ShortSlaver
Member
I really doubt he would have tweeted ahead of a offering. Also, I'm not sure they've had enough time to organize one if they weren't even talking about it before.
I respectfully disagree.
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I really doubt he would have tweeted ahead of a offering. Also, I'm not sure they've had enough time to organize one if they weren't even talking about it before.
luvb2b2: Excellent understanding as ususal you we're two steps ahead!
well you gotta hand it to elon. i've never seen a ceo who has it in for shorts so badly. what he's doing is raising money without issuing very many shares. by using convertible debt, the debt can be priced off of the shares, but the shares will never exist til sometime in the future. the shorts won't be able to use the convertible debt to hedge because holding tesla shares short is just too expensive.
and in fact, because the you can earn so much loaning out the shares, you'll find hedge funds may do the reverse arbitrage - that is, they buy tesla shares and short the convertible debt. the idea is the hedgie buys tesla and loans out the shares, earning 30%+ in the short term. the convertible debt is shorted and requires some low interest payment (which doesn't matter much compared to the 30%). and the convertible debt provides a hedge to the long tesla position, protecting against some of the downside. if this trade starts happening, it will skew the price of the convertibles low and push the share price perhaps higher.
i'm trying to understand all this business about hedging the dilution of the convertible:
"The notes will be convertible into cash and, if applicable, shares of Tesla's common stock. The interest rate, conversion price and other terms of the notes are to be determined.In connection with the offering of the notes, Tesla intends to enter into convertible note hedge transactions and warrant transactions which are generally expected to prevent dilution up to 100% over the offering stock price. In connection with establishing their initial hedge of the convertible note hedge and warrant transactions, the hedge counterparties or their affiliates expect to enter into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the notes, including with certain investors in the notes."
essentially a hedge against the note conversion would likely be tesla buying some kind of call options (or call spreads as there appears to be a cap). presumably they would exercise these calls as the notes got converted. what i don't understand is what the warrants are for, as warrants would involve newly issued shares being created. i can't really say i understand all this, except that what it does is it forces the counterparty to the conversion hedge to be short some kind of weird call option. presumably that counterparty then hedges the trade by buying shares of tesla (as typically short calls are hedged with long stock).
and then finally you have elon buying $100 million of stock in the offering. this is the dumbest part of the whole announcement. why didn't he buy $100 million when they did the offering at $27 just 6-8 months ago? my guess is that as he did in a prior offering, he is using his goldman line of credit backed by spacex/solar city/tesla. that credit line has surely grown recently, and he's putting $100 million of it to work. but it is actually quite idiotic. he already has his balance sheet at risk backing tesla's buyback guarantee. he already has a margin loan for tesla shares. and he already has a shi1-ton of tesla options. to buy relatively little at $28 and then after a 3x jump in the price he jumps in huge? that would be really poor trade management in nearly all circumstances (there are a few exceptions i can think of).
imo all this makes for great headlines, but unless i am misunderstanding something, elon has lost his mind. the structure of the offering seems to be designed to raise capital and goose tesla stock higher. the capital raise is good but i would argue that at this point it's almost intentional manipulation trying to drive the stock higher. now maybe tesla's sales and earnings are going to be good enough to justify whatever that higher price might be, but honestly i can't understand why they are manipulating the stock this way. the convertible note hedge transactions throw a whole bunch of opacity over the whole thing: what derivative transactions will be entered behind the scenes, who will participate, and how will they affect the shares? these are all unknown to shareholders.
and it seems the result is that more tesla shares will end up in the hands of hedge funds and investment banks who are using them for sophisticated trading strategies related to the hedges and the convertibles. fewer shares will be in the hand of long-term tesla investors. and volatility in the stock price will increase. it has been (and may continue to be) great fun on the way up. but some day it will turn down as sure as the tide eventually goes out. and the drop could be very painful.
oh and by the way, we don't even know how many shorts are left in the stock. nearly 110 million shares traded in the last 5 sessions, so presumably a lot of the old shorts have covered.
i know from a shareholder point of view there is some excitement that he's taking a knife to the back of the short-sellers. the offering is great and an amount similar to what i hoped they would raise. it's awesome they can do it without issuing shares. the "hot money" in tesla is going to love this announcement.
however i feel he is going too far here with some of these additional complexities. i don't believe these complexities serve the long term owners of the company. what i see happening in the future is that after the shorts are pounded to oblivion the cost of shorting will drop. at that time a lot of people who are holding shares to take advantage of loaning them out (like the stooges from the rolling naked short thread) will start to sell those shares. hedgies who are doing the trades described above will not want their shares either. and meanwhile the shorts who would otherwise support the price in a falling market will be gone. with the price artificially inflated, absence of demand from shorts, and plenty of supply from longs unwinding random derivative strategies, i would expect the subsequent drop to be exaggerated as well. i'm not describing a short process here, this is something that would likely play out over a matter of many months. maybe by then elon will have done something to justify a $15 billion fully-diluted valuation, which will happen probably by $110-120/share and things will be completely different than my debbie-downer scenario.
almost every company i've seen go to war with the shorts has ended up having some major declines in share price. i like to see tesla be shareholder friendly, but going too far to murder the shorts is not something i like to see. i think what would have been better is to just keep executing and letting the stock work its way higher naturally, keep the shorts engaged with whatever nonsense gets them to short. those shorts would basically guarantee outperformance of telsa stock in a down market and offer a constant supply of buyers to keep buoying the share price. any increase in share price would have unfolded over a longer period of time, and long term tesla owners would have been more likely to not be flushed out by high volatility.
that's my 2c. happy & sad at the same time. luv to hear other people's opinions.
essentially a hedge against the note conversion would likely be tesla buying some kind of call options (or call spreads as there appears to be a cap). presumably they would exercise these calls as the notes got converted. what i don't understand is what the warrants are for, as warrants would involve newly issued shares being created. i can't really say i understand all this, except that what it does is it forces the counterparty to the conversion hedge to be short some kind of weird call option. presumably that counterparty then hedges the trade by buying shares of tesla (as typically short calls are hedged with long stock).
imo all this makes for great headlines, but unless i am misunderstanding something, elon has lost his mind.
and then finally you have elon buying $100 million of stock in the offering. this is the dumbest part of the whole announcement. why didn't he buy $100 million when they did the offering at $27 just 6-8 months ago? my guess is that as he did in a prior offering, he is using his goldman line of credit backed by spacex/solar city/tesla. that credit line has surely grown recently, and he's putting $100 million of it to work. but it is actually quite idiotic. he already has his balance sheet at risk backing tesla's buyback guarantee. he already has a margin loan for tesla shares. and he already has a shi1-ton of tesla options. to buy relatively little at $28 and then after a 3x jump in the price he jumps in huge? that would be really poor trade management in nearly all circumstances (there are a few exceptions i can think of).
imo all this makes for great headlines, but unless i am misunderstanding something, elon has lost his mind. the structure of the offering seems to be designed to raise capital and goose tesla stock higher. the capital raise is good but i would argue that at this point it's almost intentional manipulation trying to drive the stock higher. now maybe tesla's sales and earnings are going to be good enough to justify whatever that higher price might be, but honestly i can't understand why they are manipulating the stock this way. the convertible note hedge transactions throw a whole bunch of opacity over the whole thing: what derivative transactions will be entered behind the scenes, who will participate, and how will they affect the shares? these are all unknown to shareholders.
@lub2b
I think Elon's purchase is part of the anti-shorting plan.
I think your analysis of the results of driving out the shorts is relevant. However, it only concerns the financial side. Unless Elon will need more money to fund his expansion later, he just does not care. What he cares about is "the real economy". He simply does not want all these people lurking in the shadows with knives. So he is trying to drive then out of their positions, so they stop caring enough to try to work against the company.
The transaction is set up this way so that the first two legs can be integrated (debt issuance plus purchased call) for tax purposes, creating tax-deductable OID interest. The third leg (selling a warrant), will have a higher strike, and longer maturity, and will be far enough away from the debt/purchased call strikes that the three legs will each pass muster as separate legitimate economic transactions for tax purposes. The net impact is the ability to issue convertible debt with a strike price very far out of the money (100% above the current price, apparently, in this transaction), much further out of the money than would usually be tolerated in the plain-vanilla convert market.
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
The transaction is set up this way so that the first two legs can be integrated (debt issuance plus purchased call) for tax purposes, creating tax-deductable OID interest. The third leg (selling a warrant), will have a higher strike, and longer maturity, and will be far enough away from the debt/purchased call strikes that the three legs will each pass muster as separate legitimate economic transactions for tax purposes. The net impact is the ability to issue convertible debt with a strike price very far out of the money (100% above the current price, apparently, in this transaction), much further out of the money than would usually be tolerated in the plain-vanilla convert market.
I think if you look at the last few months of activity (including Musk's participation in the equity raise here) through this lens, it makes a lot more sense. IMO Musk is teaching a master-class in putting the theory of reflexivity to maximum benefit for a high-growth-stage company in a capital intensive business.
i'm trying to understand all this business about hedging the dilution of the convertible:
"The notes will be convertible into cash and, if applicable, shares of Tesla's common stock. The interest rate, conversion price and other terms of the notes are to be determined.In connection with the offering of the notes, Tesla intends to enter into convertible note hedge transactions and warrant transactions which are generally expected to prevent dilution up to 100% over the offering stock price. In connection with establishing their initial hedge of the convertible note hedge and warrant transactions, the hedge counterparties or their affiliates expect to enter into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the notes, including with certain investors in the notes."
If Salesforce.com is valued at $25B, then there's no reason that Telsa should not be. Tesla has achieved equal profitability (0) and revenue run rates to Salesforce in a fraction of the time, and is disruptive to a much larger market. As a CRM short, I hated Marc Beinoff (CEO) and the gamesmanship that he pulled to support the CRM stock price. I believe Marc Beinoff is a Tesla Roadster and Model S owner, someone who Elon could call up for advice.
Unlike Salesforce, I think Tesla is the real deal too.
thank you for explaining that, and it makes perfect sense. so my suspicion then is correct, that whoever is taking the other side of the call options that tesla acquires will have to hedge them with either the convertible debt or tesla shares. basically every aspect of this offering screws the shorts in some way. i'm not sure i've seen anything designed with such malicious intent before.
not that we mind malicious intent against shorts :biggrin:
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would you believe alchemy of finance is sitting right here on my desk? i was just re-reading it recently so i'm familiar with what you are saying. and i agree here the perception of the company doing well is augmenting the company's balance sheet and their ability to do well. it is a reflexive loop.
i guess what i'm saying is that i still find this structure too much for no reason other than to screw the shorts. there are aspects of it that just don't make a lot of sense, for example:
1. they're swapping public debt for private debt here, which makes sense to get out of the government's umbrella. but then they are actually adding more debt to the balance sheet. why? the equity at these prices seems quite cheap to me so what economic reason is there to issue more debt other than to screw the shorts by not making shares available? i understand this is a convertible offering, so it's a hybrid security. but if the shares happen to go lower i think that debt will become payable in cash and not shares, right?
the shorts have been providing a constant bid underneath the stock for years. if you try to pound them to oblivion in one swift stroke, they won't be around to hold up the stock thru the inevitable ups and downs and we're going to have a lot more volatility if the shares ever.
i guess i would have preferred something quite a bit simpler. but regardless of my opinion this is a brilliantly designed structure for screwing the shorts. probably tesla goes to $100+ on this news.
2. on top of issuing this debt there is this bizarre matter of elon putting in $100 million after the price has tripled. it just makes no sense to me. the stock was so obviously a buy at $28, why didn't he do it then? obviously his putting money in is a huge show of confidence and it seems designed to scare shorts even more. but wait, he's not putting his money. he's borrowing money on a margin loan using existing tesla stock.
but wait, he's not putting his money. he's borrowing money on a margin loan using existing tesla stock.
i could also express my view this way:
if they had done a vanilla share offering, the stock price would have come down in the short term. shares would most likely be placed with institutions who wanted to be long term owners of the stock but missed it on the way up. the increased valuation would have given it a higher future weighting in any indexes that tesla got added to, as well as increasing the likelihood of index addition due to the larger market cap. some shorts would have covered, but others would have found more shares to short or to stay short. these shorts would have been dragged slowly behind the tesla plow, their blood effectively fertilizing the ground as their bleeding carcasses slid across the soil. since there is no debt issued bankruptcy risk is essentially zero.
by doing this carefully structured offering, the long term investors who want a pull back to buy tesla aren't going to be able to get shares. they won't chase as a matter of discipline, so they won't get in. meanwhile more shares will end up in the hands of those hedging the weird call option, and in the hands of hedge funds who are doing stock-loan / convertible bond arbitrage as i described earlier. the short term impact on the stock price will be positive and you will pile drive the shorts out. meanwhile debt increases on the balance sheet so bankruptcy can't be counted out as a worst case scenario. without shorts to support the stock as it drops, the stock will be more volatile (up & down).
now tell me which would you prefer as a long term owner of the stock? just my opinion. k.i.s.s.
i could also express my view this way:
if they had done a vanilla share offering, the stock price would have come down in the short term. shares would most likely be placed with institutions who wanted to be long term owners of the stock but missed it on the way up. the increased valuation would have given it a higher future weighting in any indexes that tesla got added to, as well as increasing the likelihood of index addition due to the larger market cap. some shorts would have covered, but others would have found more shares to short or to stay short. these shorts would have been dragged slowly behind the tesla plow, their blood effectively fertilizing the ground as their bleeding carcasses slid across the soil. since there is no debt left bankruptcy risk is essentially zero.
by doing this carefully structured offering, the long term investors who want a pull back to buy tesla aren't going to be able to get shares. they won't chase as a matter of discipline, so they won't get in. meanwhile more shares will end up in the hands of those hedging the weird call option, and in the hands of hedge funds who are doing stock-loan / convertible bond arbitrage as i described earlier. the short term impact on the stock price will be positive and you will pile drive the shorts out. meanwhile debt increases on the balance sheet so bankruptcy can't be counted out as a worst case scenario. without shorts to support the stock as it drops, the stock will be more volatile (on the way down).
now tell me which would you prefer as a long term owner of the stock? just my opinion. k.i.s.s.