An indepth look at STRK and STRF

Strategy has recently expanded its financial offerings with two new preferred share products - STRK and STRF. These innovative financial instruments provide investors with different ways to gain exposure to Bitcoin while offering regular dividend payments. This article explores the unique features, protections, and strategic significance of these preferred shares.

STRF: Fixed Income Preferred Shares

STRF represents Strategy’s non-convertible preferred share offering, designed primarily for risk-averse, fixed-income investors. The product offers a 10% annualized dividend yield based on a $100 liquidation preference, placing STRF holders in a senior position within Strategy’s capital structure. This means that in any liquidation scenario, STRF holders would be first in line to receive payment, providing an additional layer of security for more conservative investors.

What makes STRF particularly secure is its significant overcollateralization. The preferred shares are backed by Strategy’s substantial Bitcoin holdings at approximately ten times their value, creating a considerable safety buffer for investors concerned about risk exposure.

Built-in Protections for STRF Holders

Strategy has implemented several sophisticated protective mechanisms for STRF holders that create a robust framework of financial incentives and governance safeguards.

The company has established a compounding penalty system for missed dividends. If Strategy fails to make a quarterly dividend payment to STRF holders, the dividend rate automatically increases by one percentage point (100 basis points) for each missed quarter. This escalation can continue until reaching a maximum rate of 18%. For instance, if Strategy owes a $2.50 quarterly dividend (based on the 10% annual rate) and misses a payment, the next quarter’s dividend would increase to $2.75, reflecting the higher 11% rate. Additionally, Strategy would still owe the missed $2.50 payment from the previous quarter.

This mechanism creates a powerful financial incentive for Strategy to maintain consistent dividend payments. The compounding nature of the penalty ensures that delaying payments becomes increasingly expensive for the company over time.

Beyond the financial penalties, Strategy has instituted strict management obligations following any missed dividend. After missing a payment, Strategy’s management team has a 60-day window during which they must take whatever actions necessary to fulfill their obligation to STRF shareholders. This could include selling Class A shares or issuing additional convertible notes to raise the required capital.

This requirement elevates the STRF dividend to the company’s highest financial priority.

Perhaps most significantly, Strategy has built in governance consequences for extended payment failures. If the company fails to make good on a missed dividend within the 60-day grace period, STRF shareholders gain the right to appoint a director to Strategy’s board. This director would be specifically focused on addressing the dividend situation and protecting STRF holder interests. This governance mechanism represents a substantial transfer of corporate power that would likely motivate management to avoid missed payments at almost any cost.

STRK: Convertible Preferred Shares

STRK offers a hybrid approach with different characteristics that might appeal to investors looking for a middle ground between fixed income and equity exposure. These convertible preferred shares provide an 8% annualized dividend yield based on a $100 liquidation preference.

What distinguishes STRK from STRF is its convertibility option.

Each STRK share can be converted into 0.1 Strategy Class A shares at the holder’s discretion. This feature means STRK shares will typically track more closely with Strategy’s common stock price, though with less volatility due to the dividend component.

In the capital structure, STRK occupies a middle position - junior to STRF but senior to both convertible notes and Class A shares. This positioning reflects its hybrid nature, offering more security than common equity but slightly higher risk than the non-convertible STRF shares.

Price-Yield Relationship

An important aspect for investors to understand about both offerings is the inverse relationship between market price and effective yield.

The stated dividend yields (10% for STRF and 8% for STRK) are based on the $100 liquidation preference, not the market trading price.

When preferred shares trade above their $100 liquidation preference, their effective yield decreases. For example, if STRF trades at $125 in the market, while the dividend payment remains fixed based on the $100 face value, the effective yield would drop to approximately 8% rather than the stated 10%.

Conversely, when shares trade below the liquidation preference, the effective yield increases. This dynamic was recently demonstrated with STRK, which paid approximately a 99.5% annualized dividend rate - well above its stated 8% - because it was trading below its liquidation preference at the time of the dividend payment.

This floating effective yield creates interesting dynamics for investors, potentially offering opportunities to maximize returns depending on market conditions and price movements.

Strategic Shift in Capital Raising

Strategy appears to be transitioning its at-the-market (ATM) offering usage from Class A common shares to these preferred shares. This shift represents a significant evolution in the company’s approach to raising capital while maintaining its Bitcoin-focused strategy.

The move toward preferred share ATM offerings addresses several challenges that emerged during previous capital raising efforts. In late 2024, many Class A shareholders expressed concerns about dilution and selling pressure from Strategy’s capital raising activities. By shifting toward preferred shares, Strategy can potentially reduce this pressure on its common stock while still accessing needed capital.

This approach is also potentially more accretive to existing Class A shareholders over the long term. While the dividend obligations create regular cash flow requirements, they avoid the permanent dilution that comes with issuing additional common shares.

Perhaps most importantly, these new financial instruments expand Strategy’s potential investor base. The preferred shares, particularly STRF, appeal to fixed-income and more risk-averse investors who might otherwise not consider investing in a Bitcoin-focused company like Strategy. This broadening of the investor base could provide more stable and diverse funding sources going forward.

Conclusion

Strategy’s preferred shares represent innovative financial instruments that provide investors with different risk-reward profiles for gaining Bitcoin exposure. The robust protection mechanisms built into STRF particularly demonstrate Strategy’s commitment to creating sustainable financial products that balance the interests of various stakeholder groups while maintaining the company’s ability to execute its Bitcoin-focused business strategy.

These preferred share offerings continue to evolve the financial landscape around Bitcoin-focused companies, potentially setting precedents for how other organizations might structure similar products in the future.