2017 Investor Roundtable: TSLA Market Action

[surfside]

My sense is the current bond deal is just a sample of what is about to come. I see Tesla turning up Cash Flow from Operations or EBITDA very significantly as Model-3 ramp finishes. Even at 5K rate these metrics should be pretty substantial. Bond market looks at these things to a large degree. Once the next round of gigafactories are announced, I see a lot of debt issued, my guess about 5Bil, and potentially taken up at Investment Grade rates. This is really super good stuff as yet another bear argument (dilution) is severely mitigated going forward.

While Tesla's EBITDA is likely going to ramp rather quickly (and therefore the Company's debt / EBITDA will decline dramatically), it is extremely unlikely that the ratings agencies (e.g. Moody's) will upgrade Tesla from being rated B3 to Baa3 in one year.

That said, they could certainly migrate to Ba2 or better in one year and make the transition to investment grade the following year, which would still result in declining interest costs despite significant future usage of debt financing.

Just want to manage people's expectations here -- what you are suggesting just doesn't happen in the bond markets. I'm not saying it is impossible, but I would put the the likelihood as remote.

surfside

 

[surfside]

It might be prudent but I rarely see Tesla resorting to safety on anything. Moreover I see that the debt/equity for Consumer Discretionary sector in US is around 2 on a weighted average basis. On the high side it approaches to almost 3. So Tesla has plenty of room to borrow with the current equity being about ~6.5Bil and debt/equity being only about 1.15. The equity might grow with the ramp too.

I don't see many reasons not to tap the bond market for about 5bil early to mid next year

The ratings agencies are much more focused on debt / EBITDA vs. debt / equity, so profitable earnings from the Model 3 on an EBITDA basis is the key to significant access to the public bond markets.

I would agree that Tesla could/should tap the debt markets again next year, but it will likely need to be 2H given most ratings agencies focus on trailing earnings....

surfside

 

[SBenson]

While Tesla's EBITDA is likely going to ramp rather quickly (and therefore the Company's debt / EBITDA will decline dramatically), it is extremely unlikely that the ratings agencies (e.g. Moody's) will upgrade Tesla from being rated B3 to Baa3 in one year.

That said, they could certainly migrate to Ba2 or better in one year and make the transition to investment grade the following year, which would still result in declining interest costs despite significant future usage of debt financing.

Just want to manage people's expectations here -- what you are suggesting just doesn't happen in the bond markets. I'm not saying it is impossible, but I would put the the likelihood as remote.

surfside

Not entirely sure if you are disagreeing with the IG rates part or the magnitude of debt part.

There is a subtle difference between getting an actual Investment Grade rating from a rating agency vs being able to borrow at "near IG rates" though.

Would Tesla (or it's shareholders) really care if they are borrowing at 3% or 4% if they need say 5Bil for the next round of gigafactories? As long as there is a market appetite to take up that debt wouldn't Tesla want to do it? Why dilute the equity shareholders if there is an alternative option?

For reference Netflix has a rating of B1 but this happened "Netflix Inc. sold $1 billion of bonds with a 4.375 percent coupon in October. The bonds are now trading with a yield of about 4.2 percent"

 

[AudubonB]

I have no more seen the debt prospectus than, I believe, any others on this forum have, so I especially have no handle on the overage, but:

Are there any opinions on whether Tesla is better off in scenario A or B, as below? Remember to account for the repercussions regarding any future trips to the well.

A. Tesla obtains $1.5bn financing at 4.875%

B. Tesla obtains full overage to amass, let's say, $2.0bn financing at, let's say, 5.25%

 

[SBenson]

I have no more seen the debt prospectus than, I believe, any others on this forum have, so I especially have no handle on the overage, but:

Are there any opinions on whether Tesla is better off in scenario A or B, as below? Remember to account for the repercussions regarding any future trips to the well.

A. Tesla obtains $1.5bn financing at 4.875%

B. Tesla obtains full overage to amass, let's say, $2.0bn financing at, let's say, 5.25%

Without getting too mathematical, my sense is Tesla would prefer option-A. Here's my reasoning:

Tesla has adequate cash right now. It is raising this money for safety cushion. So I don't see 1.5 Bil vs 2 Bil making a big difference. Invariably Tesla will come back to the debt market for next round of GFs. Isn't it better to show that the first issuance is a roaring success in that case. A sub-5% rate sends the right signal in my view.

 

[Jayjs20]

This is fun, watching power hour and unstable macros battle each other.

 

[Waiting4M3]

 

[AlMc]

I have no more seen the debt prospectus than, I believe, any others on this forum have, so I especially have no handle on the overage, but:

Are there any opinions on whether Tesla is better off in scenario A or B, as below? Remember to account for the repercussions regarding any future trips to the well.

A. Tesla obtains $1.5bn financing at 4.875%

B. Tesla obtains full overage to amass, let's say, $2.0bn financing at, let's say, 5.25%

c. Oversubscription @4.875 of 2bn

 

[ValueAnalyst]

I have no more seen the debt prospectus than, I believe, any others on this forum have, so I especially have no handle on the overage, but:

Are there any opinions on whether Tesla is better off in scenario A or B, as below? Remember to account for the repercussions regarding any future trips to the well.

A. Tesla obtains $1.5bn financing at 4.875%

B. Tesla obtains full overage to amass, let's say, $2.0bn financing at, let's say, 5.25%

This is an incomplete question. What would the extra $500m be used for?

If the difference is breaking ground on three or four Gigafactories in 2017, then B definitely is the better option.

If extra cash will be used to accelerate Fremont-ft3 expansion, then sure B is the better option.

If extra cash allows for refinancing short-term higher rate debt, then fine, again B is the better option.

If it will be used for attracting top talent in manufacturing automation, then it gets a bit more blurry, but yea B is the better option.

If the extra cash will just sit in a bank account, then I prefer A. I think Tesla's balance sheet is conservative enough to ride out a recession.

 

[ValueAnalyst]

The ratings agencies are much more focused on debt / EBITDA vs. debt / equity, so profitable earnings from the Model 3 on an EBITDA basis is the key to significant access to the public bond markets.

I would agree that Tesla could/should tap the debt markets again next year, but it will likely need to be 2H given most ratings agencies focus on trailing earnings....

surfside

This is very informative. Thank you. It also explains how PM still has a high credit rating with nearly 100% debt-to-asset ratio...

2H18 is also when I expect TSLA to be added to S&P 500, so I can see Tesla lowering its cost of debt to sub-4.0% at that point.

Great for refinancing higher rated long-term debt and saving $200m+ per year.

 

[ValueAnalyst]

This is OT AF, but DIS reportedly just announced it plans to remove movies from NFLX.

Not all FANG is created equal.

 

[Waiting4M3]

This is OT AF, but DIS reportedly just announced it plans to remove movies from NFLX.

Not all FANG is created equal.

I don't think I will cancel my NFLX subscription over this, so not sure if that's a bad thing for NFLX, maybe they will save more money by paying less licensing fee than the money from losing subs. It will likely be more certainly a bad thing for DIS though. Losing viewers is always a bad thing.

 

[GBleck]

Short covering keep the afternoon going during the "Fire and Fury" dip?

 

[AudubonB]

Lots of greedy TMCers today, I see

Me too: if Tesla doesn't need the extra funds for GF expansions, I know where a lot of very spendy SpC sites await

 

[surfside]

Not entirely sure if you are disagreeing with the IG rates part or the magnitude of debt part.

There is a subtle difference between getting an actual Investment Grade rating from a rating agency vs being able to borrow at "near IG rates" though.

Would Tesla (or it's shareholders) really care if they are borrowing at 3% or 4% if they need say 5Bil for the next round of gigafactories? As long as there is a market appetite to take up that debt wouldn't Tesla want to do it? Why dilute the equity shareholders if there is an alternative option?

For reference Netflix has a rating of B1 but this happened "Netflix Inc. sold $1 billion of bonds with a 4.375 percent coupon in October. The bonds are now trading with a yield of about 4.2 percent"

You are absolutely correct that having access to IG-type rates and being rated IG are two separate things; I was just clarifying that we cannot reasonably expect Tesla's credit ratings to migrate so quickly.

In my mind it is too early to assume that Tesla is going to get Netflix-like treatment from the bond markets. It will be very interesting to see where Tesla's high yield bonds ultimately end up getting priced, as well as where future deals get priced; I'm certainly not ruling out the possibility that buyers in the bond markets give Tesla credit for future performance.

We will know soon enough; I think the equity markets are going to like the outcome of this bond issuance.

surfside

 

[dmckinstry]

Lots of greedy TMCers today, I see

Me too: if Tesla doesn't need the extra funds for GF expansions, I know where a lot of very spendy SpC sites await

Do you anticipate ever seeing a string of SpC's making its way up through Canada to Alaska? I would hope so.

 

[Off Shore]

Do you anticipate ever seeing a string of SpC's making its way up through Canada to Alaska? I would hope so.

And South to Panamá.

 

[MitchJi]

WSJ published a new article about the debt issuance. Full of the usual crap about cash burn and constantly needing to tap equity/debt markets in the future.

But there was this nugget which confirms earlier assumptions about interest rate:
"Tesla tapped Goldman to arrange the issue of an eight-year, $1.5 billion bond, and the investment bank is unofficially marketing it to yield 5.25%, a person familiar with the matter said. Goldman is offering prospective investors a tour of the company’s factory on Wednesday to introduce them to the firm, according to an investor."

One reason for the strong SP might be the exposure to Tesla and the M3 by prospective investors.

 

[Navin]

Selling 1.5 billion in unsecured debt is really strong. One step closer to getting added to S&P 500 and a bunch of ETFs. Huge demand driver for shares once that happens. If I was a stuck short - I'd be posting lots of nonsense on random message boards - what else can one do.

 

[ValueAnalyst]

In the medium term, I expect potentially another round of assault in mid-late Oct:

• Q3ER will show Tesla auto margin, Elon can explain with "soap" but Tamborino will not get it
• M3 capex will hit the balance sheet
  
• Semi and maybe additional GGF will have been announced, and market will be shocked at the cash needed, just like after the M3 Mar'16 reveal

OTOH, if semi/GGF announcement has any surprises, such as a partnership with potential customers, GGF already breaking ground (like TIM), and/or M3 configuration opening to non-Tesla customers in late Sep or early Oct, or higher than 1500 M3 delivered in Q3, we may see a bump in late Sep - early Oct first, before the shorts come back to try to push it down again.

I initially agreed with this post, but upon further consideration, I now disagree.

If Tesla delivers 5,000/wk Model 3's with 25% margin in 1Q18, bears have drawn their last breath.