Thứ Ba, 3 tháng 1, 2017

Dear Elon: How about a capital raise to pay down the DOE loan? part 2

  • May 17, 2013
    luvb2b
    from a textbook standpoint you are correct. however in an adverse scenario the conversion option will be worthless anyway. the simple yield would be the end result in that case. to loan money to a company that posted a (meager) profit just once in its 10 year history at 1.5% is just plain dumb imo.
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  • May 17, 2013
    surfside
    totally agreed. shows just how frothy the capital markets are right now; kudos to elon and tesla for taking advantage of them at such an opportune time.

    surfside
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  • May 17, 2013
    Citizen-T
    Yes. I wonder where the demand came from? Reports are that there was plenty of it.
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  • May 17, 2013
    deonb
    How much insider information does underwriters get? Do they perhaps have access to the upcoming announcements already?

    Wouldn't think it be illegal - Elon has access to that info, and he bought.
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  • May 17, 2013
    ModelS8794
    Not textbook, real life. Who do you think ends up counterparty to the convert hedges? Tesla -> Goldman | Goldman -> convert buyer. Most of the convert buyers lock in the spread on day one.

    I think the rate is very low too, but it's not 1.5% YTM to the convert buyer. Anyway, kudos to Musk for this whole set-up. Truly a master-class, and IMO he knows it (that's why he's playing the violin in his twitter pic).
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  • May 17, 2013
    Causalien
    As someone who's been eyeing the bond market in order to put some cash for the corporation that's just sitting on the sideline doing nothing. I am comparing TSLA's debt to treasury and the US government's balance sheet isn't something that's really attractive... the yield is worse. That is why, all corporation should issue bonds if they can right now. Fed has really messed up the fixed income market's risk valuation.
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  • May 17, 2013
    Citizen-T
  • May 17, 2013
    gregincal
  • May 17, 2013
    deonb
    Mmm... Uhh... Carry the one.

    Yeah, that's 2200 superchargers after the DOE loan payback :biggrin:.
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  • May 17, 2013
    Citizen-T
    What are they going to do with all that cash? Cash is not what is holding up most of their efforts.
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  • May 17, 2013
    DonPedro
    May speed up SuperSwapper deployment. Wait for link with upcoming announcements.
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  • May 17, 2013
    Citizen-T
    My thoughts exactly.
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  • May 17, 2013
    MuskForPresident
    luvb2b-

    Look at the trading the past 2 days in TSLA. A marked decrease in price range.

    The company selling convertibles is genius:
    - It allows them to collect a the option premium which had been off the charts
    - The holders of the convertible bonds will hedge the stock exposure to lock in the option value. If you are long volatility and hedging then you are selling stock as the price notches up and buying stock as the price notches down. This has the overall effect of dampening volatility. This is extremely beneficial after the huge move up. It helps anchor the price and reduces the future volatility. For long term holders it should help remove any short term anxiety about the stock topping here. Personally, I am much more relaxed holding it here at 92 than as as it was running from 55 to the 80s.
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  • May 17, 2013
    ShortSlaver
    I agree. I sold a ton at $80 last week. I figured it's in a short squeeze and should come back down to low $70's or $60's. The announcement of a secondary offering really stabalizes the company though and I agree, holding some at $92 feels safer.

    I'm still going to wait for my price (which I'm still debatting) and patience is the key right now. Low $80's? Mid-$70's?

    It's just hard to see through all the hype and noise right now to know what's real and fake.
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  • May 17, 2013
    luvb2b
    at the current cost of borrowing, it's very tough to hedge a long call position with shorting stock.

    as an aside, the cost of borrowing has dropped dramatically this week, by nearly half it seems. a huge amount of the shorts must have covered.
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  • May 17, 2013
    MuskForPresident
    If they continue to kill the volatility they will be draining money from short term traders that lack conviction. Probably a lot of hot money traders are looking for continued quick gains from price swings, but I think it's more likely that were in a range for a bit. A couple of dollars up, a couple down and we're pretty much back where we started. Add onto that a drift due to hot money leaving netted out with shorties throwing in the towel. The rebate has fallen off a cliff so that gives the long term shorts a bit more time, if there are any left. Stock rebate climbing back up over 35% would be bullish in my opinion.
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  • May 17, 2013
    gg_got_a_tesla
    Hire me ;) Would love to work on the software systems in the X and Gen 3!
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  • May 17, 2013
    MuskForPresident
    Borrow costs have dropped significantly. If convertible arbs purchased the bonds it's very possible that they were bundled with a stock borrow at a guaranteed rate and this was factored into the overall deal price.
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  • May 17, 2013
    CapitalistOppressor
    I just posted the link to the most current (and probably final) version of the prospectus for these notes here, and hope to have discussion on the details there as well -

    Prospectus for the newly issued convertible notes

    The actual prospectus is here -

    http://www.sec.gov/Archives/edgar/data/1318605/000119312513226108/d538784d424b5.htm

    I wasn't that familiar with this form of financing, but the more I research it and study the prospectus, I am shocked by how attractive this looks. The "problems" of having this debt on Tesla's books are overblown in comparison to the shear amount of capital this gives them going forward.

    All of the shenanigans that Luvb2b was talking about earlier seems to just be a common feature of this kind of debt, as opposed to some kind of special attack on the shorts, though it might well end up having that effect. Tesla specifically expects these to be used for convertible arbitrage and lists that as a risk related to owning them.

    After looking at the terms, I don't think i care. I am still trying to work through and model how the conversion ratios work, but off hand it looks as though most of this will eventually just be converted into shares if Tesla continues to execute and manages to develop and successfully market GenIII. And crucially, this gives them the capital to do exactly that.

    - - - Updated - - -

    The most recent number that I saw today was that 13% of the float was estimated to be short right now, compared to ~40% before. Don't have a link.
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  • May 17, 2013
    DaveT
  • May 17, 2013
    brianstorms
    Wanna bet this is done in Washington, DC, with full media fanfare? Would not surprise me if it's done at the White House. The $12 million in "profit" to taxpayers part should go over quite well.
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  • May 17, 2013
    Vger
    I actually hope they do. Both Musk and Obama deserve the credit. It is about time the FUD gets blunted with some brave new truths.
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  • May 17, 2013
    deonb
    Should invite Bush as well. He's the one who created the program initially.

    I think it would just be priceless for Elon to thank Bush for all of the government help that Tesla received, and how much foresight George Bush must have had in the EV future to approve it.

    While he's there, he should also thank the shorts (and John Peterson) for having entirely been responsible for the ability to now pay off said loan :).
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  • May 17, 2013
    kenliles
    Problem is his(Bush) party has come down on the opposite side of this program now for 5 years running; and hard. Hard against the program, hard against picking winners and losers, hard against green, hard against EV, hard against anything against oil. I doubt Bush could even be placed in the event without being run out of his own party-- I'm trying to be careful not to go purely political here- But this is a discussion about repayment of a government loan program, currently supported and expanded by one side of our representation and viscerally attacked by the other. Actually I can see both points of view and wish we could policy somewhere in the middle like we used to- with these programs playing a key role, but limited and targeted for our common good... ahh the good ol' days of yester-year

    And I think this is a very good reason Elon has chosen to pay this sucker off early and completely - Tesla will be selling cars to the entire country
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  • May 18, 2013
    DaveT
    Gotta agree here that paying off the DOE loan improves Tesla's political image, especially to some conservatives. That can go a long way.
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  • May 18, 2013
    huntjo
    In this hypothetical press conference, I would definitely invite Bush. I think the potential to bring republican talking points in line with Tesla would be beneficial. Homegrown American start up, helping wean off foreign oil. Just because Fox News and republican pundits mistakenly thought that the loan program was vaporware like those high speed trains doesn't mean we can't still reach a lot of more educated republicans who will understand a successful and sound business plan when they see one.
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  • May 20, 2013
    jeff_adams
    Here's why I hope Tesla makes this a big deal:

    Good for the stock. More publicity means more people checking out the stock performance.

    Good for sales. Everyone is attracted to a winner.

    Good for Space X. Elon scores major street cred with the government. He makes BOTH parties look good by paying this off.

    Good for possible future funding of Hyperloop. Elon will need to work with state and federal officials if Hyperloop is ever to be realized. This payoff will give him a lot of credibility.
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  • May 22, 2013
    ModelS8794
    Just to close the loop on this, today's 8-K notes the hedge transaction ended up costing 161 million (!) which means the embedded option on the convert was 26.83% of the principal, and the effective interest rate convert buyers are getting for taking on the senior unsecured credit risk is 8.26% for 5 years - this was actually very expensive debt given where Treasuries are!

    One might conclude the massive expense of the hedge transaction was a result of the huge volatility embedded in options pricing on Tesla as of last week... and so for the same reason the warrant that tesla sold as the third leg of the debt financing deal also had a ton of volatility and a high price attached - Tesla received $109.4 million selling the warrants with a $184.48 strike price (the converts have a $124.52 conversion price) which goes a long way to offsetting the huge cost of the convert hedge.

    My takeaway - that DOE loan payoff better have some really valuable karma or non-capital cost strategy associated with it, because the debt swap was a ridiculously expensive move versus just sticking with the DOE loan for the remaining term.
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  • May 22, 2013
    Johan
    I think it will provide very good press for Tesla. But wasn't the genius of this whole thing the way they tied the warrants/convertible debt together with the stock offering to attract institutional investors and by getting the offering sold out quickly at $92 they have in a way taken a valuation that was at one point perhaps ill-supported and the result of a squeeze and made it in to a respectable new "floor" for TSLA?
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  • May 22, 2013
    DonPedro
    Holy cow. That was a bit unexpected.

    One benefit of early repayment of the loan was apparently the elimination of some 3M warrants the gov't had at strikes $7 and $8.5 - not sure what the conditions were for exercising those. Ref: http://www.thestreet.com/story/11931442/1/tesla-is-just-a-winning-stimulus-as-fourth-us-automaker-emerges.html

    Do I understand it correctly that the hedge buys a deferral of dilution until the stock reaches a certain high price ($130?). (If yes, this should mean that call options should have a lower IV in a range that passes that price point?)
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  • May 22, 2013
    kenliles
    that's the way I took it as well- but the IV is not conforming to that conclusion, so I assumed my usual ignorance on the matter (that assumption serves me well as normally proven correct). The effective interest rate of 8% sounds high relative to Treasuries (and the DOE loan it replaced), although lower rated/higher risk corporate bonds are getting that return generally. I think the eventual advantages will outweigh the negatives, but it is a close call. There's also conjecture that the new pseudo-lease program potentially violated DOE rules, providing another inducement to pay it off. I would estimate there were many such rules tagged to the DOE loan that made it extremely restrictive for an industry-disruptive company to constrain itself to.

    - - - Updated - - -

    probably no need for a whole new thread for this- so I'll link it here;
    Official announcement of the DOE payoff- Tesla press announcement and Elon comment included

    http://ir.teslamotors.com/releasedetail.cfm?ReleaseID=766747

    from Elon:
    "I would like to thank the Department of Energy and the members of Congress and their staffs that worked hard to create the ATVM program, and particularly the American taxpayer from whom these funds originate," said Elon Musk. "I hope we did you proud."
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  • May 22, 2013
    gregincal
    Ah, but they partially offset the cost of the hedge transaction with a warrant transaction that netted them $109.4 million, so their real cost was only $52 million.

    Warrant Transactions
    On May 16, 2013, in connection with the offering of the Notes and in order to partially offset the cost of the note hedge transactions, the Company entered into warrant confirmations, as amended on May 20, 2013, with the Hedge Counterparties in substantially the form filed as Exhibit 10.2 to this Current Report on Form 8-K and which is incorporated herein by reference, pursuant to which the Company issued certain warrants (the � Warrants�). The Warrants allow the Hedge Counterparties to acquire, subject to anti-dilution adjustments, up to approximately 4.8 million shares of Common Stock at a strike price of $184.48 per share, also subject to adjustment. The Warrants would separately have a dilutive effect to the extent that the market value per share of the Common Stock exceeds the applicable strike price of the Warrants. The Warrants were issued pursuant to the exemption provided by Section 4(2) of the Securities Act of 1933, as amended. The Warrants are separate transactions, entered into by the Company with the Hedge Counterparties, and are not part of the terms of the Notes. Holders of the Notes will not have any rights with respect to the Warrants. On May 22, 2013, at the closing of the offering of the Notes, the Company received aggregate proceeds of approximately $109.4 million from the sale of the Warrants to the Hedge Counterparties.


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  • May 22, 2013
    kenliles
    Oh yes- that's right - the third leg; If that all lines up, then their effective rate would be more like 4%.
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  • May 22, 2013
    ModelS8794
    Looking at cost of debt and saying it's not "real" because you are buying/selling/embedding equity derivatives along with it kinda muddies the issue. DOE loan was senior unsecured debt costing various rates between 0.9 and 3.4%, maturing in ~5 years. The new debt is senior unsecured maturing in 5 years and costs 8.26% YTM.

    Tesla did right by shareholders net selling stock/embedded options/warrants at what appears today to be an excellent price. But the debt... oh, that debt is pricey.
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  • May 22, 2013
    gregincal
    I don't pretend to understand all the intricacies, but that's not a real cost to Tesla either, it's just lost potential gain of shares. They could have just issued new shares and had no real cost, just dilution. I don't see how you can count the cost of the anti-dilution measures with counting all the facets of the transaction. It definitely doesn't "cost" Tesla 8.26% in any real sense (i.e. money they have to spend).
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  • May 22, 2013
    ModelS8794
    Take a look at the interest expense line next quarter and tell me if you still believe that to be the case. Of course, that interest expense will be waved away as "partially non-cash" amortization of bond discount by those inclined to do so, plus hey, it's a "fake" expense that gives you a tax benefit. There is such thing as a free lunch after all! (not)

    For some more details on this sort of deal, I'd recommend Encore Capital's presentation on their convert bond issuance - obviously their numbers are different but it's the same concept.

    Page 4 might be particularly helpful in understanding cost of debt separate from cost/proceeds of derivative transactions.
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  • May 22, 2013
    kenliles
    So I take you believe the DOE loan should have been retained instead of paying the higher interest. Since it so obvious, why do you think they made the choice the made?
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  • May 22, 2013
    ModelS8794
    I do not believe that, nor do i think the situation obvious in any way (as this thread has demonstrated all around). i think its an interesting question you ask though, and one not raised until one realizes just how expensive a swap it was. As I said, My takeaway - that DOE loan payoff better have some really valuable karma or non-capital cost strategy associated with it, because the debt swap was a ridiculously expensive move versus just sticking with the DOE loan for the remaining term.

    Maybe the answer is a simple one of political expediency. I have never spent much time thinking about politics in my investments, but of course it is a friction we live with every day. Perhaps the negative sentiment aroused by politicians looking to score points at Tesla's expense really is that expensive in terms of forgone demand or roadblocks to strategic progress. Or perhaps there is more to the decision than that. This forum has some serious brainpower; it might help all to lend some cycles to this question?
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  • May 22, 2013
    DrJohnM
    Audio interview with Elon Musk

    At around 5 minutes from the end, he talks about what to spend the money on. Bring forward Model X. Gen 3 req $1bn but expects to fund with cash flow.

    Not in discussion with Apple except iPhone integration
    Not looking to be taken over - wants mass market affordable car before he would allow that to happen

    There are a lot of little bits of information such as cash flow positive etc. Off to work now so someone else can dissect and report in more detail.


    Watch this video at http://bloomberg.com/share/video/a2QNfmtwQe64z$oyEXpVEA


    Tesla's Musk on Loan Payoff, Financing, Mission
    May 22 (Bloomberg) -- Elon Musk, founder and chief executive officer of Tesla Motors Inc., talks about the company's repayment of a $451.8 million taxpayer-supported loan, funding raised in a stock and debt offering, and Tesla's independence and mission.
    Musk speaks with Bloomberg's Alan Ohnsman from Washington. (Source: Bloomberg)
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  • May 22, 2013
    toastypasta
  • May 22, 2013
    Causalien
    1 Billion needed for gen3. How long will it take for TSLA to generate that?
    I am thinking, maybe they really should get a button out for Gen 3.Riding on the current publicity and reception by younger people. They can use those money for the capital investment needed for Gen 3. Or am I mistaken on this? I know it is put on the balance sheet as liabilities, so not sure if they can spend it freely. People like me who can't justify owning a big car like Model S and lives in a cramped city will really welcome a smaller ev like gen 3.

    One way I was thinking about financing this, is that on top of pre order, add an option to prepaying with a monthly payment so the financial hit is spread out. It could work as tsla is not seen as on the verge of failure now. Any huge problems with this model and TSLA's online sale only restriction?
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  • May 22, 2013
    Norse
    Yeah, the fans would love it. Probably 20k in waiting list first week! I need to get a Gen3, or buy a used Model S. Selling my shares is not an option.
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  • May 23, 2013
    DonPedro
    You have to think big about this. Remember: "Tesla�s goal is to accelerate the world�s transition to electric mobility with a full range of increasingly affordable electric cars.". As long as the perception lingers that EV manufacturers are living off government dole-outs, there will be no real momentum behind this vision in public discourse and policy-making. Everyone will view the EV transition as something the gov't is try to stimulate in the future, rather than something that is happening NOW.

    There are of course many additional factors on a more day-to-day level:
    * Avoid being bashed in media
    * Attract customers that are ideologically opposed to gov't supporting companies
    * Avoid strings/covenants attached to DOE loan
    * Get rid of 3M warrants (strikes $7.5-9) in DOE loan
    * The value of the PR related to the re-payment of the loan
    * Brownie points with a lot of politicians

    In terms of financial strategy, the key thing to realize is that optimizing the cost of capital should be relatively low on the CFOs list. A percentage point or two of WACC is not what will make or break Tesla - it is public adoption, product development and production excellence. The primary goal of the financial strategy should therefore be to see how it can in any way serve these three objectives. (Not saying that the interest rate is irrelevant, just saying it plays second fiddle).
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  • May 23, 2013
    DonPedro
    I did a quick-and-dirty transcript of EM's answer in the Bloomberg interview regarding the capital raise. It sheds some light into his thinking and actions:
    - - - Updated - - -

    Elon Musk also said that the DOE loan limited them in some areas, notably raising financing for inventory etc. He said that with 2/3 of sales expected to be abroad, there would be quite a few cars in transit that have to be financed and that will be easier now.

    He also mentioned the criticisms regarding the DOE loan, and that some people would not buy the car because of that.

    Finally, he said that the bottom line was just that it FELT RIGHT. "I feel so much better having done it". I got the feeling that he has really taken the DOE loan criticism personally, and that he is glad to have fixed that. Clearly an emotional/intuitive component to this decision.
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  • May 23, 2013
    MuskForPresident
    Elon also said between the capital raise and cash flow from operations they have enough to fund both MODEL X and GEN III (about $1B) without an additional raise. Yay.
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  • May 23, 2013
    Causalien
    That needs a bit of correction. There's about ~450 million left after the DOE loan payoff I think. Elon said this is more than enough to fund Model X, however not enough to fund Gen III as that requires approximately $1 billion of capital investment.
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  • May 23, 2013
    DonPedro
    Having just heard the thing, I think MFP is right - that Tesla expects to fund Model X and Gen III with a combination of the current cash and cash generated from operations.
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  • May 23, 2013
    toastypasta
    Musk clearly states that they have enough CASH IN HAND to fund the Model X.
    He then clearly states that they need $1b to fund the GenIII though they believe they will not need to raise funds as that will come from GENERAL CASH FLOW. Meaning sales of Model S and Model X.
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  • May 23, 2013
    kenliles
    That's a very positive position and good news. I interpret that as a hope, but there might need to be a small one depending on sales between now and then. Either way, though its a very positive statement
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  • May 23, 2013
    vgrinshpun
    My back of the envelope calculation on what this might mean in terms of market cap and production:

    http://www.teslamotorsclub.com/showthread.php/14262-Long-Term-Fundamentals-of-Tesla-Motors/page12?p=345824&viewfull=1#post345824
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  • May 23, 2013
    gregincal
    Yep, I would definitely argue that what Tesla needs is cash to invest in Model X and Gen 3, not accounting profits. The actual interest they are going to be paying out is about the same or less than the DOE interest, and they get to pay even less taxes by deducting the accounted interest that they don't actually pay to anybody. They have now said they plan to fund Gen 3 entirely from Model S and Model X revenues, so anybody expecting much in the way of quarterly profits for the next few years is dreaming anyway. It's all about cash flow, as far as I'm concerned.
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  • May 23, 2013
    TD1
    The repay announcement on Elons Twitter account got 1969 retweets, usually Elons tweets get about 100-400 retweets.
    Im really surprised what a big deal the DOE loan is for the public.
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  • May 23, 2013
    Causalien
    Just look at the big banks. Even after paying back their bailout fund, they still get slapped around by politicians as they please. Want to be promoted? Attack the big banks and gain political points from your voters. I am just glad they didn't replace "big banks" with TSLA.
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  • May 24, 2013
    DonPedro
    Oh, don't get me started on this. The banks are not being slapped around at all, they are doing all the slapping that matters. Sure, some lefty-commie-takes-no-money-from-finance braveheart launches a broadside at them from time to time, but they have called the shots on every important piece of regulation. The US financial regulations are a disgrace, thanks to campaign finance, revolving door between got'v and Wall Street, and because of the race to the bottom between the various regulatory bodies. It is now a pretty common insight that Too Big Too Fail is what caused the 2008 crisis, yet nothing that works has been put in place to counter it. I wouldn't care so much if the US economy wasn't so big and globalized that you will pull us all down with you the next time again (whether it be in 2 or 20 years).

    If there is something the US needs, it is more slapping around of the banks by politicians. In fact, they should not just be slapped around - a large number of bankers belong in jail for fraud, and the rest should be put on a tight leash. After all, Wall Street should be there for America, not the other way around.

    But I don't think this thread was meant for this... :eek:
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  • May 24, 2013
    luvb2b
    once again, you are 100% correct from a textbook standpoint.

    however in practice there's going to be a huge spread between where one sells a giant block of long-dated out of the money options and where one could purchase that same block. although Tesla had to pay goldman $161 million to buy that call option, it's likely that the price at which buyers would pay tesla to buy the call option from tesla would be a bit lower. so that would offset some of the cost of the debt, perhaps by 10-20%.

    i read the link you posted to encore's debt issue presentation. great information on the accounting treatment of the debt. my thought is that while the accounting treatment is correct, i'm sure elon was thinking of it from a shareholder's point of view. from the shareholder's point of view, there's only a cash payout of 1.5% on the debt, and there is no real dilution until the stock reaches $185/share. in order for that to happen, the fully diluted market cap of tesla would be $25 billion. most likely they couldn't achieve that market cap without at least $5-8 billion in sales. that's not likely to be an issue for at least another 2-3 years. i think the key to remember is that elon has excellent insight into the future roadmap of the company, much more so than us. relative to an options valuation that is done by black-scholes or similar formulaic approach, elon can probably value the option much better especially in terms of understanding the likelihood of that option being in the money. i'm guessing that elon thinks that the $185 warrant is either not likely to be in the money, or that he will have time to address it over the next few years via either debt repurchase or share buyback.

    finally regarding the doe loan payback, i think you are right that there is substantially valuable karma about being out of the government's shadow. i think the course of events will prove the debt swap was cheaper than hanging on to the government loan, and better for shareholders. imo the guys who get screwed the worst are bondholders who are loaning money at 1.5% for many years to a company with one quarter of profit history. really makes me wonder how far the bond market (overall, not tesla bonds) can fall once it starts going down.
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  • May 24, 2013
    ModelS8794
    You keep suggesting that this isn't actually happening ('textbook'?) which confuses me I will admit. If you can't see the plain fact that bond buyers are receiving >8% YTM (or >7% YTM even including your suggested spread for the embedded option) by purchasing the bond and selling the embedded option back to Goldman (who facilitates the transaction and keeps its own book flat via the convert hedge) then I don't know what else to say. It's plain as day to me, and Tesla spells it out very clearly in multiple places.

    From Tesla's perspective, whether the bond buyer or Goldman takes the profit matters not - Tesla is receiving $600 for the convert and paying $161 for the hedge that backs out the embedded option. That leaves them receiving $439 million cash for the straight sr unsecured debt, in exchange for a promise to pay $9 million annually and $600 million at maturity - that's an 8.27% YTM and it's not in a textbook but is actually happening (for realz!) on Tesla's balance sheet.

    It's the equity and derivative buyers who are facilitating this transaction (which is why I feel the Reflexivity display was so awesome and so critical to make this work.) If not for the excellent terms Tesla received on the stock, the embedded option, and the warrants pieces of the total deal, this would have made no sense whatsoever (from a strictly financial standpoint of course - there were clearly other reasons to rid themselves of the DoE loan besides financial ones). The features that make this deal look great from a shareholders point of view (1.5% coupon on the convert, $185 strike net of all the derivative transactions) would not exist but for the excellent terms of the derivatives and the fact that the stock was in the midst of a multi-month reflexive ride up.

    Last on this from me; it's done now, the facts are what they are regardless of your or my interpretation. And anyway as I read more and hear more from all parties about just what a millstone that DoE loan was (low-cost aside), I agree with the larger (and more important) points about the value of paying it off, even if it results in writing some bigger checks along the way. The restrictive covenant forbidding working capital line of credit alone seems worth the expense of getting rid of the DoE loan, never mind the added boost of goodwill from a swath of potential customers and Musk's personal satisfaction from 'doing the right thing'.
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  • May 24, 2013
    gregincal
    From Tesla's perspective the warrant transaction is as real as the hedge transaction. You can't count one as being part of the deal and discount the other one. It didn't leave them receiving $439 million cash, it left them receiving $548 million cash. That's real money in the bank they can spend, the rest is accounting. There's plenty of companies that show a profit on their books while heading to bankruptcy, having the cash is what Tesla needs.

    - - - Updated - - -

    I don't believe the bond buyers have sold the embedded option back to Goldman, that would make no sense. Goldman has kept their books flat buy selling the hedge and buying warrants.
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  • May 24, 2013
    ModelS8794
    <Sigh> And if they sold 5x the warrants, would that have made the convertible debt better than free? Or would that just be further demonstration of the fact that it's the derivative buyers who are facilitating the transaction, not the bond buyers?

    If "having the cash" is the only thing that matters, Tesla would not have agreed to a convert hedge and warrant transaction that resulted in a net ~$60 million cash outflow. Even if you and others discount the very real costs of debt and equity financing, I can assure you Tesla does not.

    Goldman is flat if they are long an option with a 180 strike, and short an option with a $124 strike?

    OK, I can see we're not going to reach a consensus here. I guess we'll just agree to disagree.
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  • May 24, 2013
    jeff_adams
    It will be interesting to see how Tesla operates going forward. I always felt like they were struggling to meet projected time lines because they were watching the budget. Now with a little cushion, it wouldn't surprise me if they are able to speed things up quite a bit. They use to over promise and under deliver. Seems they learned the lesson to under promise and over deliver (they sure did that on Q1 report)
    �
  • May 24, 2013
    luvb2b
    the bond buyers are selling the embedded call option back to goldman? i don't think so. it's a convertible bond, the option stays embedded inside the bond. goldman writes a separate option which is then bought by tesla, and tesla issues warrants that are bought by goldman. i guess if you got that part right, that the embedded call is sold back to goldman, then you're 100% correct. i don't believe that's the case, i believe goldman delta hedges their short call and long warrant position exactly as if they are short a call spread.

    but it's not actually that right? they're only paying a net of around $60 million since their hedge is just a call spread. so effectively they're getting something like $540 million, paying $9 million annually and then $600 million at maturity. the irr on that is roughly 3.7% annually, not too far above the doe loans.

    and this is what i mean by you are right from a "textbook" standpoint. if you use all the formulas and everything else to evaluate it today, everything you say is true. but i think what the reality well end up being as time goes by will be something very different. i'm pretty sure that either (a) the dilution at the $185 strike won't come into play, or (b) tesla will find a way to deal with the convertible or dilution during the years in between.

    the point i'm making here is that elon is basically an informed seller of the convertible and warrant. he has much better information than the bond & warrant buyers, and i'm pretty sure he thinks that the $185 level when dilution would come into play won't matter.

    and that's why i say the bond buyers here are morons. they are getting options which i feel are likely going to be either worthless or worth a lot less than they are being valued today. the implicit price for those $125 calls embedded in the convertible is something near $40/share. what the bond buyers are going to be left with, in my opinion, is a piece of paper that's paying 1.5% backed by the paying ability of a company with one quarter of posted profits. and that's a lousy trade for them.

    i think for the most part we agree on most things here.
    �
  • May 24, 2013
    DonPedro
    Won't you get a different YTM depending on which bundle you consider? As far as i understand, you could put a YTM on:
    - Vanilla debt (8,36% YTM)
    - Convertible debt with strike $185 (3,7% YTM)
    - Convertible debt with strike $124 (1,5% YTM)

    So your debate is regarding which of these is the relevant object of analysis. luvb2b sees it as one package, whereas ModelS wants to look at just the debt itself. I see no real disagreement, only different perspectives. But then I might be wrong.
    �
  • May 24, 2013
    luvb2b
    i think you pretty much got it. the only addition i had was that if you assume the seller is an informed seller and knows that the warrant is likely to be worthless (or otherwise dealt with prior to the maturity date) then what happens is the issuer ends up with

    - Convertible debt with strike $185 (3,7% YTM)

    and the buyer ends up with

    vanilla debt yielding 1.5%

    and the shareholders end up with

    zero dilution!


    i think models8794 is making the point that the reason all this can happen is because people are willing to pay way up for the equity and the call options right now, and essentially it's the madness of the call buyers that is financing the trade via jacked up options premiums. i agree with him, but i think the bond buyers are pretty dumb too.
    �
  • May 24, 2013
    DonPedro
    Given my own, extremely low level of confidence regarding the right position to take in this extraordinary company right now, I will be very careful with passing judgments. But I would agree that talking the 1.5% yield seems like a very poor risk/return tradeoff.
    �
  • May 24, 2013
    Johan
    All I can make of it is that bond investors have been interested in basically the opportunity to buy a $185 call option with a long time horizon on it... In other words, as has been said before, this reflects the crazy call option premiums on TSLA at the moment. But it also speaks of "the markets" hopes and beliefs in TSLA.
    �
  • May 24, 2013
    luvb2b
    that's kind of the point. fixed income buyers are normally supposed to be concerned primarily with return of capital. i realize the convertible crowd is a little bit different but here it seems they have lost all sense of understanding the risk to the return of capital and focused entirely on the potential of return on capital. or perhaps as senior secured holders they feel that the nummi plant is a substantial enough asset to cover their investment value in the event tesla can't pay.
    �
  • May 24, 2013
    kenliles
    Agree with above. As a stock holder I'm thrilled they were able to pull this off. But I cannot envision the Bond investor's risk/reward on this. Anyone can get a 5-7% return over that time period with a corporate bond ETF that has very low risk (spread across 100s of separate companies). It can only be based in the confidence of the strike conversion. A testament to Elon and the Tesla team. As a stock holder I relay my gratitude and respect to the Tesla team.
    �
  • Jun 14, 2013
    maekuz
    Does that mean regarding the Q2 2013 results we will see roughly $9 million/4 = $2,25 million in interest expense, right?

    Are there any other consequences to the Q2 results because of the repayment of the DOE loan? Could the Q2 results somehow benefit from the DOE loan repayment?
    �
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