Here's how I look at Elon Musk purchasing more shares now at 3x price compared to 6-8 months ago. Back then, if Elon could have borrowed more money then he would have and he would have purchased more TSLA stock. However at that time, SolarCity and SpaceX were private and his TSLA holdings weren't worth a ton (compared to now). He already had a sizable loan/line with Goldman Sachs and they weren't going to extend it much further for him to buy a ton of shares.
Fast forward to now, SCTY has IPO'd and his TSLA holdings are worth a lot more, so now Goldman (and others) are able to lend him more money. In Elon's view, Telsa is a steal to get under $100/share (when looking at the long-term perspective), thus he borrows as much as he can and buys as much common stock as he can. Smart move.
Also, I think you're assuming his loan to buy more TSLA shares is completely leveraged from his current TSLA shares. But he's also got SCTY holdings and private SpaceX holdings which are worth a lot more than a year ago. This is just to say even if TSLA goes lower, I don't think he'll be subject to a margin call. He's just got too many assets right now. It's in the best interest of the banks to just keep lending him money and work with him than to work against him.
Overall, I think there's no foolishness in him buying $100m more shares at today's stock price (compared to 6-8 months ago). Just wisdom.
I disagree. SpaceX, SCTY, and TSLA are ALL still very much risky startups. SCTY is involved in a government investigation where the feds are checking to see if SCTY has been inflating their installation costs to receive higher subsidies. And SCTY has sued the feds alleging they haven't been paid enough subsidies. Subsidies are at the heart of SCTY's revenue stream and this could end very badly indeed for SCTY. SpaceX is a couple of explosions away from disaster. Remember that their first three rockets blew up or aborted. Their dragon capsule came within a hair's width of being abandoned when the final stage engines didn't startup. Turned out four of the five engines had one part made slightly differently than the one that worked. Tell me for sure that isn't going to happen again. And geez, Tesla's Model S cars have only been on the road in large numbers for the last 4 months. Tell me what happens when they get hit by a class action lawsuits alleging whatever, or their battery pack starts degrading a lot more quickly than anticipated (remember the Model S battery is different than the Roadster battery).
PROBABLY none of these things will happen. But the same logic that makes it a good idea for Tesla to bank $800M when times are good, also makes it a bad idea for Elon to do the exact opposite with his personal finances. At this point Goldman is sitting pretty - they'll make money if his investments do well, and effectively own large chunks of SCTY, TSLA and SpaceX if things go south.
Having said all this, it is very possible that Elon doesn't give a crap about this at all. Preserving $1B for his heirs is probably something he cares very little about. Making an extra $5B so that he can personally fund the first mars colony IS something he cares about. So, consistent with his past actions, he's going all in, cranking up the personal leverage and heading for mars...
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A friend of mine who is a lot more knowledgeable than me breaks down the announcement like this:
"1. Tesla is issuing convertible debt which can be converted into common stock at a TBD price.
2. To prevent that dilution upon conversion of the debt, Tesla is entering into a hedge transaction (utilizing options and warrants most likely done by Goldman). These will be what is called European style settlement meaning they are not using listed options but structures specifically designed for the company and lasting until the obligation on the convertible is eliminated. Effectively, this will give the company the ability to pull shares from the open market at a specified price and turn around and give those shares to the convertible holders as they exercise (preventing the issuing of new shares and diluting).
3. To prevent the counterparty (Goldman) from having a capital exposure being the other side of Tesla’s hedge, counterparty (Goldman) will create a series of transactions to prevent their capital from being exposed – So they will most likely buy the shares they could be obligated to deliver and then collar it (buy puts and sell calls) so that their capital is secured within a certain margin.
The only specific item Lub2b mentions that I don’t fully agree with is the idea that a hedge fund would do a reverse arbitrage with the convertible debt. Because the beta of convertible debt is too low when calculated with the common, that strategy would only work in the event of something strategic associated with the company. The hedge fund would be very much exposed to stock price movements associated with market forces that are not specific to Tesla. "
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