Exploring Tesla’s Mountain Of Debt: Musk Needs To Pick A Poison

Let’s explore Tesla’s mountain of debt with a spotlight on convertible bonds.

Tesla’s Mountain of Debt

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.

Equity

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.]