Driver Dave
Member
VW... this gotta hurt.
This might be a glimpse into the future of ICE vehicles as the move to EV expands.
This might be a glimpse into the future of ICE vehicles as the move to EV expands.
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Am I thinking about the following correctly?
Bondholders convert at 2.77 share pr 1000$ Bond value. (359.87).
if SP is above 359.87, bondholders still get 2.77 share pr, so TSLA doesn't suffer further dilution.
If Tesla hadn't hedged their convertible debt and SP was above 359.87 they would be paying off debt with shares worth more than 359.
BUT - Tesla hedged the convertible bonds by buying call options at 359.87, allowing them to buy up to 5.6 million shares at 359.87.
So; between at a share price between 359.87 and 512.66 Tesla effectively owns 56.000 contracts of 359.87 call options on their own share.
As far as I know Tesla hasnt sold that call options off. The Mar15'19 360 Call option is currently trading at 43$.
Is Tesla sitting on a call option position worth ~240m$ right now?
"In connection with the offering of these notes in March 2014, we entered into convertible note hedge transactions whereby we have the option to purchase initially (subject to adjustment for certain specified events) a total of 5.6 million shares of our common stock at a price of $359.87 per share. The total cost of the convertible note hedge transactions was $524.7 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) 2.2 million shares of our common stock at a price of $512.66 per share for the 2019 Notes and 3.3 million shares of our common stock at a price of $560.64 per share for 2021 Notes. We received $338.4 million in total cash proceeds from the sales of these warrants. Similarly, in connection with the issuance of the additional notes in April 2014, we entered into convertible note hedge transactions and paid a total of $78.7 million. In addition, we sold warrants to purchase initially (subject to adjustment for certain specified events) 0.3 million shares of our common stock at a price of $512.66 per share for the 2019 Notes and 0.5 million shares of our common stock at a price of $560.64 per share for the 2021 Notes. We received $50.8 million in total cash proceeds from the sales of these warrants. Taken together, the purchases of the convertible note hedges and the sales of the warrants are intended to reduce potential dilution and/or cash payments from the conversion of these notes and to effectively increase the overall conversion price from $359.87 to $512.66 per share for the 2019 Notes and from $359.87 to $560.64 per share for the 2021 Notes. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant transactions was recorded as a reduction to additional paid-in capital on the consolidated balance sheet."
Bondholders convert at 2.77 share pr 1000$ Bond value. (359.87).
if SP is above 359.87, bondholders still get 2.77 share pr, so TSLA doesn't suffer further dilution.
If Tesla hadn't hedged their convertible debt and SP was above 359.87 they would be paying off debt with shares worth more than 359.
BUT - Tesla hedged the convertible bonds by buying call options at 359.87, allowing them to buy up to 5.6 million shares at 359.87.
So; between at a share price between 359.87 and 512.66 Tesla effectively owns 56.000 contracts of 359.87 call options on their own share.
As far as I know Tesla hasnt sold that call options off. The Mar15'19 360 Call option is currently trading at 43$.
Is Tesla sitting on a call option position worth ~240m$ right now?
"In connection with the offering of these notes in March 2014, we entered into convertible note hedge transactions whereby we have the option to purchase initially (subject to adjustment for certain specified events) a total of 5.6 million shares of our common stock at a price of $359.87 per share. The total cost of the convertible note hedge transactions was $524.7 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) 2.2 million shares of our common stock at a price of $512.66 per share for the 2019 Notes and 3.3 million shares of our common stock at a price of $560.64 per share for 2021 Notes. We received $338.4 million in total cash proceeds from the sales of these warrants. Similarly, in connection with the issuance of the additional notes in April 2014, we entered into convertible note hedge transactions and paid a total of $78.7 million. In addition, we sold warrants to purchase initially (subject to adjustment for certain specified events) 0.3 million shares of our common stock at a price of $512.66 per share for the 2019 Notes and 0.5 million shares of our common stock at a price of $560.64 per share for the 2021 Notes. We received $50.8 million in total cash proceeds from the sales of these warrants. Taken together, the purchases of the convertible note hedges and the sales of the warrants are intended to reduce potential dilution and/or cash payments from the conversion of these notes and to effectively increase the overall conversion price from $359.87 to $512.66 per share for the 2019 Notes and from $359.87 to $560.64 per share for the 2021 Notes. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant transactions was recorded as a reduction to additional paid-in capital on the consolidated balance sheet."
jhm
Well-Known Member
Hmm, now we know Tesla intends to pay out 50/50 cash and stock. In my thinking above, I supposed Tesla would pay cash on the first $360 and either cash or stock on rest as proceeds from the hedge. This makes little difference either way. Test can go to the option writer and buy as share for $360. So assuming the option is in the money (share price > $360), Tesla exercise the option in a split of cash and stock, as much stock as they need to settle the debt. There remains no need for Tesla to actually issue new shares.
So just because Tesla is saying that the payoff is 50/50, that does not mean that Tesla will issue new shares. They can if they want, and that would be one way for Tesla to raise capital. But also they Tesla can pay it off entirely in cash, only hold shares for those that elect the conversion to shares. Going this route could actually reduce the number of shares in circulation as Tesla repurchases them at $360.
If anything I think this move, basically stabilizes the conversion value of loan for bondholders. Suppose for example the share price on March 1 is substantially above the average closing price in Feb. In this case, 100% settlement in shares would have the highest value for bondholders. 100% cash settlement would have the least value. 50/50 meets them half way. Of course, if share price is under the Feb average price on March 1, then 100% cash settlement is the highest possible value for bondholders. Again 50/50 meet them half way. So 50/50 may seem fair roughly. I think if Tesla uses this as an antidilutive stock repurchase, they would expect the share price to climb from Feb to Mar, so the 50/50 deal makes them look less greedy.
Well, sure, some hobbyist will custom-build one. After all, there was a new-build steam locomotive in Britain a couple of years ago.
LNER Peppercorn Class A1 60163 Tornado - Wikipedia
I think we can safely say that there will be no market of meaningful size which will prefer ICE to EV, however.
Timing. It's quite possible the bonds will be paid off with new stock before the hedge delivers stock to Tesla, which would then be classified as "treasury stock". I mean, this has no practical import; treasury shares are not shares outstanding.
jhm
Well-Known Member
I think this is right. To maximize the antidilutive effect, Tesla could buy upto 5.6M shares for little less than $360/share. Before today it had not occurred to me that Tesla would be in such a position. Not only does the hedge safeguard against dilutive effects of a convertible bond, but it could be exploited to antidilutive ends. It all depends on just how much cash Tesla wants to throw at this, which depends on how strong the cash flow is in Q4 and Q1.
I guess there aren't any convertible bond holders at this forum!
(C'mon, guys! It's legal for individuals to purchase these. Nobody here did?
I meant to when they were cheap but missed the window...)Fascinating; amounts to a capital raise / refinance if the stock's worth more than $359.87 at the end of February.
For each $1000 of bonds, the bondholder would get 1.3894 shares of TSLA, and cash equal to $1.3984 times the average price of TSLA in February. Let's assume the hedges pay off in cash. The effective result is the same as if Tesla pays the $920 million out in cash and then issues 1,278,248 shares of TSLA at the average price of TSLA in Feburary (which we can assume to be $359.87 or higher). If TSLA's roughly flat until March, it amounts to a $460 million capital raise. If TSLA goes up, it amounts to more (if the hedges pay off in cash).
Worth noting: some bondholders, if bullish on TSLA, might choose to convert even if the stock ends somewhat below $359.87 at the end of February. This is because of capital gains tax law. The conversion is a non-taxable event, the basis from the bond becomes the basis for the stock, and the holding period starts when the *bond* was purchased. If the bond was bought at a discount, the taxation on that gain is indefinitely deferred. Also, the stock received will immediately have a long-term holding period; if a bondholder thinks the stock will go up in the next year and plans to sell it within that year, they might choose to convert to make that gain long-term. Broker/dealers who have to "mark to market" wouldn't benefit, though.
I wonder whether Tesla made this decision in order to hedge against a very particular tail risk: a TSLA stock price above $512.66, which is where the "hedges" stop paying off. A full cash payout could have had some cash crunch risks in that case; a stock price of $612.66 would have cost Tesla an extra $256 million. With half-cash payout, a stock price of $612.66 would cost Tesla an extra $128 million.
(corrected)
Basically, but your math is off. 2.5 million shares worth of call options which probably expire in March, 3.8 million shares worth of call options which probably expire in 2021.
It's all non-transferrable and illiquid, though, so they can't just sell it. Also, the expiration dates don't match with exchange-traded options.
Tesla could effectively turn these into calendar spreads by selling exchange traded options, but they'd have to make the short side expire before the long side. So against the 2019 "hedge" calls, it would have to be a Feb 15 '19 $360, with current bid of $38.55. Selling 25000 contracts of these into the market wouldn't be possible, since there are only 4636 in OI... if it were it would be worth $96/375 million though.
More entertaining is the idea of Tesla selling calls against the 2021 hedges. Again, without accounting for the fact that the OI on Jan 15, 2021 LEAP calls is really too small to do this, I note that the Jan 15 2021 $360s are trading for $102.50/share, and so Tesla's 3.3 million share call option expiring 2021 would nominally be worth $389.5 million. The appetite isn't there for 38000 contracts, however....
(But by god I want to see them try. Is there any rule against Tesla doing proprietary trading in exchange traded options on their own stock in order to eliminate risk and make money? There probably is a rule against that, isn't there?)
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adiggs
Well-Known Member
Since I can get to a $1200 share price TODAY with a straight face (doesn't mean I believe it, but I do believe it's not ridiculous - only requires a 100 PE and assumption of a stable $3/share earnings for the next 3 quarters), Tesla thinking about and hedging against this tail risk doesn't sound ridiculous at all to me.
That's a meaningless distinction without a difference. Photosynthesis is the process whereby plants absorb CO2 and emit O2. When you kill a tree to use it's wood as a cooking fuel you abort that environmentally beneficial process. The atmosphere cannot distinguish between CO2 as a by-product from the combustion of recently killed plants or from the combustion of gaseous or liquid detritus of rotting plants that died millenniums ago, just as your electric meter cannot distinguish electrons from what ever source generated (but that doesn't preclude utilities from charging premiums for energy reputedly produced by renewable generation.)
To put this a more precise way, if dead branches fall off a tree, they can:
(1) rot and turn back into CO2
(2) be burned and turn back into CO2
(3) be buried at the bottom of a bog or underground or in a house and NOT turn back into CO2
#3 is better
Seems like a fine venue for some EV conversion company
adiggs
Well-Known Member
I respectfully disagree.
I agree that CO2, whatever the source, is CO2. On that much, we do agree.
However, CO2 from burning wood is CO2 that "recently" (last few years or decades) was taken out of the atmosphere by a growing tree and fixed into the structure of the tree. And was then burned to release that CO2 back into the atmosphere. The CO2 in this lifecycle is part of a CO2 lifecycle measured in years or decades. (Which DOES mean, if we're close to the CO2 breaking point, then every incremental source of CO2 in the atmosphere is bad juju). In this sense, CO2 from burning trees is carbon 'neutral'. It isn't neutral at the burning tree level - but its sustainable or neutral on the scale of decades as long as our burn rate is below our forest growing rate (on the scale of decades).
The CO2 from burning fossil fuels though isn't part of a CO2 lifecycle measured in years or decades. The fossil fuel carbon got put away underground millions of years ago. It's been out of circulation for a REALLY REALLY long time, and that's the problem with burning as much fossil fuels as we've burned. Every bit of CO2 from burning fossil fuels over the last few centuries represents "new" carbon to be circulated in the carbon cycle (plants <> atmosphere).
How does OP sailor cook his food with a branch that fell off a tree and was "buried at the bottom of a bog or underground or in a house?"
Chemically, C/CO2 (modern or ancient) regardless of the source is identical. Californians who inhaled all that soot (particulates) might not appreciate that "its sustainable or neutral on the scale of decades as long as our burn rate is below our forest growing rate (on the scale of decades)"
JRP3
Hyperactive Member
Correct. However the quick release of previously stored fossil fuels by using petroleum products dumps huge amounts of CO2 into the atmosphere which has been out of circulation for millions of years. Burning biomass which would decay and release CO2 anyway is a different matter. Simple example: Grown corn in the summer, which absorbs CO2, burn it in the winter, releasing CO2, grow it again next summer, absorbing CO2, etc.
jhm
Well-Known Member
Ah, the point of the hedge in the first place is to hedge the convertible bond. I'm not so sure I want to see Tesla play games with that.
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