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

Discussion in 'TSLA Investor Discussions' started by luvb2b, May 10, 2013.

  1. luvb2b

    luvb2b Member

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    Dear Elon.

    I think you must read these forums from time to time, so I thought I would drop you a line.

    As I had posted on this forum, your recently announced earnings beat was quite obvious months ago to someone who was willing to study the situation.

    On the conference call you said you hadn't thought about doing a capital raise. However your share price is now up 40% or more from the closing price on the day of the earnings report.

    It's high unlikely that the marginal buyers here are long-time Tesla supporters, as most of us knew about the earnings beat nearly $40 ago. Much of the increase is from short sellers who made the foolish mistake of betting against you. They are now in a very difficult situation and due to the high cost of shorting they have no choice but to cover. The ongoing charges for borrowing shares are killing them.

    Although I have no doubt Tesla shares will be worth quite a bit more years from now, the possibility of an economic hiccup in the time between is real. With the current share price, you could really do shareholders a service by raising capital via selling a small number of shares, perhaps 8 million? At current price this would allow you to raise over $500 million.

    This $500 million would allow you to accelerate development programs and perhaps pay down the DOE loan. It would virtually guarantee the survival of Tesla for the decade to come, an incredibly valuable proposition for a shareholder.

    There's a secondary beneficial impact of doing a capital raise: increased liquidity. Right now there are only about 60 million shares of Tesla that are available for investors. The rest are held by yourself, Fidelity, Daimler, Panasonic, and Toyota. Increasing the number of stakeholders will increase your chances of being included in the S&P 500 index and increase the number of Tesla supporters. Both of these are beneficial outcomes for existing shareholders.

    I understand how shareholder friendly you are. I know you don't want dilute our holdings needlessly. However this is a wonderful opportunity you are being presented to get out of the government loan shadow and really protect the shareholders with a very small amount of dilution. In the future when the share price might be lower and/or Tesla has substantial cash flow you could consider doing a buyback to reduce the outstanding share count.

    As the short position dwindles, the price will return to normal supply/demand dynamics and the current opportunity may be gone.

    Thank you for doing all you have done.

    Luv
     
  2. RABaby

    RABaby Member

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    It's a good suggestion that makes business sense, but I suspect Elon already has a plan, which in fact may be exactly what you suggest - or not. I believe his plan is already in place and his incremental tweets and announcements only provide nourishment for his growing baby. The value of your letter is that others can read in plain English one way to ensure continued growth and sustainability for the company. If the shorts and naysayers can't see the viability of an EV company steering along the Musk path, then they will just be run over.
     
  3. Johan

    Johan Took a TSLA bear test. Came back negative.

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    Well stated and IMO a very correct proposal.

    BTW luvb2b; I've been following you from the sidelines a bit on thelion, saw your post about buying Jun13 40 calls way back for 28 cents and over time selling them for an average of $28... 10000% gain... N.I.C.E!
     
  4. Citizen-T

    Citizen-T Active Member

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    The one thing is that a secondary would provide much needed liquidity to short sellers. I do enjoy hearing them squeal in pain, and an offering would be a shot of morphine for them.

    That doesn't mean it isn't the right thing to do. Just that it would bring an end to this squeeze.
     
  5. adiggs

    adiggs Active Member

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    As I see it Citizen-T - you're spot on about some liquidity ending the short squeeze. It would also let the company be the primary beneficiary. For those of us with a long term perspective, the stock price will be back, and the company will be that much stronger financially (or at least, that's how I see it).
     
  6. Johan

    Johan Took a TSLA bear test. Came back negative.

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    Well, if it was only 5-8 million shares they'd have to fight amongst themselves over them, as well as with fresh longs who are a little later (but not too late) to the party.
     
  7. AnOutsider

    AnOutsider S532 # XS27

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    Very nicely put, and I agree, it would be a good move. Might I suggest though, editing the title so that it's more descriptive? "Dear Elon: Now's the time to raise cash" perhaps?
     
  8. luvb2b

    luvb2b Member

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    thanks! i didn't know there was any overlap between here and the lion. what's your handle?

    actually those were april 40s that i bought and rolled. near costless rolls as i used some profits to roll forward. quite a winner though.
     
  9. CapitalistOppressor

    CapitalistOppressor Active Member

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    Off hand, I'm am increasingly leaning towards an opportunistic secondary because of a "bird in hand" and all of that.

    That said, there are technical and economic reasons why GenIII will come out in 2017. Same thing with Model X delays.

    Getting dollars now might not be able to accelerate that process at all, so the best use for them is likely to pay of an extremely low interest loan.

    So if extra cash can't efficiently expedite development, is it still worth raising money just to pay down the loan? Maybe. And there might be other productive uses for the money, like expedited SuperCharger rollout, etc.

    Regardless, unless demand craters I am seeing the clear potential for windfall profits in the 2015-2017 time frame. They should have the money to invest in the GenIII platform when that process is requiring peak funding levels.
     
  10. ShortSlaver

    ShortSlaver Member

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    Tesla might have evidence to believe they can drive their share price to something closer to a stable $85 this year, or something. Might be a better time then.

    Especially as adding that kind of news and sentiment to a stock that is clearly beyond volatile right now might be a bit nuts.

    Why not wait it out until after more better than expected news in Q2 and even better forward projections and lots of good will and then introduce another offering which covers that kind of debt?
     
  11. 30seconds

    30seconds Active Member

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    and why not issue debt? seems like they could issue $500m for a reasonable rate given their revenue/ operational ramps.

    of course the most capital efficient thing to do would be to pay back DOE on non-accelerated timeline, but they want to get out of political overhang so that seems more like a risk mgmt. decision.
     
  12. jeff_adams

    jeff_adams Member

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    The best thing about the DOE loan is the clause that says Tesla can't be sold until the loan is paid off. Selfishly, I'd prefer to have Elon keep running Tesla for now. Once it's paid off, I can envision plenty of suitors eying Tesla's value and it could be hard to say no.
     
  13. CapitalistOppressor

    CapitalistOppressor Active Member

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    Issuing debt would almost certainly violate DOE loan covenants and put them into default.
     
  14. 30seconds

    30seconds Active Member

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    #14 30seconds, May 10, 2013
    Last edited: May 10, 2013
    maybe, maybe not. I don't see how the DOE could of put such covenants to the other program loans to Ford and Nissan. It was a 10 year loan, I'm sure the finance guys at Tesla were considering normal debt financing for operational expansion as part of their capital plan.

    update:
    Ford issued $2B in debt in Jan 2013. I don't think they have fully paid back the $5.9B ATVM loans yet.
    Ford Issues $2 Billion of Bonds With 30-Year Maturity - Bloomberg
     
  15. Vger

    Vger Active Member

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    I think this is a valid proposal, again, in terms of enhancing the staying power of the company in the face of any unforeseen external pressures. The conventional wisdom is, "raise money when you can, not when you need to."

    However, there is one big problem with doing this now. We do not know yet if this price level is sustainable. It can be problematic and tarnishing of one's investor brand to sell out an offering and then watch all those new shareholders get quickly put under water. One get distracted by shareholder lawsuits, and all that BS.

    So I hope a window does open where this would make sense, but to bank on this new market valuation seems a little premature.
     
  16. luvb2b

    luvb2b Member

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    i guess my point is you know there is huge demand right now for shares. it is coming from shorts who must find a way out.

    once the short interest declines enough, you won't find this kind of desperate urgency to buy a stock hat has doubled after one of the most obviously telegraphed earnings beats ever.

    i think if they put the feelers out they would know what kind of demand is out there. i am sure they could call morgan stanley or goldman and ask them to check with their clients.

    there are numerous external factors that could cause headaches for tesla down the road. the capital is so cheap now compared to just 3 months ago... i recall that offering priced in the high $20s. now the stock is 4x higher. seems almost like a no brainer.

    i know tesla has vast earnings potential. but it will take time to fully realize that potential. additional capital can guarantee they will have that time.

    here are a few of the numerous uncontrollable risks:
    1. higher interest rates lowering affordability.
    2. some further contagion and chaos out of the euro zone
    3. a recall of model s
    4. global slowdown, which always hits car sales
    5. changes to ev incentive regulations
    6. natural disaster
    7. legal woes fighting with dealers
    8. potential for future liquidity crunch when it is time today off doe loan.

    let the shorts provide the capital to guarantee tesla's survival... seems like a fine idea to me!
     
  17. AudubonB

    AudubonB Mild-mannered Moderator Lord Vetinari*

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    This is an interesting thread. MY suggestion is that a secondary be in the form of a different class of stock. TSLA-B shares could be any combination of the following.....

    1. Convertible preferred, for example
    2. a vessel also intended as the stock options for incentivizing employees
    3. carry different voting rights (could be greater; could be lesser - depends on corporate interest)

    Benefits?

    1. Provides more capital, at the "cheaper" rate that the significantly higher share price imbues.

    2. Utterly pole-axes the shorts, in that the increased liquidity such an offering entails benefits the corporation but is absolutely unavailable to a short-seller (reason: if you're short TSLA, you can't buy TSLA-B to cover)

    3. Mitigates the dilutive effect that otherwise accrues from stock options being exercised. From all I can fathom, stock options absolutely have to be figured in to any long-term corporate model - and given the company's ever-growing need for ever-more qualified engineers, etc., - there will have to be more and more such options put out there. Eventually, such do have a dilutive effect, but benefit present shareholders only in a very, very ephemeral way "strengthen the company". I've seen too many hundreds - or perhaps thousands - of corporations over the years for which such option-granting benefits only one class of people: the insiders. Yecch.

    My two watts.
     
  18. Causalien

    Causalien Reaper of Trolls

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    I support a capital raise.
    TSLA capital raises tend to put a hard support line on their prices. I only ask that elon seek out people who will have a skin in the game instead of throwing it all to retail investors...Like their suppliers.
     
  19. CapitalistOppressor

    CapitalistOppressor Active Member

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    I don't feel like digging up the loan documents or plowing through them again. Fundamentally it's due to a measurement of creditworthiness. I recall it being a debt/equity ratio of some kind. I do know they violated this covenant in September around the time they did their secondary and it required the renegotiation of the loan, with Tesla ultimately agreeing to faster repayment in exchange for not being forced into default status.

    Regardless of the details think about it from the Federal perspective. Tesla is NOT Ford or Nissan. Tesla is a startup company with a terrible balance sheet. To even extend credit to them the Feds made Tesla promise that there would be no changes in leadership or ownership, they required the money be spent to meet certain milestones, and they required that Tesla stay financially strong enough to stay out of bankruptcy.

    Allowing a poor credit risk (which Tesla is) to take on new debt is just not something that is done lightly, whether you are talking about consumer credit card issuers or the DOE.
     
  20. Bearman

    Bearman Member

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    I agree with luvb2b, raising some capital now would be the best for the long term. Unrealized gains come and go.
     

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