are in fact credit instruments, right? They’re not bonds, they are not secured nor unsecured bonds. They are prefs, they’re equity and they’re senior to the common, but they are junior to every kind of fixed income instrument that are rated that will ever come to market. So while I think it’s interesting that we can hypothesize about what seniority amongst these prefs mean, the reality is that prefs are very low ranking still in the grand order of what it means to attach in the event of a bankruptcy relative to true creditors. This is important to understand, especially in the context of then asking why is STRF more senior than strc? Because as we talked about, in a way this is actually highly unconventional. In a normal capital structure, what you see is that the low duration notes and bonds and loans are above the high duration instruments because they are more senior in nature where the rate in fact is floating.
Jeff Park [00:14:07]: So most of the times when you see operating companies, the loans do in fact have a floating structure. They’re generally shorter tenure and they are sometimes credit facilities that can be drawn or undrawn. They could be term loans, but they’re generally senior because it has no duration. In this scenario, STRC is in fact below strf. And in a way that means it cannot really feel like a money market fund replacement because there’s someone above you in a way that is high yielding ahead and therefore money market fund, which we all assume is the safest thing, is actually juniorized here by strf. And that open question here is will people buy STRC in the construct that the pricing in itself can demand a compression to the yield that in fact spills over to strf. So the thing that I’ve been scratching my head a little bit is why was it done this way? And I think some of the truth of what I imagine the roadmap of this looked like is because Sailor was very clear at the pricing of STRF that there would be no other preferred ever that will be senior to strf. So strf, because it was intentionally made to be the most senior preferred stock and it was sold to the market as such to be the safe fixed income like instrument, I think it would have been challenging to then layer STRC on top of STRF because that would be a trade that was reversing the commitment that he had made.
Jeff Park [00:15:44]: And this is why I think we have some oddity in the reality that a low duration note happens to be junior to the most high duration note that strategy has ever issued. Summarizing this all together, what does this all mean? Well, like I said, I think this is very good for MSTR common. Why? Because it’s absolutely true that STRC for the first time is the preferred that is most aligned to the outcome of the equity and that they are directionally taking the same bet. And it is in fact the most dynamic expression of the credit spread because the rate adjusts every month that you get a live view at what people think the credit spread should be and in a way that should then affect the rates market for people to buy more bitcoin through microstrategies instruments. If it’s true that STRC can then anchor as the sponsor of the credit Spread. Now the asterisk there again being the credit spread in my opinion comes from true credit instruments, which comes from the convert and the convert. I think I made a reference to it in the tweet some weeks back comparing it to strf and strk, that it was at the time yielding something like +950 bips in spread. And that’s essentially kind of the same number we’re continually seeing across the pref instruments as well.
Jeff Park [00:17:09]: So I think the ultimate then open question is the thesis hinges upon the price action then leading the actual fundamentals, which is possible, right? Anything is possible in technical markets where there’s demand for a security. And if it is true that people do perceive STRC to be a money market fund because they do believe in the dynamic credit spread reflecting the true fixed income like nature of microstrategy in a rate plus credit spread payoff, then it could actually be the anchor to the rest of the credit spread universe. I think the challenge here is by definition I also just told you it’s the most aligned to the equity, which means it is junior to strf. And I think that’s the great conundrum. I think it’s the great intellectual paradox of what STRC represents. And my takeaway is that I’m very hopeful and very bullish for strc, mostly because I do think that this is the only preferred issuance that is actually in alignment with the performance of the equity and that has the chance also to be a volatility contributor. In the past, the other preferred issuances in my opinion were volatility muting because they are paying fixed rate off of the commons interests. The that is ultimately reducing the possibility of having additional retained earnings or growth of the common.
Jeff Park [00:18:40]: And because of that fixed cost, the volatility has to be muted by definition. But here, not only is it not a fixed rate, it is again aligned with equity. Where there’s a reflexivity here that is built in here, which means that it is a doom loop, or it could be the opposite, which could be volume up only loop as well. And that is by definition a volatility enhancer. And I’ve been unapologetic from the very beginning that the only thing that matters for a lot of these Bitcoin treasury companies is that it needs to sustain a high level of volatility to continue to financialize the energy for which to convert that into income. And because of this conviction that I have in this belief, at a fundamental level, I do believe STRC is the most aligned preferred equity instrument and that we should be supportive of the success of STRC, which will lead to the prosper prosperity of the common shareholders as well. So maybe to close it off, I know some people have asked, you know Jeff, is STRC going to replace STRK in your two asset radical portfolio thesis that you’ve been sharing in the past? And to be honest with you, I haven’t thought too much about whether it would replace it. But for those who have followed, the two single asset portfolio that I suggested in the past was 60% strk, 40% bitcoin to achieve a radical portfolio of compliance assets and resistance assets that yield a pretty good outcome to being bitcoin aligned, but also being diversified.
Jeff Park [00:20:20]: I think actually if we were to imagine a three asset portfolio for the first time, it’s now possible to me to imagine that STRK could actually be split out into STRF and STRC. So in fact instead of owning 60, 40, you could own 30 STRF, 30 STRC and 40 BTC. This is because I do think STRF and STRC are the opposite ends of the spectrum in the interests that they share. Across the pref equity universe, in my opinion, STRC is the most aligned to Bitcoin. So sorry to mstr. So in a way it has a built in, built in convert feature. It almost behaves like it has a conversion nature even though it doesn’t because of the implied credit spread to which it benefits the most from. So whereas STRF is actually the exact opposite, it is perhaps kind of the most draining of the energy of being able to take away all the duration in a permanent way.
Jeff Park [00:21:30]: And so by combining STRF and strc, I actually think that creates in itself an efficient frontier that might be more interesting and more diversified than strictly strk. I’m curious to see how the pricing eventually patterns out over a long period of time that we could actually run some analytics against it and I’ll be the first to share with you guys as we collect them over the months to come. But all to say, STRC I think is a really worthwhile asset to pay attention to. And based on the overwhelming demand for how there was interest, I’m willing to concede the possibility that there is a whole new market participant and buyer base out there who is looking for something like this as a way to think about a low duration preferred equity instrument that has more dynamic ability to think of it as a savings account where if the PAR is protected at 100, then it truly becomes a yield only instrument. And in a world deprived of yield, and those who don’t want to actively trade the PV of the rate duration. I could see this fitting interesting role for some institutional retail portfolios. So I think it’s a really strong start and if that’s the case, maybe it is true that STRC will be the anchor for the credit spot for the rest of the universe despite being junior to strf. But time will tell.
Jeff Park [00:23:02]: So I think that’s it. I think that’s all the stuff I wanted to say. Maybe it was easier to talk it through than trying to put this all in a one pager. So. So hopefully it was easiest for you guys as well to make sense of it. And if you guys have any questions on it, please you know where to find me. You can comment on this or DM me or just me on your own messages and we can always keep having these conversations. But the thing I’ll just keep saying at the end is just because these things are strange and unconventional doesn’t mean it’s wrong.
Jeff Park [00:23:40]: It could also be exactly what we need to rejuvenate different kinds of financial innovation for people to understand what Bitcoin could look like a credit instrument in a way that hasn’t been done before. So I still stand by my belief that Saylor is on a very courageous journey in trying to do things that has never been done before. And no matter what FUD that is out there, people making comparisons to these nav premiums, looking something like the investment Trust in the 20s, having explosive downside and drawing some historical analogies. All that aside, I think it’s important that we try to appreciate for what moment we are living through now and what this journey represents. And ultimately it’s you, me and everyone else who decides to bet with our wallets and buy these instruments. To which again the technical forces can always be a contributor to overwhelming fundamentals. And I’m a big believer in that, especially in a hyper financialized market that we see as we do today. Cool.
Jeff Park [00:24:46]: So with that I’ll give you guys back time for the rest of your Sunday. I hope this was worthwhile and let me know any feedback that you guys have. Appreciate you guys all joining. See you guys tomorrow in the open. And let’s Hope Bitcoin crosses 120k overnight with Asia leading the way. I’ll see you guys later. Bye.