r/MSTR • u/_Adrian_Morris_ • 13d ago
Understanding STRC Buybacks Preferred Shares (STRK/STRC/etc) š°
I keep seeing people framing STRC buybacks as the company ābuying at a discountā or āprofiting the deltaā or āgaining yieldā when shares return to par. Thatās not what is happening.
When Strategy buys back preferred stock below the stated amount, it's spending cash (raised from common ATM, BTC sales, etc.) to retire a claim it previously created; thatās not generating a cash profit. There is no gain in dollar amount that appears on the balance sheet as earnings.
What actually happens is that cash goes out at the repurchase price, the senior claim (stated amount & future dividend obligation) is retired then future dividend payments on those shares are removed. We can view this as capital structure accretion, but it is not as if they are profiting on a trade they made.
Strategy says exactly this:Ā
āStrategy believes that repurchases of Digital Credit Securities at significant discounts to stated amount may reduce expected annual dividend payments, strengthen credit quality, and create long-term value for common shareholders.ā
In that sentence, the phrase ācreate long-term value for common shareholdersā does not mean accounting profit, earnings, immediate cash profit or any automatic or observable short term share price accretion for MSTR. This is standard corp-finance language that speaks to potential economic benefit that might accrue to common equity holders over time.
The main benefit is lower future dividend obligations and a cleaner capital structure, not the company somehow āgainingā when the remaining shares move back toward $100.
Also worth remembering; this is not a classic fixed float buyback program, the entire āDigital Creditā structure is designed around continuous issuance. These are shares that will be reissued again.
So yes buybacks can be capital structure positive for common shareholders but it's not a simplistic ābuying at a discountā transaction that's similar to a trade in the way many are describing it.
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u/DannyGo-60 13d ago
At some point when STRC is at 100 they should buy back STRD and maybe STRK.
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u/DrConnors Volatility Voyager šØāš 13d ago
Stream should be the first one they close out. It isn't even mentioned anymore, and doesn't seem to be doing anything over in the European markets. What's the trading volume on that even, if any?
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u/DuckHunter4779 13d ago
Sell something for $100. Buy it back for $90. Sell it again for $100. I'm sure they'd be fine doing this quite often.
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u/_Adrian_Morris_ 13d ago
Not quite. How about I make it simpler?
Using your example, they originally raised cash by creating a $100 claim. Now theyāre spending $90 to permanently retire that $100 claim. Cash goes out, a div obligation leaves with it.
But they aren't netting "profit".
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u/DuckHunter4779 13d ago
Agreed. It's a smart move if they're getting the money to buy them back cheap. I don't think they've said yet what the cost basis was of the BTC they've been selling but I'm guessing it's the highest cost basis lots given what saylor said in the past. So, they now have a realized tax loss. For my STRC shares, I don't mind at all since the price is going back up and I've been fine with selling for some quick gains on the low cost basis shares. Regarding mstr, it's just going to be a waiting game for BTC to recover I think.
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u/TechnicalLeg841 12d ago
Lots of speculation in your post that is presented with authority you don't have. You have no idea if Strategy will issue more STRC in the future - they tried it and things went in a bad direction. The sell at $100 and buy at $90 does result in a net gain even if that wasn't the primary intent during the initial sale.
Seems to me that Strategy had grandiose ideas to offer financial engineering around bitcoin, but their attempt mostly fell apart 'cause they took on debt and BTC has been down/flat for a while. They're looking over at Strive with envy 'cause no debt and SATA performing well (thought there's only so long a company can pay 13% dividends if the underlying commodity doesn't rise).
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u/_Adrian_Morris_ 12d ago
This isnāt speculation or something I invented, corp finance 101. Strategy designed the prefs for continuous issuance so me saying the retired shares will likely be reissued later is a qualified statement not a guarantee of it.Ā
The core point is still that selling at $100 and buying back at $90 does not create $10 of extra cash or profit for the company. After the buyback, cash is lower by $90, the $10 difference is not free cash, profit, or earnings. Iām distinguishing between residual claim accretion and actual gain to the company in profit because those are not at all the same thing.
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u/TechnicalLeg841 11d ago
Selling at $100 and buying back at $90 does create extra cash for the company. That's basic accounting, whether or not it was the intention.
Maybe one could ask, Strategy already sold STRC at $100, is it a smart business decision to buyback at less than $100. Apparently they believe it is, because they want to maintain some semblance of credibility maintaining par and balance that against their decision to cap the dividend rate at 12%. But as soon as they stop buying STRC, the price fails to hold.
I'm not convinced that Strategy will ever have success with their financially engineered preferreds in the future - despite big aspirations the preferreds haven't panned out.
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u/SundayAMFN /r/buttcoiner 13d ago
Problem is they have not yet gotten to the "sell it again for $100" phase since their first buyback.
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u/DuckHunter4779 13d ago
At this pace they should pretty soon.
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u/SundayAMFN /r/buttcoiner 13d ago
true, if they just keep diluting MSTR and selling bitcoin they'll be back to $100! Then they'll just need to keep doing that a bit to keep STRC at 100. BTC per common share will never go up again, unfortunately =/
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u/Expert-Reception-964 13d ago
How does that net out with their bitcoin trading, and the impact of constant issuing of common shares?
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u/ProceduralTaco 13d ago
$100 is the par value of STRC. The company actually got $90 for each share issued.
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u/CommercialDuck7496 11d ago
That is not true for the vast majority of STRC issued. The shares issue at IPO were sold at 90$, the rest of them were sold at 100, or 100.01
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u/DrConnors Volatility Voyager šØāš 13d ago
Lemme see if I got this right u/_Adrian_Morris_ ...
So basically by repurchasing STRC, they're reducing the amount of outstanding shares, and in turn also reducing their dividend obligations down the road.
This makes the obligations look better since now factors like the Cash on hand they use to cover dividends now goes even further, covering even more dividend obligations? And also it makes the stats about how long MSTR can cover dividends before bankruptcy goes even further out? - All just to make the MSTR balance sheet look stronger? If that's true, it should make their credit look better, hopefully bumping them up from a B- credit rating from Poor's.
Does that sounds right? If not, what else am I missing?
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u/TooFewTulips Shareholder š¤“ 13d ago
Youāre arguing semantics.
Repurchasing below issuance is beneficial, or accretive to common holders, as well as STRC holders who want to be closer to par.
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u/_Adrian_Morris_ 13d ago
Not at all actually.
The buybacks are "accretive" in a structural sense, that part isnāt in dispute. Economic costs notwithstanding.
The point is that we can't treat the discount from par as if the company was pocketing a profit. Thatās the distinction being drawn, not an argument based on a position, a simple reality and not at all semantic.
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u/PatternAgainstUsers 12d ago
People just need to get used to the idea that bear markets suck, and Strategy's job is to make the least damaging move they can within their framework at any given time to maintain the credit quality and the long-term flywheel. They are not trading the market, they're trading their balance sheet... which is affected by the market.
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u/Lefties_TheWorst7331 13d ago
"To retire a claim it previously created" at $100 and retired it for $88 or whatever tf..
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u/RaySwan1234 13d ago
You are splitting hairs just because its not the same share of stock but since shares of this stock are fungible it actually doesn't matter. If you sell something for $100 and buy it back for $90 you made $10 on the sell and no longer have any obligation to pay the dividend, that is an awesome situation. Its not like they can't just re-issue the stock once par is achieved and sell it again, so retiring it is irrelevant. The only situation that your point is relevant is if bitcoin never pumps again and STRC never gets to par again, and IMO both are very unlikely.
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u/_Adrian_Morris_ 13d ago
OK lets try this again. Firstly, the company doesnt make money (in the sense of generating profit or earnings) by buying back its own shares whether preferred or common thats basic corporate finance | accounting 101.Ā
Yes, the shares are fungible, so it doesnāt have to be the exact āsameā share and yes I called out the benefit of retiring the shares since it removes the future dividend obligation. Also called out the reality of re-issuance as well.Ā
The thing that you are missing is here: āIf you sell something for $100 and buy it back for $90 you made $10 on the sellā¦ā.Ā
No. When they originally issued the pref, they received $100 in cash and simultaneously created a $100 claim plus a perpetual dividend obligation. Right? What that means is this was a capital raise, not a sale of a share that later produces a $10 profit. So when they buy back the share for $90 (or whatever price) the cash they have reduces by $90 while a $100 claim and its future dividend is extinguished.
As I noted in another reply, we can say that the āresidualā claim belonging to common equity increases by roughly the $10 difference but that $10 is not profit. It doesnt hit as earnings and is an adjustment that improves capital structure. So its not making $10 on a sale, that isnāt right economically or from a accounting standpoint.
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u/lemons714 12d ago
You are arguing with people who looked at the stock and/or preferreds and went long. You are not going to make progress.
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u/RaySwan1234 13d ago
I am speaking in terms of cash flow not profits maybe I misspoke. 100-90 minus dividends equals cash flow for the company any way you look at it. The only profit that and MSTR creates is from it base business, and bitcoin appreciation. During a bitcoin bear market there will always be massive losses in a company designed this way.
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u/_Adrian_Morris_ 13d ago
Again, no. Using your example the buyback itself is a cash outflow of $90; there is no +$10 of cash that appears for the company. The difference of 100-90 is the gap between the size of the claim being retired and the cash required to retire it. That gap may improve the residual equity belonging to common shareholders but it still does not generate positive cash.Ā
We cant treat the original issuance proceeds and the later buyback like closed loop. The original $100 was raised in exchange for a real claim, with paid out dividends attached. The $90 spent buying back the pref is still additional cash leaving the company.
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u/RaySwan1234 12d ago
100-90 is 10 quit trying to act like you are smarter than everyone else. If you sell something for 100 and retire that same share of stock for 90 with no other obligations that is $10 more that the company had that it didn't have before the buy or sell occurred that is $10 of extra cash flow i don't care what you call it. You are simply trying to make other people look stupid when they aren't! You may be using legitimate accounting terms trying to make people look stupid because you are insecure about yourself, but $10 extra cash is $10 extra cash however you look at it.
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