S&P assigns MicroStrategy a "B-" rating: high Bitcoin exposure, capital structure unusually fragile.

Previously known as MicroStrategy (微策略)'s Strategy Inc. (MSTR), it recently received a “B-” issuer credit rating from S&P Global Ratings, with a stable outlook. Although the company boasts strong financing capabilities and prudent capital structure management in the capital market, its highly concentrated asset allocation in Bitcoin, insufficient liquidity, and weaknesses in capital structure remain the main sources of pressure on the rating.

The high concentration of Bitcoin assets is a key risk factor.

S&P Global Ratings stated that Strategy Inc.'s operating strategy is centered around Bitcoin, which has led to an extremely concentrated asset structure and increased market risk faced by the company. Although this strategy provides investors with an opportunity to indirectly hold Bitcoin (especially for those who are unable or unwilling to invest directly in Bitcoin), the company's approach has also resulted in a currency mismatch between assets and liabilities: most assets are in Bitcoin, while liabilities and accrued interest need to be repaid in USD.

The company will invest all cash beyond operational needs into Bitcoin, which not only limits its dollar liquidity but also makes it more sensitive to Bitcoin price fluctuations and changes in regulatory policies.

S&P: The capital structure is exceptionally fragile, with a significantly negative RAC ratio.

S&P specifically pointed out that the Risk-Adjusted Capital (RAC) ratio of Strategy will show a significant negative value in the second quarter of 2025. This is because, when calculating the adjusted common equity, S&P deducts Bitcoin assets from the equity, indicating that the company’s total net capital is negative.

This evaluation method reflects the high non-correlation between Bitcoin and traditional market risks, leading S&P to adopt a conservative stance on the company's capital and earnings capacity, and believing that the capital structure will remain a long-term rating weakness.

Cash flow is negative, with the main earnings coming from Bitcoin appreciation.

The operating cash flow performance of Strategy is weak, with cash flow from operating activities generating a negative $37 million in the first half of 2025. The company's earnings are almost entirely derived from the fair value appreciation of Bitcoin assets. Specifically, in the first half of 2025, the company reported a pre-tax profit of $8.1 billion, with over 99% coming from the increase in Bitcoin value, while the software business is basically breaking even and unable to provide stable cash flow.

This makes the company extremely reliant on the performance of the cryptocurrency market, and if the price of Bitcoin falls, profitability will be severely impacted.

High-risk currency mismatches, cybersecurity concerns

The company holds Bitcoin (long position) for the long term, but its liabilities are denominated in US dollars (short position), creating a natural currency mismatch risk. Additionally, the security of Strategy's Bitcoin storage is also a matter of concern. Although the company diversifies its Bitcoin holdings across multiple US institutional-grade custodians, there may still be periods where some of the holdings are concentrated in a single custodian.

S&P pointed out that if the private key is lost, stolen, or damaged, the company may never be able to recover part of its Bitcoin. Although the company has signed liability clauses with the custodians, only a portion of the Bitcoin assets are covered by insurance, and the risk of potential loss still exists.

Rely on the capital market to maintain operations and investment strategies.

Although Strategy has strong capital market financing capabilities, with a current market value of approximately 80 billion USD and nearly 15 billion USD in issued convertible bonds and preferred shares, its financial strategy is highly dependent on market confidence. The company tends to raise funds through the issuance of new shares, preferred shares, or convertible bonds to purchase more Bitcoin, repay debts, and pay interest.

S&P believes that this strategy carries potential risks, especially when companies are unwilling to sell Bitcoin. Once they face liquidity pressure, they may have to liquidate at a loss during a downturn in coin prices.

Convertible bonds and preferred stock dividends pose potential liquidity risks.

Strategy has over 8 billion dollars in convertible bonds, of which about 5 billion dollars are currently out of the money, set to mature gradually starting in 2028 (with the earliest buyback option in September 2027). S&P is concerned that if the maturity coincides with a downturn in Bitcoin prices, the company may have to sell Bitcoin at unfavorable prices or restructure debt, which would be regarded as a similar event to default.

In addition, the company's annual expenditure on preferred stock dividends is about $640 million, which is much higher than the approximately $35 million interest on convertible bonds per year. Although the company can choose to defer dividend payments, some preferred stocks (such as Strife and Strike) stipulate that if dividends are not paid for four consecutive quarters, preferred stockholders can obtain a seat on the board, further constraining the company's decision-making.

Stable Outlook: Capital Market Capability Remains Key

S&P has given the Strategy a stable rating outlook, provided that the company can continue to prudently manage its debt maturity structure and continuously raise funds through the issuance of stocks, preferred shares, and bonds to meet various expenditures, while not anticipating any significant regulatory risks impacting its business model.

Possible situations for future downgrades include:

If the price of Bitcoin plummets or other factors affect the company's financing ability;

The company is unable to effectively manage the maturity risk of out-of-the-money convertible bonds.

As for the opportunity for a rating upgrade, the likelihood is low in the short term, but if the following conditions are met, there is hope in the long term:

Improve cash flow and liquidity of US dollars;

Reduce reliance on convertible bonds;

Even under pressure in the Bitcoin market, it can still demonstrate the capital market's fundraising capability.

Regarding the analysis of S&P, Strategy founder Michael Saylor expressed optimism, stating: “This is the first time a major credit rating agency has rated a Bitcoin financial company.”

This article S&P assigns MicroStrategy a “B-” rating: high Bitcoin exposure, capital structure unusually fragile. First appeared on Chain News ABMedia.