CMCSAComcastNeutralComcast

1w ago

Credit Weekly: Rates Did Most of the Damage

The Fed hiked 25bps. And then the market hiked another 60. The second move is the one high yield investors should be watching. Since the end of August, the peak policy rate priced into futures has risen about 60bps. The 5-year Treasury closed above 5% for the first time since 2007, and the high yield index has lost 1.84% in September, with rates doing most of the damage and wider spreads adding to it. Every borrower that needs to refinance now faces a higher base rate. How much that hurts depends on what the borrower does with the money. This week showed who can absorb it. SoftBank borrowed $11bn at record yields for the company to fund its OpenAI stake, the 4th largest junk bond deal on record, and the market took it without much trouble. At the other end, CCC spreads finished at the top of their one-year range. Several Fed speakers also named the AI buildout as one reason inflation is sticky, and the committee is hiking to deal with it. The companies funding the buildout can pay the higher rate. The stress is showing up in borrowers with less room to absorb it. One ask before we start. I put together a short reader survey to get a better sense of the type of content you want to see more of. Takes 2 minutes and feel free to skip any questions. Take the survey here The 5-year went through 5% Implied peak SOFR was about 4.3% at the end of August. By Friday it was 4.8%. Several Fed speakers said this week that AI is part of how they read the data. Paulson said the buildout is one factor keeping underlying inflation stubbornly high, and Barkin said the wave of AI investment is pushing up prices for some technology equipment. Oil, tariffs and a strong labor market are doing plenty on their own, so I wouldn’t say AI sets the path of rates. But it has become part of some officials’ case for further tightening, and Paulson tied AI price pressure directly to her support for the hike. The 5-year closed above 5% on Thursday for the first time since 2007 and finished the week at 4.99%. Why the 5-year? Because that’s high yield’s tenor. It’s where most of the paper in this market was priced and it’s what a refinancing gets marked against. Take a bond issued in 2021 with a 5% coupon against a 1% base rate. It now rolls into an 8% market against a 5% base, and almost all of that is the base rate. Since the end of August the 5-year has risen about 50bps, while high yield spreads are about 31bps wider. Most of the rise in borrowing costs came from the market repricing the path of rates, not from the hike itself. The borrowers who can pay 8% SoftBank sold $11bn of dollar and euro bonds on Wednesday to fund its OpenAI stake. It paid record yields for the issuer and the deal ranks 4th on the list of the largest high yield transactions on record. It anchored the busiest week for junk issuance in a year. The 3rd largest deal on record is Jane Street's $14.6bn, in August. Two of the four biggest deals this market has done priced within 6 weeks of each other, one for a Japanese conglomerate buying AI equity and one for a proprietary trading firm. Jane Street isn’t an AI deal, but it’s the same kind of borrower. Neither is a leveraged buyout, and a sponsor-owned company at 6x needs this market far more than either of them does. They came because it was the cheapest large pool of money available that day, and when it isn’t, they’ll go somewhere else. September’s issuance is already the second busiest month of the year, behind April. SoftBank is borrowing at those yields to make an investment it believes will earn more. A company refinancing a flat business pays the higher coupon without getting a new source of return. Outside AI, issuers are staying short Outside the hyperscalers there’s very little long paper being issued, and it showed this week when Sysco printed $14.7bn with a 30-year tranche that paid almost nothing over secondary. Investors who want duration outside AI had few other places to get it. Issuers that aren’t building data centers are borrowing five and seven years and waiting for a better long end. That’s rational on the day and worth watching in aggregate. Those issuers are keeping refinancing risk instead of selling rate risk, betting that rates come down before the bonds come due. If enough balance sheets make that bet at the same time, a lot of this year’s seven-year paper comes due together in 2033. The bottom of the index Everything sold off this week, single-Bs too. Single-B spreads are 281bps, 28 wider on the week, which still leaves them in the bottom third of their one-year range. CCCs are 968bps, 49 wider, at the top of their range, with yields at 14.6%, the highest since late 2023. The index sits roughly in the middle. So the widening was general, and the only part of the market at a one-year extreme is the bottom tier. That looks like the low end starting to break, and CCC fundamentals have weakened too. But the losses are narrower than the index level suggests. Pull apart the CCC return this year and the damage is concentrated. Optimum is the largest single drag, and communications is the weakest sector in high yield this year. The bottom is a short list of capital structures built for businesses that stopped growing. Cable subscriber losses aren’t new, and credit investors have been worried about them for years. What changed this week is in equities. Meta’s Muse app climbed to number one in the App Store, and investors sold a basket of subscription stocks, including Charter, Comcast and SiriusXM, on the idea that AI agents will make subscriptions easier to cancel. That adds another valuation lens to the stronger names in the sector, not just the overlevered ones. Whether credit adopts it is an open question. If it does, the CCC wides in cable are less likely to mean-revert with the rest of the index, and names like Charter have room to reprice wider. Housing is the one place the hike works the old way Thirty-year mortgages went through 7% for the first time since early 2025, and refinance applications are 62% lower than a year ago. Builder sentiment is at its lowest since 2022, and the median new home price is down about 6% y/y. This is what a hike is supposed to do to an economy, and housing is the clearest place it’s happening. It’s already in credit. Housing is one of the worst sectors in high yield this month, and with purchase applications 11% lower than a year ago, there is little sign of a turn. Next week PCE with annual revisions comes out Wednesday, and Friday brings the only payrolls print before the October meeting. On the credit side, the next supply test is Paramount. The state settlement cleared the way for about $52bn of debt for the Warner Bros deal. A $7.5bn term loan across dollars and euros is already being marketed, and banks plan to sell $32bn of investment grade bonds and $12.4bn of second-lien secured bonds early next week, aiming to price everything around September 30. SoftBank raised $11bn to buy into AI. Next week, Paramount asks the market to finance a media acquisition. How that deal prices will say more about the reach of this week’s bid than another index close. JunkBondInvestor is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber. Primary Market Issuance Secondary Movers JBI Bulletin Board Always interested to hear from readers. Whether you’re working on something I should know about, hiring, or thinking about partnerships, reach out at info@junkbondinvestor.com 1) Now Hiring I’m growing the team. If you have a credit background and want to work directly with me, see the careers page or reply with a short note on what you’ve done. If you liked this, you might also like: JunkBondInvestor is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber. JunkBondInvestor is an independent financial research publication providing general market commentary, corporate credit analysis, and educational content. The information provided is for informational purposes only and does not constitute investment advice, financial planning, or personalized recommendations of any kind. Nothing published constitutes a solicitation, offer, or recommendation to buy, sell, or hold any securities, nor does it guarantee any financial outcome. Any credit opinions or outlooks expressed are solely the independent views of the authors and are intended to reflect general credit trends, not specific investment recommendations. Investing in high-yield bonds, distressed debt, and leveraged loans carries significant risk including potential loss of principal. JunkBondInvestor operates under the Publisher’s Exemption of the Investment Advisers Act of 1940 and applicable state laws. This issue includes sponsored content and partnership links.

ORCLOracleNeutralOracle

2w ago

Credit Weekly: Who the Hike Hits

The Fed hiked. It was the first increase since 2023, the vote was unanimous, and the 25bps move takes the range to 3.75% to 4.00%. Warsh called it removing “a dose of accommodation.” He also said strong growth and the AI buildout’s competition for debt are part of why Treasury yields are up. The 10-year is at its highest level since 2007. So what happens 2 days later? A bitcoin miner sells $2.3bn of five-year notes at 8.25% to build a data center for Meta. And gets about $10bn of orders. That deal was in the works before the hike, so it doesn’t tell you anything about the hike. But it shows you who a hike actually hits. CleanSpark CHOSE to borrow. At a price well above where similar paper cleared earlier this year. And the book was 4x oversubscribed. Now if you’re a floating rate loan borrower… you don’t get to choose. Or raise a dollar. Your interest bill goes up at the next reset, the way an adjustable-rate mortgage does. I wrote in May that the Fed can’t slow a capex boom held back by transformers and turbines. This week was the money side of the same problem. JunkBondInvestor is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber. The FCF Hit Leveraged loans float, and most direct lending does too. The hike turns into cash interest on the next reset date with no pricing process in between. How far does this go? The Fed’s own dots have 16 of 19 participants expecting at least one more hike this year. Futures are more aggressive, with the funds rate near 4.2% by December and 4.7% by next September. KKR, one of the biggest owners of and lenders to exactly these borrowers, is looking for hikes in December and March and then a hold at 4.375% into early 2029 . I’m going with KKR, which is actually the CONSERVATIVE case. It works out to 75bps including this week. Now take a borrower at 6x debt to EBITDA, all floating, none of it hedged. 75bps costs 4.5% of EBITDA. Doesn’t sound like much, right? But let’s run a live example. A company with $100mm of EBITDA and $600mm of floating debt was paying SOFR of ~3.60% pre-hike plus a spread of 350bps or about $43mm. Say capex, taxes and working capital left $10mm of FCF. The 75bps adds $5mm of interest, before any tax offset. Interest coverage goes from about 2.3x to 2.1x but FCF goes from $10mm to $5mm, cut in half, and EBITDA didn’t move. Now the $10mm is my illustration, I made it up. But thin cash flow, I didn’t make that up. In the second-quarter sample of public loan issuers , 22% had cash-flow coverage below 1.5x, up from 20% a year ago, and 17% were levered above 7x. What does a company in that spot do? It can live with less FCF, cut capex, slow hiring, call the sponsor for a check, or PIK if the documents or the lenders allow it. It’s unlikely to be a missed payment initially. Higher rates squeeze investment and hiring long before they produce a default, which is how a small move at the Fed reaches the real economy. To the extent the strongest AI borrowers keep financing at the higher price, more of the adjustment lands here. Then again… This is not every borrower outside AI. The same sample grew EBITDA 9% in the 2Q, matching 1Q as the best pace since 2022, so for many leveraged companies earnings are rising faster than SOFR lifts the interest burden. The exposed ones are borrowers whose interest resets faster than their cash earnings can improve. That means contracted or reimbursed pricing, thin margins, and costs that can’t be passed through to the customer. Healthcare, consumer products, and transportation were the weakest sectors in that sample. Houlihan Lokey’s private credit data this week fits the narrative. Defaults, per HL, touched 2.5% of borrowers by count but only 0.8% of principal, so the stress is in the small names. About 12% of borrowers with less than $20mm of EBITDA have loans marked below 90, and in 2023 that number was 1%! Healthcare was the only sector with elevated defaults on both measures, 4.2% by count and 2.7% by size. Software, notably, was among the lowest. How Long They Hold The length of the hold matters more than the size of the hike. Borrowers cleared the near term, and only $32bn of loans mature through the end of 2027 . The wall is 2028. Amend-and-extend ran at $106bn in 1H’26, but B-minus borrowers got 27% of those amendments, down from 44% last year. The extensions went to the better credits. A rate held into 2029 sits on top of everybody still waiting, and in my example that’s an extra $5mm going out the door every year of the hold. Source: Pitchbook | LCD; Morningstar LSTA US Leveraged Loan Index Paying More and Building Anyway As for the AI borrowers…they’re paying more too. CleanSpark paid about 175bps more than the average BB issuer, when similar financings with IG tenants cleared below 6% earlier this year. Debt backed by residual value guarantees usually prices 100bps to 150bps over the guarantor’s own bonds . Meta’s Hyperion raised $27bn inside 150bps of Meta, and the next one of those prices off a Treasury curve at a 19-year high. The bank loans behind the buildout float as well. SoftBank’s was marketed at about 275bps over SOFR, and the Crux facility probably floats too, so they take the hike at the next reset like any other loan. Converts point the same way. CoreWeave priced $3.7bn due 2033 this week, upsized from $3.0bn, at a 2.875% coupon and a 22.5% conversion premium. The coupon on its April convert was 1.75%. The price went up and they kept raising. Why? Part of it is because demand for vol is high. A convert trades cash coupon for equity upside, and 2.875% is WAY below what CoreWeave pays on straight senior debt (currently yielding 11-13%). US-listed companies have sold $131bn of converts this year through September 10 , already an annual record, with $25bn in August alone. The banks are also still writing very large checks for the right sponsor and amortizing assets (chips in this case). Ten of them are lending $22bn to Crux , the Blackstone and Alphabet venture, to buy TPUs. And look at who is on the other side of these deals. Meta is the tenant behind CleanSpark and stands behind Hyperion, and Alphabet is a partner in Crux. For them, the spending is strategic. A borrower with a counterparty like that, a public stock, and lenders competing for the mandate has more room to pay up and keep going. The line between the two groups follows cash flow and financing options more than sector. An AI developer on an unhedged floating construction loan with no revenue until 2027 looks a lot like my 6x borrower. On the other hand, the rate hike barely registers for a BB industrial with fixed-rate bonds and no maturities until 2030. Where AI Financing Is Under Pressure Most of the AI chain depends on equity somewhere, and equities had a weird week. The Philadelphia semiconductor index fell about 6% in one session as the fight over AI guardrails escalated, and it’s more than 20% off its record with the 10-year near 5%. Holtec pulled its IPO on Wednesday, citing worries about an AI slowdown. OpenAI’s own projections show the March raise running out in 2028 , with $278bn of cumulative burn through 2030, and the IPO has been deferred. Credit is starting to pick and choose. The $18bn of loans behind the Oracle-leased Jupiter campus are quoted at ~90 by the syndicate banks , and distribution is stalled amid concern about Oracle’s borrowing. On an aggregate, AI-related IG bonds have widened about 50bps in recent months while the rest of the index has barely moved. So what do you do with all this? If you own floating loans, the KKR path means SOFR around 4.35% held through 2028. Re-run your coverage on that, then put FCF after interest right next to it. Sort by who hits a 2028 maturity with thin coverage and little FCF left, and by whose pricing is contracted or reimbursed. That’s where the capex cuts, the amend-and-extend requests, and the PIK elections show up first. Houlihan already has PIK elections on 11.8% of private credit loans by size. On the AI side, watch the equity calendar. Anthropic moved its IPO from October to November, and it could be the largest listing ever. SB Energy and Nscale are trying to list around it. Get those done at size and the chain keeps its alternative to debt. Another slip means more of the bill falls on banks and bond buyers who are already asking for more. High Yield Market Performance Primary Market Issuance Secondary Movers JBI Bulletin Board Always interested to hear from readers. Whether you’re working on something I should know about, hiring, or thinking about partnerships, reach out at info@junkbondinvestor.com 1) Now Hiring I’m growing the team. If you have a credit background and want to work directly with me, see the careers page or reply with a short note on what you’ve done. 2) Tell me what to cover A 2-minute survey on who you are and what you want more of. I’ll share the results in a future issue. Take the survey here . If you liked this, you might also like: JunkBondInvestor is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber. JunkBondInvestor is an independent financial research publication providing general market commentary, corporate credit analysis, and educational content. The information provided is for informational purposes only and does not constitute investment advice, financial planning, or personalized recommendations of any kind. Nothing published constitutes a solicitation, offer, or recommendation to buy, sell, or hold any securities, nor does it guarantee any financial outcome. Any credit opinions or outlooks expressed are solely the independent views of the authors and are intended to reflect general credit trends, not specific investment recommendations. Investing in high-yield bonds, distressed debt, and leveraged loans carries significant risk including potential loss of principal. JunkBondInvestor operates under the Publisher’s Exemption of the Investment Advisers Act of 1940 and applicable state laws. This issue includes sponsored content and partnership links. JunkBondInvestor receives compensation from sponsors for featured placements and may earn referral fees from partner programs.

NeutralAMDCORZCore ScientificCore Scientific

3w ago

Core Scientific ($CORZ): Is It Cheap After the Selloff?

Core Scientific is down about 40% from its recent highs. That’s not unusual for an AI stock this summer. What’s unusual is what happened to the company while the shares were falling. It finished building nearly everything it had promised CoreWeave. It signed a second tenant, and the tenant is AMD. Those are the two things a skeptic would have told you a year ago were the whole risk. So the risk everybody was worried about has largely been reduced, and the price has gone down. That leaves one question. Is the stock now cheap? To answer that I’m going to walk through the leases one at a time, put a value on each, and compare the total with what the market is paying today. Then I’ll look at what the price assumes about everything the company hasn’t built yet. First, let’s review what’s changed. Background For most of the past year, the only question anybody has asked was does a second tenant sign? The sole customer was CoreWeave which had 590MW across 5 campuses. Everything else in the portfolio was uncontracted power. So while investors waited for another tenant, CORZ kept delivering capacity to CoreWeave. Billing capacity went from 225MW at the end of March to 395MW at June 30 and 437MW by mid-July, with 4 of the 5 campuses substantially complete. The last 150MW, Dalton Phase 2, starts delivering at the end of this year and wraps in early 2027. At that point all 590MW is billing. That rent stream is what they borrowed against in May. $3.3bn of 7.75% secured notes on the CoreWeave project assets. And unlike operators who borrow ahead of construction, most of this capacity was already delivering or close to it. Then on July 27 the second tenant signed. 377MW leased directly to AMD , triple-net. Another 152MW to a neocloud, with conditional credit support from AMD. Both run 15 years with 2.5% annual escalators. Base contracted revenue over $14bn. Total signed capacity is now about 1.1GW. Roughly half the 530MW lands in 2027 and the rest by the end of 2028. Build cost is $11mm to $12mm per MW, about $6bn of construction spending, which management plans to finance with project bonds. Beyond that, AMD also received warrants on 30mm shares at $23.47 and reservation rights over another 1.9GW at the 3 direct-lease sites through December 2028. Unfortunately, the stock price did not cooperate. $30.46 at the June high. $22.75 on July 24. $20.74 the day before the AMD announcement and $21.81 three days after. Today it’s $17.93. Part of that is the broader AI sell-off, which also brought forced selling, including the liquidation of much of Situational Awareness’s public portfolio. Part of that is Texas. Six days after the announcement the governor directed ERCOT to verify every project in its large-load queue, and ERCOT delayed its Batch Zero classifications while it did so. The company’s Pecos and Hunt sites were both inside that process. So the first AMD site was suddenly waiting on the state. Meanwhile CORZ kept chugging along. The company closed its Polaris acquisition on August 14, $444mm in cash, adding 440MW of gross grid-connected power at Muskogee. Later that month, it set up a $100mm revolver and $500mm of letters of credit that free up about $300mm of cash collateral. As for where the Texas sites actually stand, that’s in the September 10 power update . Denton, with 297MW of existing load, is grandfathered outside Batch Zero. Hunt’s 431MW has conditional approval under Pathway (e), an approved stability study, collateral posted and long-lead equipment on order. Pecos has conditional approval on its existing 300MW and on a further 300MW of studied load, but it won’t get its final allocation and load ramp until Batch Zero concludes. Today’s capitalization Let’s start with today’s capitalization, because there are a few adjustments most people skip and they change the number. Read more

NVDANVIDIANeutralNVIDIA

8/9/2026

Credit Weekly: What If They Just Keep Borrowing?

Google came to the bond market last week with another massive deal . You may not have noticed because these deals have become all too common. The hyperscalers show up week after week, size gets done, each deal on its own looks routine, and everyone goes back to their screens. It’s only when you add them up that the picture changes. Hyperscaler capex for 2027 is tracking as high as $1.2 trillion. Six months ago that number was materially lower. Debt issuance is projected to be around $250 billion for 2026, and the street is penciling in $400 billion for next year. Meanwhile the 30-year sits at 5.20%, the highest since 2007, with real yields pushing 3%. The government shows no sign of spending less, and even fewer signs that the cost of borrowing enters the conversation at all. Source: Reuters A government running a deficit doesn’t get to skip an auction because the coupon looks ugly that week. The deficit gets funded whether the long bond is at 4% or 6%. And a hyperscaler chasing the AI race isn’t pausing spending over 50bps. So what happens to everyone else when the two most price-insensitive types of borrowers just continue to borrow? Issue Sponsored by 9fin: Download the Whitepaper AI is driving one of the largest capital allocation cycles the credit market has seen. But the opportunity is creating new risks across software, infrastructure and private credit — from hidden lease commitments and data center financing to changing SaaS economics and portfolio exposure. Our new whitepaper explores: Capital allocation into AI credits Risks of massive AI commitments How AI is sorting the credit universe New economics of SaaS businesses in the world of AI Private credit’s AI explosion and implosion Built using 9fin’s proprietary data, market expertise alongside 9fin AI Chat, it shows what’s possible when deep credit intelligence and purpose-built AI work together. Download the whitepaper The Textbook Version Under textbook theory, the cost of capital does the disciplining. A developer models a project, the financing costs 200bps more than it did 2 years ago, the projected IRR slips below the hurdle rate, and the project dies. Multiply that across every borrower in the economy and you have the main way rate hikes reach the real economy. Rates rise, marginal projects stop clearing, and demand cools. These factors matter less to the two borrowers at the top of this market. The government’s case is obvious. By the time Treasury shows up to fund a deficit, the financing requirement is a quantity and not a decision. The hyperscalers are the more interesting example because they aren’t even running the calculation. The spread of their expected returns over any plausible cost of debt is enormous. Even that undersells it, because the cost of capital isn’t really in the investment equation at all. Capacity you don’t build this cycle is capacity a competitor locks up, along with the power, the land, and the customer. In a race for a market where winner takes most, incremental financing cost does not deter the investment decision. They also sit increasingly at the top of the credit universe by size and duration. Hyperscaler and AI-related paper was roughly 3% of the IG index a year ago. It’s about 6% now, and Amazon alone just became the 5th-largest issuer in the entire index, behind only the 4 major banks. This supply is duration-heavy, with data center leases running 20 to 40 years and much of the debt termed out to match. So a growing share of a rising long-end market belongs to borrowers like these, and the level they clear at becomes the reference point everyone else has to price against. The New Issue Concession Start with hyperscaler spreads. The complex has been backing up for months, sitting 20bps+ wider YTD against an IG index that is flat, with the long end leading the move. That’s old news by now. What’s newer is that the new-issue concessions are widening too. Take Alphabet’s deal from last week. Demand was enormous, with the book peaking among the largest on record, and the deal was walked in meaningfully from IPT and traded well on the break. It still paid a double-digit concession. The same borrower paid essentially nothing on its February print and a single-digit concession on its euro deal in the spring. The NIC keeps stepping up, and the borrowing plan hasn’t moved an inch in response. The early-summer jumbos show the same repricing from the other side. Amazon, Nvidia, and SpaceX all cleared fine when they came, with concessions that looked normal at the time. Then the supply kept coming, the whole complex backed up underneath them, and that paper still sits wide of launch, in some cases dramatically so. Nothing about those credits changed. The market level did, and each new deal pays whatever the level is on the day it prices. That’s how a concession that cleared in June becomes a double-digit one by August. Issuers have started paying in other currencies too. Alphabet’s deal came wrapped in a pledge that it’s the last dollar print of the year, Meta promised the same in April, Oracle in February, and somewhere between $50 and $60 billion is queued for after Labor Day, a number that would be bigger except some issuers were asked to wait. Now run that forward. This summer already gave us the exchange rate, with roughly $75 billion of unexpected supply moving the complex about 15bps. Street estimates near $400 billion of issuance next year work out to something like 4 jumbo prints per major issuer. If that sensitivity holds even loosely, might we see another 30-50bps of spread purely from a supply re-rating? Each round would eventually attract its own buyers, but it at least raises the question. The problem is now long-duration IG credit gets compared to the hyperscaler curve, and every round of supply moves that curve wider. A credit that looked fair value against Alphabet in the spring looks rich against Alphabet today, and nothing about that credit changed either. The Relative Value Question Relative value is how this reaches the top of the market, but it’s only half the transmission, because the two borrowers press on different components of the all-in yield. Treasury supply pressures the underlying rate. Hyperscaler supply pressures the spread above it, and the capacity of the investor base absorbing it. Everyone else inherits some combination of the two, depending on what they benchmark to. Play the comparison out at the single-name level. Alphabet just paid T+85 for 10-year money and T+130 for 40-year, from a balance sheet holding $162.5 billion of cash and securities against $101 billion of debt . Now put a cyclical industrial BBB next to it, a business with real leverage, real cyclicality, and earnings that shrink in a downturn. A PM choosing between the two isn’t stretching for the BBB’s extra spread when the AA+ alternative holds more cash than the BBB’s entire EV and brings a new deal every quarter to buy it in. So the BBB’s refinancing cost drifts higher without the BBB doing anything wrong, because the alternative sitting next to it in every portfolio review keeps getting cheaper. The rate component is also where the rate-sensitive economy lives. Housing and everything mortgage-adjacent run on transaction volume that dries up every time the 10-year backs up. Commercial real estate is rolling maturities struck at 4% coupons into a 5-handle long end. For most of these borrowers, the level is being set by a borrower whose funding needs have nothing to do with housing starts or cap rates. You can see the split inside high yield itself. The aggregate index looks fine, with spreads in the 260s and nothing to worry about at the headline. But the aggregate is increasingly a quality index, dominated by the BBs. Look underneath and the CCC bucket is widening out on its own, because that’s where the junk actually lives, the disrupted business models and the levered vintages that can’t grow into the new curve. The index averages the two into a number that describes neither. How Does This Clear? Where this goes, I don’t know, and I don’t think anyone does yet. But here are a few ways I’ve been thinking this could play out. One version is that the squeeze eventually wins. Treasury keeps the underlying curve elevated while hyperscaler supply pushes the corporate complex wider, the rate-sensitive economy meets a higher hurdle rate all at once, and enough investment and refinancing gets curtailed that the slowdown goes economy-wide. Perhaps even dragging us into a recession. In that world, the buildout will have exported its financing cost onto borrowers who never asked for the exposure. Another version is that the AI side just gets big enough that it doesn’t matter. If the revenue and productivity gains behind the capex arrive anywhere near the timeline being underwritten, the growth at the top could swamp the drag on everyone else, the way a handful of large caps can carry an equity index while breadth rots underneath. The aggregate numbers could look fine for years while the median borrower quietly pays more for money, because the index no longer represents the median borrower. The third version is nothing happens. Spreads cheapen until the paper finds its buyer, which is how credit usually clears. Issuers stagger the calendar, lean harder on leases and private placements, and pay up when they must. Treasury terms out its bill-heavy funding gradually instead of all at once. The economy absorbs a higher cost of capital the way it absorbed 2022, unevenly and without an event. That path isn’t painless either, just the one where the rate-sensitive economy lives with a structurally higher curve for years and nobody ever gets to point at the moment it happened. The “K-shaped” economy and credit markets live on. All three fit the numbers today, and that’s what makes this hard. The variables that would sort them can’t be observed yet, whether the AI capex cycle monetizes on the timeline its financing assumes, and how much widening it takes to pull new capital in before anything breaks. Easing Into Supply One more scenario, since it’s the one I keep coming back to. Say the first version starts playing out and the bottom half of the K breaks while the top half keeps spending. The pressure to cut turns political long before it shows up in the aggregate data, because the aggregate data is the average of a boom and a recession. So the Fed cuts. The part we haven’t lived through is what the cut does to the long end. Easing into record supply doesn’t have to rally 30-year bonds. It can push long yields higher, as the market adds back inflation risk and term premium at the exact moment the deficit is growing and the hyperscalers are still printing. There’s already a preview. The September 2024 cut was followed by a roughly 40bps increase in long yields over the following month. And on Friday, one of the worst payroll misses of the cycle bought the 10-year all of a few basis points. Easing has not produced a durable long-end rally this cycle, and growth scares barely move it. Play that forward and you get something strange. A recession in half the economy, cuts at the front end, and a long end that backs up anyway. The hedge every portfolio counts on, long duration paying for the credit losses, has to clear a heavier calendar than in any recent cycle to work. And the borrowers most dependent on term financing get far less relief than the cuts imply. Housing still prices off the mortgage and Treasury markets. Fixed-rate corporates still pay the term yield plus whatever spread the weaker economy demands. Floating-rate borrowers get some immediate base-rate relief, but wider spreads and thinner refinancing availability can eat most of it. The bottom of the K breaks, the Fed responds, and the response steepens the curve on top of the borrowers it was meant to help. I’m not predicting this per se. If the long end rallies hard through the next few soft prints and September’s expected supply clears flat, the worry is misplaced. But until then, one question is worth sitting with. What’s the right price for duration when the seller doesn’t care what you pay? JunkBondInvestor is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber. High Yield Primary Secondary Top Movers JBI Bulletin Board Always interested to hear from readers. Whether you’re working on something I should know about, hiring, or thinking about partnerships, reach out at info@junkbondinvestor.com 1) Now Hiring: I’m hiring for a variety of roles, full-time and in-person. Reach out with a short note on your background, or see the careers page . If you liked this, you might also like: JunkBondInvestor is an independent financial research publication providing general market commentary, corporate credit analysis, and educational content. The information provided is for informational purposes only and does not constitute investment advice, financial planning, or personalized recommendations of any kind. 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STRCStrategy PP VariableNeutralStrategy PP Variable

8/6/2026

The Game Theory Behind Strategy's ($MSTR) Distressed Preferreds

Last November I asked whether Strategy could afford $736 million of preferred dividends. The number is now $1.75 billion. Here’s an update on what’s transpired since then. The short version: Almost everything I flagged as a risk got tested. Bitcoin declined from $126,000 to $64,000. MSTR fell from $434 to $98 and the premium collapsed toward NAV, closing the equity flywheel that made every raise accretive. And the “never sell” identity, the thing Saylor could never afford to break? He broke it. Selling Bitcoin 4 times since June. So much for “diamond hands.” What’s more interesting is what he did on the way down. Any rational operator would’ve slowed the purchases when the premium died. Saylor sped up, and he funded it with preferreds that ballooned to $15.4 billion across 5 tranches, now trading at prices that range from near par to distressed. The quick read on those prices is seniority. The deeper read is the documents, because nothing in this stack ever matures, nobody can force a payment, and what management does with paper it wants to retire looks nothing like a traditional payment waterfall. And this stopped being theoretical when Bloomberg reported distressed funds were talking to Strategy’s bankers about swapping their paper. Somebody has already done the reading. If you’re new to the story, read this primer to get up to speed. Background Strategy (formerly known as MicroStrategy) is the largest corporate holder of Bitcoin and at this point, really a publicly traded Bitcoin fund that finances itself in the capital markets. For a while, the financing was the easy part. The machine ran on one key input: MSTR 0.00%↑ trading above the value of its holdings. Sell stock above NAV, buy more Bitcoin, grow Bitcoin per share, do it again. As long as the premium held, every raise was accretive. Then Bitcoin rolled over, peaking near $126,000 in October 2025 vs. $64,000 today. MSTR followed it down, $434 in July 2025 to $98 today, with the premium compressing towards parity. Holdings grew from roughly 650,000 coins to 842,139 through the decline. The money to fund these purchases was split between common stock and preferreds. On the preferred side, one security did nearly all the work: STRC , the variable-rate cumulative preferred. STRC went from $2.8 billion outstanding last fall to nearly $10.5 billion today. If you’re not familiar, STRC was supposed to be managed around par meaning that if it ever traded below that, management would increase the coupon to entice investors. 7 raises took the rate from 9% at issue to 11.5%, and the price still traded as low as 74 this summer. Management attributed the worst of the decline to broker-dealers pulling leverage from STRC holders, setting off forced sales into an already weak market. A 12% rate, a rebuilt reserve, Bitcoin sales, and a $1 billion repurchase authorization helped restore confidence and pulled the price back to 93 for a 12.9% current yield. The rebound was mainly sponsorship and the reversal of a technical liquidation, not the extra coupon. And every 100 basis points on $10.5 billion now costs the company $105 million a year. The preferred dividend obligation is now about $1.75 billion so the natural question is how he pays it since Bitcoin produces no cash flow. Strategy sells common stock, parks the proceeds in a USD reserve (that started at $1.44 billion last December) and writes the checks from there. As the reserve drains, it gets refilled with more MSTR, more STRC when it trades near par, or Bitcoin sales. The circular logic is quite a feat in itself. They issue stock to hold cash to pay dividends on preferreds they issued to buy Bitcoin, and every link works as long as somebody keeps buying the next piece of paper. Today, the reserve sits at $4 billion (USD) which buys time but it doesn’t make the structure self-funding. Issuing more STRC increases the dividend by $120 million for every $1 billion raised, so eventually the payments have to come from common shareholders, Bitcoin sales, or a reduction in the obligations themselves. In May 2026, part of that reserve also went to repaying debt. Strategy repurchased $1.5 billion of the 0% converts due 2029 for about $1.38 billion, an 8% discount to par . The repurchase took convertible debt from $8.2 billion to $6.7 billion, and management says it wants to keep shrinking the converts rather than adding to them. Fine. But watch what grew in their place. The preferred layer now totals $15.4 billion. Strategy swapped low-coupon debt with real maturities for high-coupon paper that never comes due. Less refinancing risk but also substantially more cash out the door every year. The preferred market spent the year pricing that trade despite not one dividend being missed. Part of the spread is legal. The waterfall runs STRF, then STRC, then STRE, then STRK, with STRD at the bottom, and STRD is noncumulative, meaning the board can skip a dividend and never owe you the skipped amount. The rest is sponsorship. STRC is the flagship management wants to scale. The others increasingly look like leftovers from Strategy’s experimentation with different versions of “Bitcoin credit.” Strategy currently carries $6.8 billion of debt and $15.4 billion of preferred stock against $54.2 billion of Bitcoin and $4.0 billion of cash. Bitcoin and cash cover the entire debt/preferred stack about 2.6x, leaving roughly $36 billion of residual value left for the common, and MSTR’s $37.6 billion market cap trades modestly above it. Saylor has time, just not unlimited time. At current levels the cash covers the preferred checks for 2+ years without raising another dollar. The converts are the more immediate concern. Puts start in September 2027 and run through 2029, $6.7 billion in total if nothing equitizes, and with MSTR trading around $98, even the lowest conversion price remains out of the money. This paper will need to get refinanced, repaid, or repurchased, and every path costs money. Saylor’s Financing Plan Going Forward So what’s the plan? There are two real changes in direction, both new. No more net new bonds. Saylor has said that if he were rebuilding the capital structure today, he’d skip the converts and go straight to STRC. Refinancing remains available if a convert put has to be addressed, but management no longer wants the debt stack to grow. And no more automatic all-in allocation. Management now admits that putting every dollar raised into Bitcoin left the structure too exposed. Future proceeds will be split between Bitcoin and cash based on market conditions, with the USD reserve targeting 2 to 3 years of dividend and interest coverage and 1 year as the minimum. Better for the preferreds, less amplification for the common. But why fund a Bitcoin balance sheet with 12% money when convert buyers were happy at zero? Because STRC has no recurring principal claim. No maturity to refinance, no put to fund outside a fundamental change, and no missed-payment default that hands holders a seat at the restructuring table. Skip the cumulative dividend in a true emergency and it accrues, but nobody can accelerate the principal. Converts are cheaper until the day they mature into a weak market, and Saylor has decided he’d rather never meet that day. Expensive capital that can’t force the issue beats cheap capital that can. The plan needs STRC back at $100, because near-par, low-volatility trading is what makes it issuable at scale. Get it there and the capacity is real: Strategy sold as much as $2 billion of STRC in a month during stronger periods, and Saylor believes $1 billion a month is sustainable in a normalized market. The economics depend on which security you own. For the preferreds, Strategy only needs enough liquidity to keep making the payments. For the common, Bitcoin has to outperform the cost of the capital used to buy it, and future issuance can support the carry but cannot turn negative spread into value creation. Management’s own numbers frame both: at ~3.2% annual appreciation, Strategy can sell enough coins to cover every dividend and interest payment without shrinking the dollar value of its holdings, although the coin count still declines, and roughly 10.8% is where the leverage earns its cost. Between the two, the bills get paid but the financing produces little incremental value. Selling is also no longer hypothetical. Strategy has sold Bitcoin 4 times since June, starting with a 32 coin trial balloon and escalating through early August (5,258 coins and $323 million in total). For the preferreds and converts, a management team willing to monetize Bitcoin rather than defend the “never sell” narrative trims real tail risk. The plan is less fragile than the annual obligation makes it look and more dependent on capital markets than the asset coverage suggests. It’s also why the smaller preferred dividends keep getting paid: suspending one saves relatively little and damages the STRC market that funds everything else. The machine works while at least one of three channels remains supportive: MSTR above NAV, STRC near par, or Bitcoin salable at an acceptable price. What Happens If Bitcoin Stays Down? This is where it gets interesting and the scenario that everyone’s worried about. What happens if Bitcoin just stays here, or grinds lower, for 2 more years? What if the premium never comes back, STRC can’t get to par, and the reserve drains with nothing refilling it? Read more