2017 Investor Roundtable:General Discussion

[generalenthu]

That sounds about right. It is fancy pit option for MS that raises initial funds presumably so they can hold tesla shares for up to three years. For this upfront cash they pay interest only as long as they need to and only as long as the deal is not going terribly south for them.

An investor who is willing to write a put on Tesla and hold cash to secure that put would potentially be interested in this product from MS. In lieu of proceeds from sale of a put, the investor in this product would receive upto 10.5% coupons.

I think @jhm comes close, and just fell short of connecting all the dots. So here is my version of what is happening. I will start with the conclusion first to make it easy to understand the mechanics.

Tesla is selling convertible debt with 3 year maturity. I doubt this is the only tranche, and could be one of the tranches.

So who buys convertible debt? outright investors who are a smaller fraction and hedge funds who are a larger fraction. and typically hedge funds buy the bonds and sell some common to neutralize their exposure. If tesla does well, their long would make more than their short and would come out ahead. The downside is if tesla goes bankrupt, they'd lose their principal. So when Tesla issued convertibles last time, borrow got tight and the hedgies were in trouble. So this go around, the convertible investors might be looking to acquire puts instead of going outright short. And it is not like there is a ton of borrow even right now.

So if hedgies are buying converts, they are highly likely to ask MS to sell them some puts as well. and MS cannot just sell long dated puts. They are looking for someone to take the other side of this trade and the structured notes come into play. This is where their retail presence gives them a huge leg up. Also remember banks are prohibited from making prop bets (Volcker Rule).

Also good to remember that Deepak did a few converts back in the day and his fingerprints are showing up.

From an investment perspective, it is likely that when the issue settles, some hedgies are likely to outright sell the common short, into the pop, and neutralize the upward move. Also wall st. is likely to see the increased debt load a bit more negatively. So brace for more flatness after the raise.

FWIW, personally, I like the converts relative to outright common offering as the dilution is less. Typically this is at a 130-140% strike and using 250, the effective issuance will be at 325-350.

PS: Without a convertible offering, it makes no sense for MS to buy the put that the investors are effectively selling and sit on it. It would violate the no prop positions rule.

 

[Papafox]

Thanks all for clarifying the purpose of the Morgan Stanley security. Rather than raising any capital for Tesla, the prevailing theory is that this security is being used to offset risk associated with a capital raise.

 

[dennis]

Tesla is selling convertible debt with 3 year maturity. I doubt this is the only tranche, and could be one of the tranches.

I reached out to my guy at Morgan Stanley Wealth Management, who contacted their Structured Note desk. Here is what he said in response to my question as to whether this was a cap raise by Tesla:

No, it is issued through MS Finance, not TSLA.

 

[generalenthu]

I reached out to my guy at Morgan Stanley Wealth Management, who contacted their Structured Note desk. Here is what he said in response to my question as to whether this was a cap raise by Tesla:

Your guy at MS is absolutely right. All I am saying is MS is issuing this note because they are trying to offset some other risk. This is what banks do.

I am just working back from what that other risk is. And my analysis tells me it is a convertible bond offering.

 

[generalenthu]

Thanks all for clarifying the purpose of the Morgan Stanley security. Rather than raising any capital for Tesla, this security is being used to offset risk associated with a capital raise.

More accurately, this MS offering lets them sell a better tailored package to hedge funds who are the natural buyers of convertible notes. I guess the hedgies would take this note offering off of MS for easily 300 bps above what they are offering customers in coupons.

FWIW, I am in the banking industry and have been following these types of deals for a long time. And I have at one point been pitched far weirder structures to manage our risk. Also, these typically are structured to look good for the retail investors, but are generally bad deals, adjusted for risk.

To hedge myself a bit, there could still be a common only offering, but i'd put that at less than a 5% probability.

 

[Intl Professor]

probaly in the first 7 days in may
thinking about going to 50% cash

You could invest in tons of the precious bodily fluids in bull semen.

 

[Curt Renz]

Jim Cramer, a legendary market manipulator and a Goldman Sachs henchman, is dissing TSLA on Mad Money today. He is claiming that TSLA has lost its luster and on its way downwards to $160. He is recommending F and GM instead as they have supposedly made a golden cross.

Tesla's Cyclical Winter of Discontent: Cramer's 'Off the Charts'

It looks like dark forces are trying real hard to suppress stock price. This could very well be the single most important sign of the bottom.

 

[jhm]

I was thinking that MS simply selling a huge load of Tesla shares. So they just need this hedge as long as it take sit well the shares above the closing price.

If a convertible bondholder wants a hedge it seems simple enough to write call options near the strike that the bond converts at or perhaps short shares.

So an important detail here is that the share closing price that the MS product is based on is not necessarily any strike price related to a convertible bond. So this product does not seem tailored to a convertible bond.

 

[geneclean55]

I think @jhm comes close, and just fell short of connecting all the dots. So here is my version of what is happening. I will start with the conclusion first to make it easy to understand the mechanics.

Tesla is selling convertible debt with 3 year maturity. I doubt this is the only tranche, and could be one of the tranches.


From an investment perspective, it is likely that when the issue settles, some hedgies are likely to outright sell the common short, into the pop, and neutralize the upward move. Also wall st. is likely to see the increased debt load a bit more negatively. So brace for more flatness after the raise.

FWIW, personally, I like the converts relative to outright common offering as the dilution is less. Typically this is at a 130-140% strike and using 250, the effective issuance will be at 325-350.

PS: Without a convertible offering, it makes no sense for MS to buy the put that the investors are effectively selling and sit on it. It would violate the no prop positions rule.

So there could be a SP pop on the 22nd of March?

 

[jhm]

You could invest in tons of the precious bodily fluids in bull semen.

Not sure I want to touch that metaphor.

 

[generalenthu]

So there could be a SP pop on the 22nd of March?

I am going off memory here, typically convert offerings drop price in the short term, but tesla is a different beast as cap raises in the past have been positive. It's hard to tell what the reaction would be, and would think that any pops (if they happen) might be aggressively sold. I personally would not try to trade that and would stay far away.

 

[Sonny Daze]

The Seeking Alpha Tesla 4th Quarter earnings call transcript is the 'official' transcript of the call on the internet. It is being directly linked to by most media organizations including Nasdaq and CNBC, and the one that comes up when any investor searches google for it.

http://seekingalpha.com/article/404...-results-earnings-call-transcript?part=single

Anybody know if this now available somewhere else where I don't have to create yet another account?

 

[vgrinshpun]

More accurately, this MS offering lets them sell a better tailored package to hedge funds who are the natural buyers of convertible notes. I guess the hedgies would take this note offering off of MS for easily 300 bps above what they are offering customers in coupons.

FWIW, I am in the banking industry and have been following these types of deals for a long time. And I have at one point been pitched far weirder structures to manage our risk. Also, these typically are structured to look good for the retail investors, but are generally bad deals, adjusted for risk.

To hedge myself a bit, there could still be a common only offering, but i'd put that at less than a 5% probability.

Is it common for the details of the structured notes offering to come out before the convertible bond offering (if there is one) becomes public? Or this was some type of unsanctioned leak?

 

[vgrinshpun]

I agree with your assessment of Trip. But as I said I am trying to reconcile the low guidance with US delivery dates moving to May 1-2 months before the Q1 end date. The only explanation I can come up with is that Tesla is production constrained at 47-50K for 1H17. Thoughts?

I believe that if Tesla indeed is production constrained, it is at higher than 47-50K as they will need to fill in transit pipeline before starting deliveries of Model 3. So if they are planning to add roughly 10K cars to the pipeline, the actual production goal for 1H17 is 57-60K. I've posted more on this here.

 

[SteveG3]

Jim Cramer, a legendary market manipulator and a Goldman Sachs henchman, is dissing TSLA on Mad Money today. He is claiming that TSLA has lost its luster and on its way downwards to $160. He is recommending F and GM instead as they have supposedly made a golden cross.

Tesla's Cyclical Winter of Discontent: Cramer's 'Off the Charts'

It looks like dark forces are trying real hard to suppress stock price. This could very well be the single most important sign of the bottom.

looking at the Yahoo Finance feed for TSLA (link below), it looks like someone was vigorously following Cramer's advice in the video about (paraphrasing) "the key being working your connections to get the bogus story repeated".

today, there are 6 different repetitions of this same story on Cramer TSLA segment in the feed, 5 of them by CNBC alone. based on past experiences, these may well be repeated as new links at the top of the feed tomorrow morning.

TSLA : Summary for Tesla, Inc. - Yahoo Finance

I don't know that this is the sign of a bottom as TMSE suggested. some past waves of smear pieces have failed and some have been effective. As we've all seen, the stock has been right around $250 for a week now... sort of hanging there waiting for trader conviction about where the next $15 move will be. this simply looks like an attempt to fabricate that conviction and swipe the share price from it's nesting spot.

 

[generalenthu]

Is it common for the details of the structured notes offering to come out before the convertible bond offering (if there is one) becomes public? Or this was some type of unsanctioned leak?

I wouldn't go as far as calling this an unsanctioned leak. Banks typically line up potential buyers when they know of something coming up and in this case Elon pretty much confirmed that there is going to be a raise. Also, it is hard translate this knowledge into a profitable trade.

I haven't followed the timing that closely to answer your question.

 

[Zhelko Dimic]

I think @jhm comes close, and just fell short of connecting all the dots. So here is my version of what is happening. I will start with the conclusion first to make it easy to understand the mechanics.

Tesla is selling convertible debt with 3 year maturity. I doubt this is the only tranche, and could be one of the tranches.

So who buys convertible debt? outright investors who are a smaller fraction and hedge funds who are a larger fraction. and typically hedge funds buy the bonds and sell some common to neutralize their exposure. If tesla does well, their long would make more than their short and would come out ahead. The downside is if tesla goes bankrupt, they'd lose their principal. So when Tesla issued convertibles last time, borrow got tight and the hedgies were in trouble. So this go around, the convertible investors might be looking to acquire puts instead of going outright short. And it is not like there is a ton of borrow even right now.

So if hedgies are buying converts, they are highly likely to ask MS to sell them some puts as well. and MS cannot just sell long dated puts. They are looking for someone to take the other side of this trade and the structured notes come into play. This is where their retail presence gives them a huge leg up. Also remember banks are prohibited from making prop bets (Volcker Rule).

Also good to remember that Deepak did a few converts back in the day and his fingerprints are showing up.

From an investment perspective, it is likely that when the issue settles, some hedgies are likely to outright sell the common short, into the pop, and neutralize the upward move. Also wall st. is likely to see the increased debt load a bit more negatively. So brace for more flatness after the raise.

FWIW, personally, I like the converts relative to outright common offering as the dilution is less. Typically this is at a 130-140% strike and using 250, the effective issuance will be at 325-350.

PS: Without a convertible offering, it makes no sense for MS to buy the put that the investors are effectively selling and sit on it. It would violate the no prop positions rule.

After reading carefully offer and your explanation, I'm starting to think your explanation sounds probable.

This structured product would offer MS access to cheap puts between March and June. If MS believes that we're entering period where puts will be very popular (to hedge convertibles), and assuming MS want to bring their exposure close to 0 (by shorting, which @nerodin will disagree with), having access to cheap puts through structured product would let MS sell plenty of puts and still be able to balance position, eventually, even if it's temp. off balance .

After these 3 months (June 20), if the stock is up, MS will exit structured product at the cost of the interest(that's condition of the product), and if the stock is down, it's made them some money. In any case, they can balance position gradually over 3 months, while they can satisfy high peak demands for puts, without being exposed.

Yeah, I don't know enough about derivative world, but I can't see otherwise why would MS offer this product otherwise, it is one-sided, equal to put buying.

BTW, this would also explain today's drop - if convertible sales have started, and hedgies are buying puts with it, MS would start shorting stock to bring position into neutral, which would explain drop. Again, @nerodin disagrees this is mechanism that's used in reality by MM, i.e. sell puts - short stock(not 1:1) is not what's happening, and he might be right (shrug).

Last point, pricing of structured product is later in the month (17th or so), so MS would be exposed to price swings if convertible/puts sales have alreday started. This makes me think convertible sales prob. didn't start, so today's drop is a) knee-jerk reaction or b) ppl that understand what's going on are stocking on puts.

Warning: I have no education/experience on derivatives, just couple of years of playing around with options and a bit of a common sense

EDIT: I realized buyer of this product takes risk for bottom 60% of the TSLA SP, while first 40% is still on MS, so in a way buyer acts as a underwriter/re-insurer That means MS would be less sensitive to short term fluctuations of the SP, and this product is more about keeping their book of risks under some limit('margin'), rather than really protecting them dollar for dollar. So comments about when sale starts are less relevant

 

[vgrinshpun]

BTW, this would also explain today's drop - if convertible sales have started, and hedgies are buying puts with it, MS would start shorting stock to bring position into neutral, which would explain drop. Again, @nerodin disagrees this is mechanism that's used in reality by MM, i.e. sell puts - short stock(not 1:1) is not what's happening, and he might be right (shrug).

I would think that an SEC filing should come at the same time as convertible offering...

 

[dc_h]

Reminder - how many people live in condos and apartments that have no access to at-home charging? That is the down-market that EVs must go to in order to actually grow substantially. Some 25-30ish person getting by on barely a living wage in an apartment shared with a room-mate who wants an EV does what in terms of charging?

I have a two-car garage and plug in daily. However, I know many people in locations where population is denser where they simply do not have the opportunity to plug-in at home. Wide-spread DCFC and higher public charging is very necessary. Not everyone is suburban, two-car garage (sorry three-car garages are "de-rigeur") and then add in their capability to take ITC and jump onto the EV bandwagon. I know a guy who is very green-centric. Doesn't have a job, drives an older car and talks about buying an EV. Without a job I wonder how he's going to pull that off. The arena he is looking into a new job, the green-space, pays relatively low. Buying a $35k new Tesla Model 3? More likely a used Nissan Leaf sub-$10k.

He is not going to buy a car that is profitable for any other mfr either. I wish him luck and the best, but this segment is not relevant for the profitable segment of the auto industry. Get rid of CAFE and this lower end of the market will lose access to a lot of cheap high quality compact\effeciency cars in the US.
Tesla is currently competing primarily with green cars for people who can level up, and buyers in the luxury market already. These people generally have homes. The Model 3 market starts to move into a new space of more urban upper middle market. Infiniti G37, BMW 3, also mostly people who are passionate about cars or the environment. This is still mostly a market of homes and nicer condos where electricity is not a stretch. This probably kills 20% of possible sales, but longer term this will be less and less of an issue. New building will support EV's and older buildings in super cities, like NY, will mandate EV support.
I think it is good to force us to think these things through. Figuring out how EV's and EV trucks and drones and other high intensity electric devices will maintain power in the future will be market opportunities. A tiny little startup in Fremont has already built a global highway charging system, doesn't seem too hard to believe that a big global auto mfr will be able to drive this further downstream.

 

[geneclean55]

I wonder if Musk will be attending tomorrow.

Trump to meet with business leaders on infrastructure