Did you know Allianz is at the center of the biggest racket in financial markets since AIG was insuring mortgage CDOs?
Some of you are probably familiar with MicroStrategy. They are the software firm led by Michael Saylor that morphed into a Bitcoin hedge fund (that doesn’t hedge!).
After Satoshi (the creator of Bitcoin), it is believed MicroStrategy is the second largest holder of Bitcoin in the world.
What does Allianz have to do with this? MicroStrategy wants to buy more and more Bitcoin. To do that, they need to raise capital. To do that, they have issued more shares, as well as convertible debt.
Last month, they raised $3B of debt to buy more Bitcoin, and it is rumored one of the buyers of the bonds was…
Allianz!!!
Micro’s Strategy
Before addressing what Allianz is thinking, it’s probably best to spend some time explaining what MicroStrategy is trying to accomplish so you can understand why they issued these bonds.
Michael Saylor is, depending on your point of view, either a genius who understands the power of crypto better than mere mortals, a hype man who is purposely inflating a bubble to make himself famous, or a grifter who is looking to monetize a bubble for personal gain (he has sold $370M of company stock).
Maybe he’s a bit of all three? Regardless, he is an evangelist for Bitcoin.
To further his goals, he needs to buy more Bitcoin. To buy more Bitcoin, he needs more funds. So what has Saylor done? He’s replicated the Hare strategy of using hype to create cheap capital.
One of the more fascinating facts about MicroStrategy is it trades at a premium to its Bitcoin holding. A rather large premium, actually, over 2X (they own ~$40B of Bitcoin after recent purchases vs. a market cap of $88B and which reached over $100B at the recent peak).
Why? Mainly because markets are irrational, but there is also a bit of logic to it.
See, owning crypto directly has adverse tax consequences. It is taxed like a commodity which means you pay higher rates on gains.
However, if a company buys a bunch of crypto and you buy it’s stock, now you get taxed at the lower rate applicable to stocks.
Therefore, some people would rather own MicroStrategy than actual Bitcoin. This explains some (but certainly not all) of the premium to net asset value.
Regardless of the cause, Saylor has figured out how to take advantage of this premium.
The Capital Factory
Most companies manufacture goods and then sell them for more than the cost of production. Not MicroStrategy.
They manufacture capital and then use it to buy something cheaper than their cost of capital.
The simplest way to do this is to issue equity. It doesn’t take a rocket scientist to realize if your Bitcoin holdings are worth $1 and your stock is worth $2, you should issue more stock to buy more Bitcoin.
Let’s do some simple math. We start with 1000 shares and one Bitcoin (worth $100K). The market values us at $200K, so each share trades at $200.
We then issue 1000 more shares and raise $200K. We use the cash to buy two more Bitcoin. We now have a market cap of $400K on 2000 shares (so still $200/share) and own three Bitcoin.
But guess what, our stock is now only valued at a 33% premium to our Bitcoin holdings. Oh no! No, oh yes! What happens next? Traders bid the stock up to $300, so it once again trades at 2X the value of its Bitcoin.
What do we do next? We issue another 1000 shares to buy three more Bitcoin. Now, we have 3000 shares and six Bitcoin (worth $600K). Now, our market cap needs to rise to $1.2M, or $400/share.
| Shares | Bitcoin | Market Cap @2X | Share Price | |
| Start | 1000 | 1 = $100K | $200K | $200 |
| Issue 1000 shares @ $200 | 2000 | 3 = $300K | $600K | $300 |
| Issue 1000 shares @ $300 | 3000 | 6 = $600K | $1.2M | $400 |
You can, theoretically, keep doing this forever (as long as there are an infinite amount of dumb investors).
Year to date, MicroStrategy has used this tactic to buy 234K more Bitcoin ($22+B) for 70M new shares.
However, just like with a hot Christmas toy, demand isn’t truly infinite and, at some point, you will find you have flooded the market and there are no buyers left.
That is a dangerous place to be as then the stock crashes and the game ends. So what else is a Capital Manufacturer to do?
Volatility Arbitrage
Issue convertible debt. If you think convertible debt is about delaying dilution vs. an equity raise or potentially issuing equity at a higher price, you probably still use dial up internet and a cordless phone.
Converts exist to feed the insatiable demand of options traders. A convertible bond is really a combination of debt and a stock option.
That means derivatives traders can trade converts vs. the common stock and try to arbitrage differences in price like they would with call options and the underlying stock.
What is the takeaway here? These traders don’t really care whether the stock price goes up or down. They just want it to move.
In other words, they want the stock price to be volatile. The more volatile it is, the more the option (and thus the convert) is worth.
And guess what happens to be the most volatile stock in the market? That’s right – MicroStrategy!
It is expected to move up or down 100% in just one month. By contrast, Microsoft is expected to move 20%.
So options traders would pay a very high price for MicroStrategy converts.
Money For Nothing And Converts Are Free
Normally, a company issuing a convert has to pay annual interest and the conversion price is say 25-30% above the current stock price.
But because MicroStrategy stock is so volatile, they were able to issue converts with zero interest and a 55% conversion premium!
This is what Allianz chose to buy – the most expensive convert in the market! Yet, given the level of volatility in MicroStrategy, the terms of the deal are not unreasonable for convert traders.
What is more likely to convert in the money? An insurance convert with a 25% premium or a super volatile company with a 55% premium?
It is not unreasonable to think MicroStrategy will surpass the conversion price at some point in the next five years (or even five months). The real question is whether it can stay there.
But you can hopefully see why issuing converts is alluring to MicroStrategy. Instead of issuing stock at $434 (the price the day the convert was done), they (potentially) raised money at $672!
This is far superior to selling new shares at the current price!!! If the stock converts, instead of issuing shares at the already wild valuation of more than twice its Bitcoin value, they issue at an even more insane 300+% premium!
Of course, this all presumes Bitcoin (and MicroStrategy) keep going up. If they don’t, the bond doesn’t convert to high priced shares and instead must be repaid in cash at maturity.
Therein, lies the risk, which I’ll cover below, but first let’s address the other side of the equation.
We can see why MicroStrategy would issue converts, but why would Allianz buy them?
If You Don’t Know Who The Patsy Is…
I’m sure you’ve all heard the Buffett quote about how if you’ve been playing poker with a new crowd and you haven’t figured out who the patsy is, it’s because it’s you.
In this case, the patsy may well be Allianz, wading into a game between a savvy dealer (Michael Saylor) and a bunch of sharks (derivative traders).
Why would Allianz step into this viper’s den?
They wanted to own Bitcoin.
I don’t have any inside knowledge of their thought process, but I’m pretty sure I can figure it out. Insurance balance sheets are supposed to be conservative. Bitcoin is not conservative and inappropriate for ownership by an insurer.
However…what if we could find a back door way to own Bitcoin that wouldn’t come with a huge capital charge?
Insurers can own convertible bonds, typically at the same capital charge as ordinary corporate bonds. Now, MicroStrategy is on the junk end of the issuer scale, so their convert is still probably a NAIC 3 or, more likely, 4.
However, this is a lot better than the capital charge on MicroStrategy equity or a direct holding of Bitcoin.
Thus, Allianz gets indirect exposure to Bitcoin with the same capital charge as holding high yield debt – even though MicroStrategy is actually more volatile than holding Bitcoin itself!
While we don’t know how much of the recent $3B convert they bought (will have to wait for year end filings), Allianz has confirmed they bought $150M of the $600M convert done earlier this year (at a 40% conversion premium).
Gambling, Not Investing
I’m guessing Allianz would dispute my characterization and argue the convert is far less risky than owning Bitcoin itself. Sorry, I don’t buy it.
Their argument is likely that if Bitcoin goes down 50%, MicroStrategy can still pay the bond off. Sure, Allianz wouldn’t make anything (remember, the bond pays 0% interest!) but at least they wouldn’t lose anything.
This is true, but only up to a point (covered below).
On the other hand, if Bitcoin goes up 50%, Allianz may also make very little. If MicroStrategy goes up 50% in sympathy (a big if, see “Basis Risk” below), that would be just short of the 55% conversion premium, so all Allianz gets back is its principle.
“See”, Allianz surely will point out to the insurance commissioner, “if it’s down 50% we get back par and if it’s up 50% we get back par, so this really isn’t risky at all”!
To which one should ask, then why even buy it? You could purchase a larger amount of NAIC 1 bonds for the same capital charge instead as one MicroStrategy convert – and those bonds actually pay a coupon.
The obvious answer is they think MicroStrategy stock will go up far more than 55%, so they’re gambling on the stock price (for a bond capital charge).
Basis Risk
But betting on MicroStrategy and betting on Bitcoin aren’t exactly the same thing. As noted, MicroStrategy trades at a large premium to its Bitcoin holdings.
This premium can grow or shrink over time. I think most neutral observers would suggest it’s more likely to shrink. If Bitcoin doubles over time, but MicroStrategy’s premium to NAV is cut by half, then MicroStrategy stock will be flat. Oops!
Also, volatility can decline over time making it harder for MicroStrategy (and Bitcoin) to move enough to reach the 55% premium conversion.
Finally, there is the risk future capital raises are done in ways that disadvantage Allianz.
For example, MicroStrategy’s debt as a % of its Bitcoin is still fairly low, so they could issue a bunch more converts. Each new convert raises the risk that if Bitcoin collapses, MicroStrategy can’t pay back its debt.
What do you know, MicroStrategy tells you in their investor presentation that their plan is to raise $21 BILLION (!!!) more of converts in the next three years (vs. $7B today).
While they would also own more Bitcoin from raising that much additional capital, they would still be more heavily levered than today and have greater default risk.
Triple Leverage
So let’s review what Allianz has done here. They are buying MicroStrategy at an inflated premium to its Bitcoin holdings after Bitcoin has nearly doubled in three months and with volatility at its absolute peak.
They did all this right in front of a truckload of additional debt to come which weakens the credit profile of their bond.
Oh, and their base case is they earn 0% return for their trouble.
Can we count all the ways this can go wrong??? This is the absolute inverse of a margin of safety.
There is an extremely remote chance to win, high odds of only getting your principal back (return-free risk!), and non-negligible odds that MicroStrategy collapses under its own weight and you lose your whole investment.
Warren, I think we’ve found our patsy!
Editor’s Note: If anyone from Allianz’s investment department is reading this and wants to dispute my interpretation, you’re more than welcome to reach out.
Addendum
I wanted to discuss one final issue which is the risk that MicroStrategy creates systemic risk with its little Ponzi scheme.
This idea of selling shares to something at a premium to the sum of its parts isn’t new. We’ve seen it in past cycles and it almost always ends poorly.
What is different this time is the parts have no intrinsic value. I still believe Bitcoin is worth (approximately) $0. It is nothing more than a confidence game. At some point, people lose confidence and the game ends.
The question is whether MicroStrategy, as the Pied Piper of Bitcoin, will bring about the end of the game. If you were making a list of suspects, it would have to be at the top of the list.
Just as Saylor’s buying whips up the frenzy that drives Bitcoin to new heights, any selling by MicroStrategy could unleash a powerful negative reaction.
Frankly, he is trapped. He can’t ever sell without risking inciting a panic. Note, he has sold MicroStrategy shares instead, but that is perceived differently than selling Bitcoin.
What would make him sell Bitcoin? Certainly not reaching any price target. He is a True Believer. It would have to be that he becomes a forced seller.
What could force him to sell? Debt maturities.
In other words, if the stock stops going up, the debt won’t convert and they’ll have to sell Bitcoin. Note, there is a debt maturity every single year from 2027 to 2032 (the slide below does not include the new $3B due in 2029).
As you can see below (the blue line), Bitcoin has had 75+% drops from its highs four times in just twelve years!
The difference is next time it happens, MicroStrategy will have to sell at the bottom to pay off a maturing convert!
When that maturity approaches, every hedge fund I’ve ever heard of will try to beat MicroStrategy out the door.
This will cause a further collapse in Bitcoin pricing while, simultaneously, collapsing the MicroStrategy NAV premium.
This means the following year’s maturing debt will also need to be paid off by selling more Bitcoin and the cycle starts anew.
Given that forced selling, it may be the next selloff is closer to 90% than 75%.
And sitting right at the center of it, unfortunately, will be Allianz hoping their future maturity can be paid in full.
Why would Saylor have to sell vs just raising more capital (maybe at a much lower premium/discount)? I think the party keeps going until the liquidity regime changes.
Capital markets aren’t always open. If BTC is down 50% and they have a $1B debt maturity to pay off, he doesn’t have many options other than selling $1B of BTC.
Since other investors will know this, they will sell $10 or $50 or $100B in front of him to drive the price down.
The melt down is the same psychology as the melt up, just in reverse.
“I still believe Bitcoin is worth (approximately) $0. It is nothing more than a confidence game. At some point, people lose confidence and the game ends.” The code is simple. It’s been working for 15 years now. If someone could hack it they would profit in the hundreds of millions if not billions (i.e. it’s the world’s largest bug bounty ever) so it stands to reason it would already be hacked if hackable but it hasn’t been hacked. So what is going to shake people’s confidence? Another 15 years of operational excellence? Continued institutional acceptance? Continued financial gains?
Haha, good try “Michael”. I never said it would go to $0 because of a hack though if you saw the recent Google quantum supercomputer news, it might be closer than you think!
This was a very interesting article.
Yes, I think MSTR is over priced and at some point, Saylor will sell.
Bitcoin is volatile and it is bound to disappoint Saylor’s beautiful infinite capital machine. It disappoints everybody at some point.
But mark these words, confidence always returns. Bigger and more determined.
So you mentioned how Bitcoin is a confidence game and it is true. But the party is not going to end, it is going to phase shift, once again.
I’ll start with the Googe Quantum Supercomputer news. I have studied the quantum computing stack and are a certified developer of these computers. What I can tell you is that these computers are going to be very hard to build because the Physics of how to realize them is really arcane and even then, we are scratching the surface.
It may take not 10 years, but 100 years.
But imagine they are pulled off, then hacking Bitcoin will not rug Bitcoin. Hence MSTR, Saylor, and all his buddies and fanbase.
Before you hack Bitcoin, hacking a Bank with that computer is far easier.
So this actually plays into MSTR raising more capital. From Banks fleeing vulnerable dollar / altcoin rails.
But the biggest phase shift is the name of the game. Scarcity of a digital commodity that cannot be manufactured.
Bitcoin is the only cryptocurrency that, as the coins get sucked up by super hodlers like Saylor, is being pushed towards a supply shock that will make MSTR overvalued.
At some point, MSTR and all big whales will be so overvalued Saylor will want to cash out, but selling to normies will crash the price.
The stock will climb high and Saylor will pay all his debts. Say in BTC.
Granted.
But sitted on all his bitcoins, he won’t be able to move more his stockpile because no body wants to give him any more of their hard money / BTC. Everybody wants to hodl.
Due to lack of movement, the price starts to fall.
And no, no naive people will be onboarded because these naive people will be hodlers too. Waiting for a payday.
From who? Aliens?
(In my scenario, imagine up to 1 billion people have been made hodlers. The remaining billions don’t give even a slight damn about BTC tech or stocks or whatever).
So eventually, the coin will crash due to unuse or little movement. But not to zero. Just like the US dollar, it will inflate away slowly (deflating in price) as Bitcoiners accept the reality that maybe people aren’t as tech savvy as they thought and they should actually build sh*t that people love to trade for BTC more than USD, not hodl to some imaginary value.
Then after maybe 10 years,
of dropping 5% per year on average, it climbs a little over 10% per year.
Until a better usecase is found, or lost coins create a new phase shift.
If those Quantum Computers are built, bingo, it jumps again.
I give it saturation at ~ $10 million per coin by 2040.
At that point, it will be stuck. It won’t go higher because there will be hodlers blocking its movement, too much debt that needs it to go up but no one is selling more debt, and many scammers who will have rekt all possible newbies into quietly watching this storm of wild money hype.
Unless real utility from AI, nanotechnology, or Elon bringing resources to Earth from Mars, bumps it up to $20 per coin.
I mean, BTC is money and it is seemingly immutable to ANY code changes.
It is like a rock
But well, money doesn’t go up in value forwe’ll, At one point in its distant past, dollars were going up in value (meaning they were like BTC). Yes, gold standard.
No, it wouldn’t have happened forever.
Growth isn’t forever.
Even skyscrapers have hit a limit now.
If it doesn’t inflate away into uselessness, it will saturate as per current market activity.
Until market activity starts growing faster, it saturates.
What will people sell Bitcoins for in this medium-far future? If continuous issuance of dollars (that will have become completely non-physical – i.e. no wheelbarrows) has “devalued” the USD, at the same time as layer 2 networks for Bitcoin exchange make transactions trivially inexpensive, surely people will just start to “sell” their BTC for services & physical goods.
In other words, BTC just becomes the numeraire for economic goods and the dollar goes away.
I read MSTR is issuing new 0 coupon converts to retire higher coupon interest bearing debt, thereby saving interest payments for the firm. He is issuing new converts to pay off existing debt, and does not need to sell bitcoin. The capital markets need to be open for the next four years – capturing American exceptionalism vs. ROW. Saylor is not stupid, he has actually managed this process which no public company can replicate as he has first mover advantage. He does need to buy an income generating firm at some point.
I don’t think Bitcoin is zero, its floor has been $17k (Satoshi’s) & in many regimes its a store of value where citizens live in a corrupt or unstable regime. How many rubles or Yuan or dinars do you think have converted to Bitcoin. It reflects a need for those that feel powerless in their fortune in an unstable regime. Its a substitute for real estate, gold, art & other portable stores of value that are inflation hedges & immutable. Thanks for this note, a very clear explanation of why MSTR is trading at a premium & why one would buy it vs. bitcoin. Allianz & other insurers must be stretching for investment returns.
He says very clearly in his investor deck the plan is to raise $21B more in converts and I believe there is no more coupon debt, so this is about way more than refinancing. The intent is to drive the so-called “yield” up through leverage.
I agree there are places where people would want to use Bitcoin for gray market activities (whether noble like you suggest or illicit to avoid getting caught) but, if that were its main purpose, the value should be fairly stable and boring, not highly volatile. The last thing someone in Argentina needs is to convert pesos to Bitcoin, instead of USD, and see it cut in half. The volatility actually proves it is a terrible store of value which means the main reason to own it is speculative fervor.
I don’t understand the tax consequences of Bitcoin gains treated as a commodity. My understanding was that its subject to capital gains, similar to equity gains. Is this tax treatment something new?
Commodities typically tax gains at ordinary income. It’s a bit more complicated than that (I don’t remember all details) but that’s the main thing and also there are issues holding them in retirement accounts.
This is an interesting argument, and I think mostly accurate but I think some of it is a bit overstated. I did a bit of digging, and it appears that the zero coupon converts were probably sold to investors in the low to mid 90’s, not at par, so the implied interest rate Allianz is receiving is likely somewhere between 1.2% to 1.7% annually. Still low for a high yield bond, but not exactly zero.
Whereas cryptocurrencies are non-admitted assets for insurance companies and effectively get a 100% capital charge, there are easier ways for an insurance company to get more direct exposure to Bitcoin than a MSTR convert if it really wanted to. My guess is that Allianz’s purchase of the Microstrategy convertible bond is more of a bond investment with a potential equity upside due to the high volatility.
Given the bond rating, company’s debt to equity, and debt to assets (admittedly mostly Bitcoin), it’s not quite as risky a holding for an insurance company as I think you make it out to be.
It’s reasonable to assume that an insurance company will hold a bond to maturity, but a long only investor doesn’t need the stock price to close above $672 by the conversion date. If the stock price goes up part way to $672, or the volatility increases, the delta of the convert will increase & the market value should go higher. An investor who bought below par could realize a market value gain long before the bond matures.
As you mentioned, MSTR converts are an absolutely fantastic holding for a volatility investor, who could trade the delta & gamma and hedge out the credit risk to Microstrategy itself. But, the converts that Allianz bought have a conversion price so far below the current stock price that they have very little delta in the price. An interesting trade for a patient investor might be to warehouse those bonds until the delta increases, then sell them to a hedge fund.
Thanks for the thoughts. Didn’t realize it was sold at a discount, so good catch.
I agree for an average investor you don’t need to hold it and wait for the convert, but do we really think a life insurer should be buying bonds to trade gamma???
That’s my main point – if they’re buying it to hold, then they’re the minnow here, cause everyone else is buying it to play the vol, so they’re not fully understanding the trading dynamics.
And if they are buying it on a view on vol to sell later, that doesn’t seem consistent with their likely risk management framework and I don’t think a regulator would be happy with that choice.
Hi Ian, I found this this really interesting, thank you for taking the time to share your thoughts.
I am still exploring this – but do you think part of Allianz buying strategy may be due to accounting?
U.S GAAP requires Bitcoin to be treated as an intangible asset, meaning any drop in Bitcoin’s price triggers an impairment loss on the balance sheet, even if the price later recovers. This creates volatile financial reporting, and adds operational complexity, as Allianz must track fair value and comply with the detailed U.S accounting rules. By buying MicroStrategy stock, Allianz avoids these challenges while gaining indirect exposure to bitcoin. In other words, if Bitcoins value falls, it must be reported, but if its price rises above its carrying value, the gains cannot be recognized until he asset is sold. This results in understated assert value on the balance sheets and mismatch between reported performance and the actual portfolio value. However, MSTR gains and losses are recognized symmetrically, thus avoiding the hidden gains problems associated with Bitcoin.
Also – for what its worth Michael Saylor’s track record as CEO has its blemishes. In 2000, while Michael Saylor was still the CEO, the company was hit hard after an accounting scandal, where it prematurely recognized revenue, leading to a major statement of earnings and a 62% drop in one day. This coincide with the dot-com bubble collapse, causing the stock to fall from $333 to $4 share price by the end of the year.
Yes, I think the accounting plays a role. I would guess it’s a secondary motivation, but you are correct that the convert is less likely to need to be written down (though if Bitcoin crashes and Micro’s ability to repay is questioned, the bond could end up impaired too). Note, MicroStrategy itself has had this issue with GAAP equity being hit by previous Bitcoin declines.
And yes, I remember MicroStrategy’s past failures! It is amazing he has become the face of this movement. It would be like if Dick Fuld came back to run a crypto focused investment bank and every new memecoin used it to create synthetic securities!
Putting aside your speculative critique as to Allianz’s motivation for indirectly gaining exposure to Bitcoin, I think your underlying opinion about Bitcoin itself is born out of an entitlement mindset leading to a blindness as to what motivates some to own it. Meaning your entitlement emanating from being born and living in a democratic country with a rule of law and one that values property rights.
One of the larger incentivizes for the motivation behind why certain investors purchase Bitcoin is directly connected to their status as citizens of repressive countries where the state attempts to corral capital via capital controls.
Separately Trump has hinted at the creation of a national crypto reserve fund and it’s likely incentivized by the exact dynamic described above.
That said, something like a stablecoin if (properly regulated effectively) works somewhat like a money market fund, but instead it’s linked to the blockchain. However it can be structured to only invests in T-Bills. For Americans there isn’t a lot of utility in this as a savings vehicle since Americans have access readily to money market funds.
However, if a stablecoin becomes a means of a transaction then there’s a floating balance created (hundreds of billions potentially) aimed at funding the U.S. government. What becomes really attractive about a stablecoin then is it becomes deemed a store of value for people like the Chinese, Russians, Argentineans, etc.. since no government can stop these people from accessing a stablecoin.
Therefore if the U.S. creates a stablecoin this becomes a huge portal for capital outflow to the United States and directly into the T-Bill market. Other countries (EU, etc..) would likely then follow form and mimic the U.S. in this day and age of historically high debt to GDP and budget deficit levels.
In a geopolitically decoupling industrial world where cheap Chinese goods are dissipating this is a very plausible national capitalistic strategy (amongst others like corporate interest expense deduction, etc.) to attempt and assist manage funding governments with rather large debt levels and rising inflation levels.
Hey Ian, couple things come to mind.
Bitcoin’s last decade of history and price action make me think the loss of confidence scenario is quite low. The volatility seems to be decreasing over time and more so looking forward, and the 200 week MA only increases over time. Over a 5 year time period I don’t see as much of a confidence issue.
Here’s a 50 minute convo between a director at Howden Re and a former convertible bond trader turned fund manager on MSTR’s bond strategy.
https://m.youtube.com/watch?v=8U1JqBQ82b4
Keen to hear your thoughts.
Re: Bitcoin’s lack of intrinsic value, here’s another video. https://m.youtube.com/watch?v=nQQUvYnOfeg
TLDR there is none.
I think there’s a lot of misinterpretation in this — you said it yourself, this is a very poor way to get exposure to BTC as the 50% premium eats a lot of upside plus you’re getting Microstrategy (not Bitcoin) at a premium to the holdings.
Seems far more likely this is just a typical yield play for them and they’ll act as the convertible arbitrageurs.
Simple example:
– Allianz buys $150m of bonds with a conversion price of $672.
– 2 year 55% out of the money calls on Microstrategy sell for ~36% of the stock price (using today’s prices but they would have done it then).
– $150m of bonds divided by $672 stock price is 223k shares so they can sell 2,232 options
– If the stock goes up 55%+ in the 2 years then Allianz converts the bonds to cover the calls they sold and makes ~$25m of premium from selling the calls (~10% interest rate given the call premium is upfront).
– If the stock *doesn’t* go up 55% in 2 years, then the calls expire worthless and Allianz keeps the bonds plus the call premium (again, ~10% interest rate). They can then do the trade again.
With all that said, I don’t love the trade as Saylor is liable to overleverage the company and create downside risk (though that could be hedged with some deep OOTM puts).
Tl;dr: Let’s not be too quick to dunk on Allianz as they’re professionals but please don’t try to DIY this either.
I understand a professional convert trader can profitably trade this. That, however, is not the mandate of an insurer’s general account. That is why there are risk capital charges assigned to investments. They shouldn’t be gambling on convert arb, even if it’s priced well.