I have been meaning to learn how STRC works for a little while now, and lucky for me BitMex Research decided to publish a deep dive today.
The tl;dr
STRC is marketed as the lowest risk part of the suite of the MSTR investment products. So low risk in fact, that is compared to US treasury securities or stablecoins. Except, with a much higher yield than these low risk alternatives. One can see below an image from MSTR’s recent investor presentation, where STRC is compared to “Treasury Credit”
Except, not quite: BitMex Research doesn't seem to think there is any world where paying STRC premiums could bankrupt Strategy, because Strategy can simply reduce the premium.
How does STRC work?
The idea is that if STRC trades below $100, the dividend payment can be increased, which should push up the price of MSTR. In the other scenario, if STRC trades above $100, the dividend amount can be decreased, which should in theory push the price down towards $100.
Dividends are typically paid each month and the dividend can be adjusted at the company’s discretion.
A key difference to treasuries being that the money raised by issuing STRC is used to buy Bitcoin. This is another attempted hack of the financial system, to buy more Bitcoin.
What seems to be the risk:
if a company has a variable coupon, where the variation is designed to keep the price of the debt stable, then if the company gets into difficulty and credit risks increase, the coupon payments will need to increase to keep the price of the debt stable. This means that as the company hits difficult times, its liabilities will increase. A downward death spiral is therefore possible, where the credit worthiness of the company goes down and down, until bankruptcy.
Why such an outcome is unlikely:
Our understanding of the above is that MSTR can, at its absolute discretion, lower the dividend rate by up to 25 bps a month, no matter what else is happening. It doesn't matter what is happening to the STRC price or on the wider market, the dividend rate can be reduced by 25 bps a month. This equates to 300 bps or 3 percentage points per annum. Therefore, based on a prevailing 10% dividend rate, it will take three years and four months to bring the rate down to zero, at the maximum allowed rate of decline. In certain scenarios the company can reduce the dividend rate even faster each month, if market interest rates in the wider economy are also in decline. So for example if the market overnight rate declines by 100 bps in a month (from the start of the month to the floor), then the STRC dividend rate could decline by 100 bps + 25 bps = 125 bps in any given month. This seems fair, if the base rate is declining then STRC should be able to adjust.
if things become challenging for MSTR, instead of selling Bitcoin, MSTR could just abandon the narrative that STRC is targeting stability.
Don't forget to brush your teeth, kids!
there is still no form of security or risk of bankruptcy and the company does not have to pay dividends to STRC holders at all, if it doesn't want to.