Tesla Bankruptcy? Fraudulent Conveyance?

Mish

An interesting Tweet popped up on my screen today regarding Tesla, bankruptcy, and possible fraudulent conveyance.

The Tweet looks cryptic so let's explain.

"11 USC 101 & 548" refers to 11 U.S. Code § 548 - Fraudulent Transfers and Obligations.

"SCTY" was the symbol for Solar City.

Zucchi is referring to Tesla's solar business as described in this November 2017 Motley Fool article: Tesla's SolarCity Buyout Looking Worse By the Day.

A year after paying $2.6 billion for SolarCity, Tesla appears to be shutting down the company's operations at a speed no one anticipated. If the trend continues, there may not be much of a solar business left.

Why did Tesla buy SolarCity for $2.6 billion if it was just going to shut down most of its valuable operations within a year?

Tesla didn't need SolarCity to start selling solar in Tesla showrooms or to develop the solar roof, which was actually a Tesla development. It seems to have been a bailout for Elon Musk and his cousins Lyndon Rive and Peter Rive, who would have lost hundreds of millions, if not billions, if SolarCity had failed.

Fraudulent Conveyance?

Let's backtrack a bit further, to April of 2017: Investors Should Have Known Tesla's SolarCity Acquisition Was a Bad Business Decision.

When Tesla bought SolarCity in late 2016, it was supposed to create a vertically integrated renewable energy company. People thought Elon Musk could marry EV sales with solar and combine SolarCity's installation arm with Tesla's Powerwall to create a path for customers to eventually go off-grid -- or at least charge their car with solar energy. When the solar roof was shown off last fall, the expectations got even higher.

But even before the deal closed, Tesla signed a deal that would bring Panasonic in as a partner and cut Silevo technology out. Now, it appears the solar panels Tesla has introduced are just rebranded Panasonic panels. And with Panasonic running the Buffalo plant -- dubbed "Gigafactory 2" -- Tesla doesn't have a new or differentiated product at all. It's just installing Panasonic panels.

How Musk & Family Cashed in on the SolarCity Deal

What's becoming increasingly clear about Tesla's buyout of SolarCity is that it was a huge benefit to Musk and his cousins Lyndon and Peter Rive. The three had $100 million of solar bonds issued by SolarCity, bonds that were recently bought back by Tesla. The three will have bonds transfered to Tesla under the same terms, unlike outside investors, but would you rather have a struggling SolarCity owe you $100 million, or market darling Tesla, who has easy access to equity markets?

The debt is on top of the 22.2 million SolarCity shares that Musk turned into Tesla shares and the 2.3 million shares the Rives converted. Had SolarCity gone bankrupt, as some major residential solar rivals have done, rather than being bought by Tesla, they would have lost hundreds of millions combined.

​Tesla Bonds in Freefall

Bloomberg reports Tesla Bonds Are in Free Fall.

In August, investors lined up for the chance to finance Tesla Inc.’s ambitious rollout of its Model 3 sedan. Wooed by Musk’s personal appeals, bond investors pretty much ignored the carmaker’s prolific cash burn and repeated failures to meet production targets and lent it $1.8 billion at record-low interest rates.

But now, after a spate of fresh setbacks in the past week, including a fatal Tesla crash and a credit-rating downgrade, bondholders are asking hard questions about whether Musk can deliver on his bold promise to bring electric cars to the masses before the company runs out of cash. On Wednesday, Tesla’s notes plunged to a low of 86 cents on the dollar, the clearest sign yet creditors aren’t totally sure the company will be money good.

>The company, which has never shown an annual profit in the 15 years since it was founded, will need to raise over $2 billion to cover not only its cash burn this year, but also about $1.2 billion of debt that comes due by 2019, Moody’s Investors Service analyst Bruce Clark said in a report Tuesday.

Tesla is burning through money so fast that, without additional financing, it would run out of cash before year-end. To put that into perspective, that amounts to more than $6,500 every minute of every day, according to data compiled by Bloomberg.

With a junk rating of Caa1 from Moody’s on Tesla’s unsecured bonds -- seven levels below investment grade -- coming back to the market might prove to be too onerous in any case, says Bloomberg Intelligence’s Joel Levington.

Absolute Craziness

Despite all this, and despite the fact that three executives quit (two from the finance team), shareholders approve a $2.6 billion pay package for Musk.

Question of the Day

What is a Block Hole Worth?

What If Musk Heads to Mars?

Addendum

Fraudulent Conveyance is heading to court: Tesla shareholder lawsuit against SolarCity deal set to proceed.

A class action lawsuit by Tesla Inc shareholders against the electric car maker's chief executive, Elon Musk, and the company's board over the SolarCity deal was set to proceed after a Delaware judge refused to dismiss it.

Mike "Mish" Shedlock

Comments (27)
No. 1-27
vboring
vboring

From the beginning, Elon said that the purpose of Tesla was to create a market for electric vehicles. They've done that. They won. With or without Tesla, mainstream EVs are coming to every segment of the market. Every VW group vehicle will have a version with a plug. He can declare victory and turn out the lights. Tesla doesn't need to exist anymore.

klausmkl
klausmkl

The only money Tesla has ever earned is by selling its carbon permits to other companies since its carbon free, literally hundreds of millions worth, thats it. Not a single penny profit from any of it's cars.

klausmkl
klausmkl

Not for the common man, maybe a novelty item for Doctors and Lawyers. Take away its federaL GOVERNMENT tax INCENTIVES and demand will be further reduced. The battery technology just is not there yet. Also you want to sit there for 8 hours as it recharges?

klausmkl
klausmkl

\

ZZR600
ZZR600

There's something very wrong when a company losing Billions for selling no more than 100k cars per year can be valued at about the same as a company like Ford that sells 6M cars per year and manages to turn a profit.

ZZR600
ZZR600

Ignore the hype and compare it to its peers, i.e., other CAR manufacturers, then Tesla is selling to a similar market to JLR, which makes ~500k cars per year. Work our what JLR is worth and IF Tesla manage to make as many cars PROFITABLY then that is the future worth of Tesla. In the long run, all the major automotive OEMs will be bringing new hybrid or pure EVs to market. These guys know how to make cars will be eat up market share.

ZZR600
ZZR600

What Tesla has done is shake up the market and has made other OEMs take EVs seriously. The range and battery technologies will improve, I don't see this as a long term issue. The BIG problem is the grid's (largely coal, gas or nuclear derived) capacity to cater for many millions of extra cars draining power. In countries like the UK where the additional margin is paper thin (~5% availability above peak) and where it can take decades to approve new power stations, there'll be a physical limit to how many EVs the grid can absorb. Ye canna break the laws of physics c'ptn!

KidHorn
KidHorn

I have friends who defend Tesla. They compare it to Amazon. Both companies spend a lot on R&D and investments in lieu of profits. They fail to recognize that Amazon is highly cash flow positive. Something Tesla has never been. Amazon could be hugely profitable in they wanted to be. I doubt Tesla will ever be.

abend237-04
abend237-04

I've said before: This is a good little $5.00 stock, but don't short it thinking you can make money driving it there...yet.

gkaplan
gkaplan

Elon Musk is the poster boy for Crony Capitalism and Corporate welfare. Plain and simple.

Jojo
Jojo

But at least Tesla is actively training employees to fill its worker needs, as opposed to Microsoft, Google, Apple and so forth who insist on hiring only pre-trained foreigners via H1-B!

Tesla starts community college courses to train technicians
The Associated Press Mar 26, 2018

CHARL0TTE, N.C. — Electric car maker Tesla Inc. is fostering community college training programs for what could be new blue-collar jobs as mechanics for the growing number of battery-powered vehicles.

A first group of Tesla technicians is set to graduate next week from a 12-week training program at Central Piedmont Community College in Charlotte. The company said a second group is nearing the end of classes at Rio Hondo College in Whittier, California.

Courses focus on skills specific to electric vehicles such as battery architecture and charging technology, and particularly servicing Tesla vehicles. A spokeswoman said Monday the Palo Alto, California-based company pays for the instructor, curriculum, and classroom or workshop equipment among other costs.
.....
https://www.smdailyjournal.com/business/tesla-starts-community-college-courses-to-train-technicians/article_b27259ec-3151-11e8-be38-1b5bd352a2f3.html

abend237-04
abend237-04

When this puppy finally howls, Elon may wish he was in that Model 3.

Long VIX
Long VIX

Haven't looked into tesla cash flows too closely, but in the worst case there is always possibility for Tesla to restructure in case bankruptcy looms - just keep employees that are contributing to the bread and butter - Model S and Model X - and abandon anything else.

Anyone thinking that model s or model x is not profitable vehicle should get their calculators out. My ebike man-made battery (which is 18650 Cells + human labor + battery management system module + package + warranty) with massive premium costs 500USD/kwh. Tesla probably gets their battery packs around or below 200USD/kwh. Battery pack is the most expensive part of an EV. So 100KWH battery pack costs ~20K USD. The Model S or X with 100KWH battery retails for 100K+ USD. So It is 80K for electric motors, software and body of the car. Rest is premium that tesla uses to sponsor rest of their R&D - self driving cars, model 3 production,Tesla Semi, Tesla Solar Roofs, Tesla Powerwall and what not.

My only concern would be if stock market crashes and/or car financing interest rates go up and affordability for such expensive vehicles disappears. Then Sillicon Valley millionaires would not be able to afford such expensive cars anymore and things could get ugly.

Also, Tesla is a massively shorted stock. There are a lot of folks with too much skin in the game and are trying to get out of their shorts. They have been predicting Tesla bankrupcy from 2012.

Also, Tesla is cult stock. Elon Musk has too much skin in the game too with his new Tesla compensation package (he gets nothing if tesla fails and he gets a lot if tesla becomes success). So another "worst case" scenario is that Space X will simply buy Tesla stock and/or bonds. If you don't think that Space X is on brink of becoming massively profitable company by reusing Falcon rockets, then again take out your calculator and figure out how much rocket fuel costs and how much a one-time use rocket costs.

Long VIX
Long VIX

Solar panels, Electric cars, Powerwall batteries are pro-Libertarian technologies. They help you to get out of monopolies created by Big Oil and your local utilities company. It will be hard for governments to tax sunshine or electrons.

It is kinda funny to see faux libertarians loose their cause on this one.

Yes, there are subsidies going in tesla, but there are subsidies going in utilities, Big oil, hospitals (treatment of smog caused asthma)...

stillCJ
stillCJ

Editor

Tesla is reminding me of DeLorean, but on the scale of Enron.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

Long VIX
Long VIX said (edited): Haven't looked into tesla cash flows too closely, but in the worst case there is always possibility for Tesla to restructure in case bankruptcy looms - just keep employees that are contributing to the bread and butter - Model S and Model X - and abandon anything else. Anyone thinking that model s or model x is not profitable vehicle should get their calculators out. My ebike man-made battery (which is 18650 Cells + human labor + battery management system module + package + warranty) with massive premium costs 500USD/kwh. Tesla probably gets their battery packs around or below 200USD/kwh. Battery pack is the most expensive part of an EV. So 100KWH battery pack costs ~20K USD. The Model S or X with 100KWH battery retails for 100K+ USD. So It is 80K for electric motors, software and body of the car. Rest is premium that tesla uses to sponsor rest of their R&D - self driving cars, model 3 production,Tesla Semi, Tesla Solar Roofs, Tesla Powerwall and what not. My only concern would be if stock market crashes and/or car financing interest rates go up and affordability for such expensive vehicles disappears. Then Sillicon Valley millionaires would not be able to afford such expensive cars anymore and things could get ugly. Also, Tesla is a massively shorted stock. There are a lot of folks with too much skin in the game and are trying to get out of their shorts. They have been predicting Tesla bankrupcy from 2012. Also, Tesla is cult stock. Elon Musk has too much skin in the game too with his new Tesla compensation package (he gets nothing if tesla fails and he gets a lot if tesla becomes success). So another "worst case" scenario is that Space X will simply buy Tesla stock and/or bonds. If you don't think that Space X is on brink of becoming massively profitable company by reusing Falcon rockets, then again take out your calculator and figure out how much rocket fuel costs and how much a one-time use rocket costs.

Who the F is losing any cause? What is it about fraudulent conveyance that you defend? Let's not conflate good ideas with obviously corrupt behavior. Faux-Libertarian indeed. But go ahead, keep making a fool out of yourself.

Long VIX
Long VIX

@Mish

Setting for a minutes Tesla aside, the statment "Losing libertarian cause" was targeted to those "libertarians" who are against technologies like electric cars, solar power and powerwalls in general. The technologies that can potentially grant majority of world population independence from Oil wars, energy monopolies and other policies imposed by bigger actors.

It was not targeted to you, but rather to few other commenters saying that those companies investing in those technologies are wasting money and will sooner or later go bankrupt and that those companies are comitting fraud by having tax-payer subsidies and that Big Oil is not having any subsidies. In fact I do read your blog and I know that you posted something among lines where you asked if EVs are more efficient than ICE cars. It was a good start for debate. So I do not count you in that narrow-minded anti-technology libertarian camp that I call as "faux libertarians".

Now, getting back to the specific case about Tesla buying SolarCity with no intention in being in solar power business (in other words Elon Musk bailing out cousin's SolarCity). I will believe that there was a fraud comitted only when Gigafactory 2 in Buffalo City will be closed and Tesla will stop doing stuff like this - https://twitter.com/Toblerhaus/status/977353009595269120

Firing employees after acqusition is nothing unusual. It happens all the time for various reasons.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

Thanks - Apologies offered. I am certainly not against the technologies or even Bitcoin. I have a post on that coming up. Meanwhile, the Fraud case will be heard.

Long VIX
Long VIX

@Mish All is good.

Based on how often there are lawsuits filed against "volatile" companies, I would not be surprised that there is just a legal firm that smelled blood and is trying to get money out of Tesla.

Since Tesla is a cult stock, then I also would not be surprised that majority of Tesla shareholders are actually against this lawsuit. Though, It may or may not matter what shareholders think, if there was indeed brutal, outright fraud comitted by Elon Musk. Also, from these lawsuits shareholders get almost nothing and majority of settlement proceeds go to the lawyers. So it does not make sense for existing shareholders to go with this lawsuit and sink the ship they are most likely still in. I out of curiosity once filed a claim in such collective lawsuit where settlement was reached and I got a check for $20 as former shareholder which was a major disappointment - not worth even walk to USPS.

By the way the link to Delaware court referenced from that Yahoo Finance article does not work - https://courts.delaware.gov/Opinions/Download.aspx?id=270820 - I quickly tried to google more details, but can't find anything more interesting.

stillCJ
stillCJ

Editor

Long VIX, you seem confused. I know some libertarians but I do not know a single one that is opposed to technology. However, Libertarians are supposed to be opposed to government supporting certain industries and businesses, including car makers, solar panel makers, oil companies, farm subsidies, etc etc. In other words, libertarians favor laissez-faire capitalism but definitely not crony capitalism.

Long VIX
Long VIX

@stillCJ

Well, it seems that you agree with me that Ludditism should not have anything to do in Libertarian world. However, If you go and check articles and/or their comment section on "libertarian" sites like zerohedge.com and on mishtalk.com (by guest commentors and not Mish) you will see quite a lot of content there bashing technologies like Solar Panels and EVs as impractical (especially if made by tesla). If anything, those technologies are pro-Libertarian in sense that governments can't tax them that easily anymore. I just wanted to provoke thoughts for certain "libertarians" with this irony and it seems I succeeded.

Also, it is important to pay attention from which angle a person tries to reason his point that Tesla is about to go bankrupt - whether that argument is 1) that Tesla is making technology that is impractical; OR 2) that Tesla has terrible financials; OR 3) that Elon Musk is allegedly fraudster by merging TSLA and SCTY or 4) Tesla is receiving government subsidies. 5) Tesla does not know how to automate. Same point, but different arguments. One choses the wrong argument to argue the same point and he immediately looks stupid.

Tesla and Solar City shareholders voted back in 2016 to merge - I can't think of more "libertarian" way to make a decision whether to merge or not. The plaintiff argument is among lines that in one conference call Musk called Tesla "my company". Do libertarians have anything to say about lobbying between two entities in private sector as well?

As for Green Energy and Big oil subsisdies. I think any libertarian would be happy if we could get rid of both subsidies. But there are some subtle Big Oil subsidies we don't seem to be able to get rid for the last several decades - https://archive.mishtalk.com/2013/09/06/the-dick-cheney-syria-oil-connection/ What libertarian is supposed to do in this case? Give up trying to fight Big Oil subsides and focus on fighting easiest subsidies? Or perhaps subsidize Green energy for few years in an attempt to kill Big Oil and its subsidies? Think of "Stanford marshmallow experiment". Assuming Green Energy does succeed any libertarian living decade from now will be better positioned thanks to our choice today.

As another analogy to "Stanford Marshmallow Experiment" - In Computer Science there are two sorts of algorithms - Greedy and Dynamic programming. Greedy algorithms make choice that looks the best one at the given moment. It is not guaranteed to lead you to the best long-term choice. Whereas Dynamic Programming algorithms are willing to explore all non-Greedy choices initially and then guarantees you to get the best long-term choice.

Or that is not how libertarians are supposed to think and they should always take the best short-term, greedy choice?

stillCJ
stillCJ

Editor

Thank you for that very long comment, VIX. You are a lot more confused than I previously suspected. I would be wasting my time to make more replies to you, you just don't get it at all.

MorrisWR
MorrisWR

I have stated in the past that Tesla will go bankrupt just based on their inept manufacturing processes. They have no clue how to utilize robotics in a state of the art factory setting. This is no surprise and I am wondering why investors continue to be taken.

Long VIX
Long VIX

@stillCJ thank you for our both answers that did not have any real content or argument - they were very helpful and showed that you are very smart. Very unconfusing, indeed.

My main question was simple, if shareholders voted to merge then where is fraud? Tesla brings this as argument in response to plaintiff. Plaintiff brings as argument that Musk claimed "tesla is my company" and other nonsense stuff. I see libertarians crying on this particular Tesla affair the same way as liberals crying on Trump+Russia collusion that votes were somehow skewed. Voting happened and deal with it.

As for what libertarian would do if faced with such hypothetical "Stanford Marshmallow Test" - that was more thought provoking question that probably irked you a little bit, because under pure libertarian model it should be assumed impossible.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

1) There could be fraud if details were withheld. 2) There is fraud by definition, according to the rules - whether or not the rules make any sense is subject to debate.Regardless, Libertarians rules DO NOT apply. Fractional reserve lending is the same way. It's fraud because it affects others. That I agree to let banks lend my 5-year CD for 25 years or checking account that is available on demand is irrelevant.


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