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

[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.

 

[luvb2b]

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.

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.

 

[DonPedro]

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.

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.

 

[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.

 

[luvb2b]

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.

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.

 

[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.

 

[maekuz]

... to pay $9 million annually...

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?