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Tesla's Mountain of Debt

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The chart is from Tesla's U-turn Puts it Back at Square One on Cash. I added the boxes in blue. The reason will become apparent in a moment.

> With a debt load of about $10.5 billion and the possibility of an impending cash shortfall, Wall Street expects the luxury electric carmaker may need to raise funds before long.

> Tesla, which has had just one quarter of positive free cash flow since the fourth quarter of 2013, has $1.3 billion in debt coming due in the next 12 months. Meanwhile it has just $1.3 billion of cash on hand after backing out $942 million of customer deposits on cars.

> With analysts forecasting a slowed, but continued, cash burn in the second half of 2018, Tesla may need to borrow up to $2 billion by the end of the year to stay afloat.

Convertible Bonds

> The most likely option, according to analysts, is a convertible debt issue. Convertibles give owners the right to trade their debt for equity after shares rise over a certain price. They allow holders to benefit from a rising share price, while also offering bond-like protection if it falls.

> The one challenge of using more convertible debt, however, is “that it drives more short sellers to your stock. And Musk does not want that,” said Jeffrey Osborne, senior research analyst, Cowen Inc.

Straight Debt

> Tesla could issue straight debt akin to the 5.3 percent coupon junk bond coming due in 2025. That bond however, is trading well below par at 87.13 cents on the dollar, and so it would be unlikely that Tesla could get the sort of favorable terms they secured in their last offering.


> Musk said, on the company’s second-quarter earnings call, that he would not tap them for cash. “We’ll not be raising any equity at any point... I have no expectation of doing so; do not plan to do so.”

[My Comment: Not only would the SEC investigate Musk for selecting that option, Equity solutions would also represent shareholder dilution.]

Lease/Asset-Backed Deal

> Tesla could securitize automotive leases backed by drivers’ monthly payments as it did earlier this year when it sold $546 million of bonds backed by leases on Model S and Model X cars.

> There are two problems with issuing new asset-backed securities.The first is that old vehicles may not sell for as much as expected given the increasing competition Tesla is facing in the electric vehicle space. Second, leases as a percentage of vehicles sold have fallen dramatically as it is not possible to lease a Model 3 sedan. While roughly 20 percent to 30 percent of Model S and Model Xs were leased, the Model 3 must be paid for in cash.

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Convertible Bond Arbitrage

Investopedia breaks down Convertible Bond Arbitrage

> Convertible bonds are sometimes priced inefficiently relative to the price of the underlying stock. To take advantage of such price differentials, arbitrageurs will use a convertible bond arbitrage strategy. If the convertible bond is cheap or undervalued relative to the underlying stock, the arbitrageur will take a long position in the convertible bond and a simultaneous short position in the stock. In the event that the price of the stock falls in value, the arbitrageur will profit from its short position.

> Since the short stock position neutralizes the potential downside price move in the convertible bond, the arbitrageur captures the convertible bond yield. On the other hand, if stock prices rise instead, the bonds can be converted into stock which will be sold at the market value, resulting in a profit from the long position and ideally, compensating for any losses on its short position. Thus, the arbitrageur can make a relatively low-risk profit whether the underlying share price rises or falls without speculating as to which direction the underlying share price will move.

Tesla Short Position

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I do not know how much of that short position comes from convertible bonds but I am confident it's a considerable amount.

It's also a price insensitive position, not subject to a short squeeze as Musk implied.

​Meanwhile, unless Musk ramps up sales, which seems highly unlikely do to a parts shortage, he has a decision to make.

Question at Hand

Dear Elon, if you have to raise capital, what's your poison?

Bonus Question

Dear Elon, please elaborate on what you meant by "Force Majeure". By any chance are suffering from a severe parts shortage?

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Disclosure: I am short Tesla via staggered PUTs.

Mike "Mish" Shedlock