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Seeking Alpha 2026-06-29 10:45:22

Explaining The Strategy Preferred Shares And Why STRF Is The Only Potential Choice

Summary Among the five preferred series (STRF, STRC, STRK, STRD, STRE), STRF is structurally superior due to its cumulative status and punitive compounding rate (up to 18%). Strategy officially established a USD Reserve on December 1, 2025. This cash is explicitly earmarked to cover dividends for preferred shares like STRF and interest on debt. While the reserve provides a massive cushion, it remains discretionary. Strategy is funding this reserve by selling common stock (ATM program) rather than through business profits. MSTR can only cover a bit over a year of preferred share dividends while also having to grapple with a February 2027 maturity date for its debt. Thesis In the past few days, the preferred shares from Strategy ( MSTR ) have been in the spotlight due to their massive negative price moves: Performance (Seeking Alpha) Strategy Inc. 8.00% Series A Preferred Shares ( STRK ) and 10.00% Series A Perpetual Stride Preferred Stock ( STRD ) 'lead' the pack with moves in excess of -30% in the past month, but Strategy Inc. Variable Rate Series A Perpetual Stretch Preferred Stock ( STRC ) is also fairly close at -27%. Many market participants are ultra-focused on STRC because the Strategy CEO compared it in the past to money market instruments: Saylor Quote (X/Twitter) So said investors have been shocked to be down almost -30% in the span of a few weeks (STRC trades close to $71/share as we speak). It appears that many investors were caught wrong-footed, and we are going to explain why the market has punished these instruments so badly. Furthermore, we are going to show you why the Series A 10% Preferred Equity ( STRF ) is the only viable security from the cohort that you should consider. We have covered STRF before on the Seeking Alpha platform. Let us quickly recap what STRF actually is STRF are preferred shares from the company and thus fall in the equity line of the balance sheet. The details regarding the securities can be found in the prospectus here , but below please find a summary of the most important analytical aspects regarding the shares: Ticker: STRF (Nasdaq listing) Par Value: $100/share Interest Rate: 10% Maturity Date: Perpetual Dividend type: Cumulative (VERY important to remember) Payment Dates: March, June, September, December Compound Dividend: 10% + 100 bps (another very important feature to remember) Maximum compound dividend rate: 18% One of the most important aspects from a structural standpoint is the cumulative dividend that compounds at a punitive rate if it is not paid. This is very important to remember, because later issuances give Strategy much more flexibility in terms of deferring the coupon or resetting it at their own volition much lower. It is the case with the 9% Preferred Shares, which we covered here with a 'Sell' rating. For example, if STRF misses a payment, the next quarter the rate compounds at 11%. Furthermore, if the next quarter the payment is skipped as well (the cumulative one), the new rate will be 12% (each missed quarterly payment date the rate moves up by 100 bps as per the above formula). This is a very, very punitive rate that basically moves to 14% during a year of not paying dividends (four quarterly missed payments). In fact, the company itself calls STRF the 'Crown Jewel' in its capital structure presentation: Capital Structure (Strategy) The above pyramid should give investors a good sense of the riskiest slices of the capital structure in the company. The common shares are the riskiest (at the bottom of the pyramid), while the convertible debt (classified as liabilities on the balance sheet) sits at the top of the pyramid because they are the most senior. The bitcoin ( BTC-USD ) listed by Strategy in the pyramid is a holding, not a slice of the capital structure. The reason for which they put it there is that Strategy's capital value depends almost entirely on the price of its main holding, namely bitcoin. The ranking in a bankruptcy can be found in the 'Ranking' section of the prospectus (the link was provided above), which states the following: The perpetual strife preferred stock will rank as follows: * senior to any other class or series of equity security, including our class A common stock, class B common stock and perpetual strike preferred stock, with respect to the payment of dividends and with respect to the distribution of assets upon our liquidation, dissolution or winding up other than any equity security referred to in the second bullet point below; * junior to our existing and future indebtedness (including all of our issued and outstanding “Convertible Notes”) An investor needs to differentiate between an obligation to pay and a commitment to pay An educated investor needs to make the differentiation between the legal obligation to pay a security and management's 'commitment' to pay it. For example, when the Strategy convertible debt comes due for maturity, the company must pay it back; otherwise, it will go into default. Conversely, preferred shares do not need to be paid. While STRF has structural and legal components that defer that interest at a punitive rate, other preferred shares from Strategy do not have the same provisions. If we look at the other preferred shares, we get the following: STRC: variable, cumulative dividend; the dividend is variable and can be changed by MSTR at its discretion, with the absolute floor being SOFR. So if MSTR runs out of cash, they can legally change the dividend on STRC to equal SOFR. When pricing preferred equity that yields just SOFR but the market requires above 10% yields, one gets a low price in the 40s or 50s. Hence, the current move is related to a fear that MSTR will cut the variable rate. The full prospectus can be found here . STRK: fixed 8% rate, cumulative dividend, plus equity upside via a conversion feature (this only holds value when MSTR shares are outperforming). The dividend here is cumulative, but there is no punitive rate if it is deferred. STRD: is the worst of the lot (and has the lowest price). This security is not cumulative and has a fixed 10% rate. If MSTR wants to preserve cash, it will just stop paying this security with no recourse or legal implications. So on the back of the sell-off in Bitcoin, the market is fearing that MSTR will not be able to access liquidity via the issuance of common or preferred shares, thus will be forced to cut the dividends to some or all of its preferred shares. The ones most affected are the non-cumulative ones, followed by lower coupon ones like STRK and finally the variable rate STRC. STRF has held up the best from the bunch because it embeds a punitive rate if the dividend is suspended. Thus, this security forces the company to think twice about not paying because it is a cascading liability. In effect, STRF is more of a play on the solvency of the company, whereas STRD holders are at the whims of the management. That is the explanation for its outperformance, and that is why investors should only consider STRF from the suite of preferred shares offered by MSTR. Cash on the balance sheet If we look at the latest available financials on the Seeking Alpha ' Balance Sheet ' tab, we will see that the company does show a large cash balance of $2.2 billion. On December 1, 2025, the name announced the creation of the large cash balance via a 'liquidity reserve': Strategy today announced that it has established a USD Reserve of $1.44 billion to support the payment of dividends on its preferred stock and interest on its outstanding indebtedness (“Dividends”). The USD Reserve was funded using proceeds from the sale of shares of class A common stock under Strategy’s at-the-market offering program. Strategy’s current intention is to maintain a USD Reserve in an amount sufficient to fund at least twelve months of its Dividends, and Strategy intends to strengthen the USD Reserve over time, with the goal of ultimately covering 24 months or more of its Dividends. The maintenance of this USD Reserve, as well as its amount, terms and conditions, remains subject to Strategy’s sole and absolute discretion and Strategy may adjust the USD Reserve from time to time based on market conditions, liquidity needs and other factors. Please note the bolded text (by us) above. The reserve is a discretionary one, as decided by Strategy. If, let us say, they decide to buy more bitcoin because the price is very low, they can certainly do that. The reserve is NOT a legal requirement, just a commitment by the company. Based on the latest developments, S&P affirmed its junk rating for Strategy but noted that the lack of operational cash flow generated by the company was a weaknesses: While we believe the establishment of a US$ reserve may mitigate some liquidity risks, we also note that the company only has a limited track record of managing the US$ reserve, and further declines in the stock price or mNAV could weaken the company’s access to capital markets. We continue to view Strategy's narrow business focus and lack of operational cash flow generation as weaknesses. As stated by S&P as well, a weak ecosystem for bitcoin would erode the company's access to capital markets. Given the current amounts outstanding on the preferred shares stack and the current coupons, the total estimated annual cash outlay for MSTR is $1.5 billion to service the interest payments. This is a very large figure, and the current liquidity reserve covers a little more than one year of payments. Given that MSTR generates very little cash organically from its software business, the market is concerned about cutting the dividends to the preferred shares or suspending them. The other alternative for MSTR would be selling bitcoin. What can MSTR actually do An investor needs to run through some risk scenarios here. If bitcoin keeps going down (and we are in this camp), MSTR will need to make some decisions regarding its cash outlay. We are of the opinion that the company will not sell its Bitcoin. That step, in our view, is only the last resort to pay for the convertible debt, which has its first maturity date in 2028 and has a $1.01 billion principal amount: Debt Maturities (Strategy) The above is actual debt and the only securities that can cause MSTR to default. Paying interest and principal on time for debentures is a precondition to staying solvent. Strategy fully understands this and will pay its debentures no matter what. There is no legal obligation and no solvency implications if preferred equity is not paid (i.e., deferred dividends). MSTR can, and we believe will, shut off dividends to its preferred shares if bitcoin keeps falling. The company's goal is to stay solvent, and the only way it can go bust is by defaulting on its debt. It will NOT do that. Instead, the most logical approach is to save cash by shutting off dividends to the preferred shares, waiting for bitcoin to rally again. Such an action would preserve the company solvent and keep management employed and compensated. In this particular scenario, STRF is the best security since it has a cumulative dividend that will increase and compound as it is not paid. STRD is the worst because they will get the cash shut-off, and they will not get it back again. The above-outlined scenario is not an outside one but a very real and possible one. The market is already pricing for it, with STRD touching 50 today. So basically, 50 c/$ for an instrument represents very distressed territory. Market participants are purely saying, 'What is this worth if I don't get any dividends for two years?'. Investors therefore need to understand that the risk of dividends being shut off is real, and the market is pricing for it. Do not get lured by the promises of salesmen painting STRC as a 'money market' instrument. Look at the legal obligations and understand that from a legal standpoint, only STRF protects investors best. We have actually warned investors about this very real risk in an article on STRC back in December 2025. You can find the article here , and we rated STRC 'Sell' at the time. Conclusion STRF are the first issued preferred shares from MSTR. The securities are cumulative and have a punitive interest rate if cash payments are deferred. The structure does not allow for a lower coupon, thus putting a floor on price during an MSTR liquidity crunch. The company announced its commitment for a liquidity reserve in cash to pay future dividends, but the maintenance of such a reserve is purely at its discretion. We are bearish on bitcoin and consider STRF the best preferred security from what MSTR has issued so far. The massive drawdowns in the MSTR preferred stock are the result of market participants pricing in the possibility of dividend suspensions.

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