With privatisation plans dashed, Tesla must confront the reality of its debt

Elon Musk’s privatisation plans for Tesla 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 car maker may need to raise funds before long.

Tesla chief executive Mr Musk said late on Friday he would heed shareholder concerns and no longer pursue a $72bn privatisation 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 $1.3bn in debt coming due in the next 12 months. Meanwhile it has just $1.3bn 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 $2bn by the end of the year to stay afloat.

In response to a request for comment, a Tesla representative referred to Mr 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.

The most likely option, according to analysts, is a convertible debt issue. Mr Musk has historically favoured convertible bonds to raise capital, and Tesla and its SolarCity unit each have three issues of convertible senior notes, worth a total of $4.2bn.

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 at Cowen.

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 $1.3bn Tesla has coming due in the next 12 months, $230m is from a SolarCity convertible due on November 1, and another $920m 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.

Mr 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.

Tesla could issue straight debt akin to the 5.3 per cent 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 favourable terms secured in the previous offering.

Krishna Memani, chief investment officer of OppenheimerFunds, which is among Tesla’s top 10 bondholders, said that the level of scrutiny Mr Musk would have to go through “would be meaningfully higher in any new issuance”.

Equity markets have historically been friendly to Tesla, however Mr Musk said, on the 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 Mr Musk for potentially misleading investors when he tweeted that he had “funding secured” for a $420 a share privatisation deal, according to media reports.

Tesla could securitise automotive leases backed by drivers’ monthly payments as it did earlier this year when it sold $546m 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 saloon. While about 20 per cent to 30 per cent of Model S and Model Xs were leased, the Model 3 must be paid for in cash.

With a debt load of around $10.5 billion, there is the possibility of an impending cash shortfall