INSUBCONTINENT EXCLUSIVE:
NEW YORK: Elon Musk's take-private plans for Tesla Inc have evaporated, but the company's looming debt needs remain.
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 Chief Executive Musk said late on Friday he would heed shareholder concerns and no longer pursue a $72 billion
take-private deal, abandoning an idea that stunned investors and may draw regulatory scrutiny.
None of that has done anything to help it
with a looming issue: cash.
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.
In response to a request for comment, a Tesla representative referred to Musk's statement on the company's second-quarter earnings
call when he said the company planned to pay its convertible debt with internally generated cash flow.
DEBT RAISINGThe most likely option,
according to analysts, is a convertible debt issue
Musk has historically favored convertible bonds to raise capital, and Tesla and its SolarCity unit each have three issues of convertible
senior notes, worth a total of $4.2 billion.
Convertibles give owners the right to trade their debt for equity after shares rise over a
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.
Frequently, convertible bond owners will hedge their
positions by selling the underlying stock short
Moreover, the dilution caused by conversion could also pressure a stock, drawing the interest of short sellers.
Of the $1.3 billion Tesla
has coming due in the next 12 months, $230 million is from a SolarCity convertible due on Nov
1, and another $920 million from a Tesla convertible due on March 1, 2019
Tesla's shares, at $319.27, are a long way from the $560.64 needed to convert the SolarCity debt but have traded above the $359.87 March
2019 debt conversion price.
Musk could also choose to offer convertible bond investors the opportunity to exchange their debt for equity
below either or both strike prices, although that could require some assurances on the company's fundamentals.
STRAIGHT DEBTTesla 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.
Krishna Memani, chief investment officer of OppenheimerFunds, which is among Tesla's
top 10 bondholders, said that the level of scrutiny Musk would have to go through "would be meaningfully higher in any new
issuance."
EQUITYEquity markets have historically been friendly to Tesla, however 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."
The Securities and Exchange
Commission has opened an investigation into Musk for potentially misleading investors when he tweeted that he had "funding secured" for a
$420 a share take-private deal, according to media reports.
LEASE/ASSET-BACKED SECURITY DEALTesla 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.
