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TESLA bonds

March 31, 2018

As a little procrastination project, I’m going over the car company Tesla’s financial situation since it was in the news this past week. NB- i’m an engineer, not a financial advisor! Please don’t go gambling based on anything you read here.

Here’s a dump of the bonds, which you can access here:  (click on the search tab and enter the associated stock symbol). Data retreived as of today 20180331.

CUSIP: 88160RAA9
TESLA 6/1/18 1.5% convertible (TSLA @ $124.52)
outstanding <$60 MM ish (mostly converted, orig $660 MM)
last trade yield: n/a, it’s way ITM, basically a stock, mostly redeemed

CUSIP: 83416TAA8
SOLARCITY 11/1/2018 2.75% convertible (SCTY @ $61.67)
outstanding $230 MM
last trade yield: 5.9% ish
notes: deep OTM for SCTY

CUSIP: 88160RAB7
TESLA 3/1/2019 0.25% covertible (TSLA @ $359.87)
outstanding $920 MM
last trade yield: 1.5% ish

CUSIP: 83416TAC4
SOLARCITY 11/1/2019 1.625% convertible (SCTY @ ??)
outstanding: $566 MM
last trade yield: 6.9% ish

CUSIP: 88160RAC5
TESLA 3/1/2021 1.25% convertible (TSLA @ $359.87)
outstanding $1380 MM
last trade yield: 1.6% ish

CUSIP: 88160RAD3
TESLA 3/15/2022 2.375% convertible (TSLA @ $327.50)
outstanding $977 MM
last trade yield: 1.332% ish

TESLA 8/15/2025 5.3% senior unsecured
outstanding: $1800 MM (?)
last trade: $87 -> yield to maturity ~7.5% ish?

So what I really want to do is say a few words about Tesla’s situation with regards to ramping up its manufacturing (I think they do have a good shot at reaching  their capacity on the model 3, in terms of technical challenges. I’m hoping to write a blogpost on why). However, this post is about the very real (but at times exaggerated) financial pressure the company is under. I want to get that out of the way first, hence this post.

So what’s going on here?

First of all, lets talk about convertibles. Most of the Tesla debt is convertible bonds. The way that works is there’s a strike price (I listed in parentheses). Generally, the bond holder can trade their bond in for stock at that price. Obviously it only makes sense to do so if the stock is over that price, otherwise you keep the bond and collect the coupon.

Sometimes there are other limitations, in particular on when the redemption can be made – somewhat akin to the difference between American and European style options. I’ll gloss over that here. However, it is very significant that a convertible has some option-like characteristics.

You’ll notice the yields are way lower than one would expect for a plain corporate bond. That’s because the conversion option has a value associated with it, even if it is out of the money. 2 observations on that value: (1) the more risk the company takes, the more value the conversion option has (and also the more value the stock has, as is universally the case for indebted companies with a potentially moneymaking future). (2) The value of the conversion option decays with time, as the maturity date approaches.

Another thing having lots of convertible debt does to a company: it makes future cash  needs uncertain. Take for instance the 3/15/2022 2.375% bond. Will Tesla need to refinance the $977 million principal payment in 4 years, or won’t it? It totally depends on how well their stock does – if the stock rises above the $327 strike price, they’ll be paying it back in the form of equity, not debt. We won’t know which until the moment is much closer. The effect of this is that when the business case looks plausible, the robustness of the company’s finances is doubly boosted. When the future business prospects falter, the finances plunge doubly fast.

Last week there was a scare that this might happen. A bit too soon, IMO. All in all, the TSLA balance sheet has something like $10 billion in debt. In the process of ramping up Model 3 production, their burn rate is way up. As of now, it looks like the 3 convertibles with the over-$300-strike have a real good chance of finishing out of the money. So that’s an extra $3.3 billion in principal payments coming down the pipe.

Meanwhile, Tesla will presumably need a lot more capex, not just to finish fleshing out its manufacuring operation (which I think they can do, actually), but also to build out a national network of proprietary high-speed chargers — that’s one of their selling points, to both consumers shopping for an electric vehicle, and to investors in their business. That’s where the problems are going to come from.

A petrol pump flows at 5 gallons per minute typically (10gpm is max allowed). 120 million Joules per gallon. That’s 10 MegaWatts of energy transfer rate.

An EV charger that is even 10% of that transfer rate has to have some monster electrical service. Putting that in at chargers across the country costs big bucks. If Tesla can’t come up with the capital to do that, they will either (1) have to adapt to “generic” chargers and share those with GM, Nissan, etc. Possibly at a slower rate. Or (2) de-facto restrict their drivers outside of their home turf in southern California, to using the charge-at-home-at-night scenario. Hurts the business case.

So they’ll be raising money. I’m certain of that. There are too many incentives to continue to double down and add more risk. They won’t get away with making 2% coupon payments on their debt anymore, but you can get many more years of a company operating, paying “high yield” rates of 5-7%.

Ok, I’m off to enjoy the sunshine. Next up, will talk about their manufacturing situation and why I think it’s not as bad as some people fear.

Disclosure- I am neither long nor short Tesla or any of its competitors, partners, suppliers etc. – in any form including stocks, bonds, options, business relationships etc. This is an unpaid piece.

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