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.
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