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First up: A huge thank you to @neroden, and everyone else who contributed to answering my question about buying the 2019 notes. I would have posted my thanks earlier, but I try not to fill space on the msg board until I have something useful to say. The conclusion to my analysis was to stick with stock (since I too, am not really worried about downside), but that arbitrage play was fascinating, and if I had access to more money, I would probably have tried it.
Unfortunately that means I didn't buy any Notes to tell you if Tesla has made an election. But in trying to answer that question, I have spent a number of hours poring over the prospectus for the convertible bonds, attempting to divine what Tesla would do. (Perhaps I'm just slow, but I found that to be a really challenging read.) So take this with a grain of salt, because I don't actually know, but here's what I've gathered. As always, please correct any inaccuracies.
1) As you know, there are 3 settlement methods Tesla can pick from (before Dec 1st), if a bondholder chooses to convert. They are: Payment in Shares (@ 2.7788 shares per $1000 bond); Payment in Cash (based on the value of the shares they would have gotten, at a (volume weighted) average SP over a set of 20 trading days that precedes the maturity date (March 1st); or a Combination of the two, with Tesla choosing how much cash, and the rest in shares.
2) Tesla has already paid for a hedge -- options that limit their dilution/cash outflow no matter which settlement method they pick. So if the SP is high, they execute those options and only pay ~$360 per share. Essentially that means they don't really care what the SP ends up at.
3) The true value of the convertible bonds will only be known just before the maturity date. (Based on the avg SP over a set of 20 trading days that just precedes March 1). And since bondholders can elect to convert any time up to the maturity date, nobody will make this decision until the day before maturity, when the value is finally defined.
4) It is specified that if Tesla doesn't make an election on how to settle a conversion, it will be deemed to have selected the combination (cash + shares) option. That option normally allows Tesla to specify how much cash they want to pay. But if they don't elect, then it will be deemed to be the value of the bond ($1000), and any excess value (based on avg SP over ~$360) in shares.
Based on these points, here is my assessment:
A) Since Tesla has cash now, they will not elect to pay in shares, unless they would otherwise be doing a capital raise, which Elon seems eager to avoid.
B) The difference between selecting Cash, or Combination w/ the default $1000 cash. is immaterial due to the hedge position covering the difference. So they would go with the default Combination option instead of Cash.
C) Tesla may have elected to do Combination w/ less cash out than $1000/bond. This would basically be a mini-capital raise. If this happened, I imagine we'd have heard about it by now.
D) I suspect Tesla went with the default option of Combination @ $1000 cash + remaining value in shares. Basically what this means is Tesla owes ~920M on March 1st. If SP is low, nobody converts, and Tesla owes 920M Bond + 1.15M interest. If SP high everyone converts, and Tesla pays 920M as part of the Combination settlement, and the rest is covered by their hedge position. Tesla doesn't know whether people will convert or not, but at the end of the day, it doesn't really matter to them. They need to be ready with ~920M on March 1 regardless.
So basically after all that reading, I conclude that it doesn't actually matter what they picked, it'll cost them the same. I think I'm going to go sleep now.
Unfortunately that means I didn't buy any Notes to tell you if Tesla has made an election. But in trying to answer that question, I have spent a number of hours poring over the prospectus for the convertible bonds, attempting to divine what Tesla would do. (Perhaps I'm just slow, but I found that to be a really challenging read.) So take this with a grain of salt, because I don't actually know, but here's what I've gathered. As always, please correct any inaccuracies.
1) As you know, there are 3 settlement methods Tesla can pick from (before Dec 1st), if a bondholder chooses to convert. They are: Payment in Shares (@ 2.7788 shares per $1000 bond); Payment in Cash (based on the value of the shares they would have gotten, at a (volume weighted) average SP over a set of 20 trading days that precedes the maturity date (March 1st); or a Combination of the two, with Tesla choosing how much cash, and the rest in shares.
2) Tesla has already paid for a hedge -- options that limit their dilution/cash outflow no matter which settlement method they pick. So if the SP is high, they execute those options and only pay ~$360 per share. Essentially that means they don't really care what the SP ends up at.
3) The true value of the convertible bonds will only be known just before the maturity date. (Based on the avg SP over a set of 20 trading days that just precedes March 1). And since bondholders can elect to convert any time up to the maturity date, nobody will make this decision until the day before maturity, when the value is finally defined.
4) It is specified that if Tesla doesn't make an election on how to settle a conversion, it will be deemed to have selected the combination (cash + shares) option. That option normally allows Tesla to specify how much cash they want to pay. But if they don't elect, then it will be deemed to be the value of the bond ($1000), and any excess value (based on avg SP over ~$360) in shares.
Based on these points, here is my assessment:
A) Since Tesla has cash now, they will not elect to pay in shares, unless they would otherwise be doing a capital raise, which Elon seems eager to avoid.
B) The difference between selecting Cash, or Combination w/ the default $1000 cash. is immaterial due to the hedge position covering the difference. So they would go with the default Combination option instead of Cash.
C) Tesla may have elected to do Combination w/ less cash out than $1000/bond. This would basically be a mini-capital raise. If this happened, I imagine we'd have heard about it by now.
D) I suspect Tesla went with the default option of Combination @ $1000 cash + remaining value in shares. Basically what this means is Tesla owes ~920M on March 1st. If SP is low, nobody converts, and Tesla owes 920M Bond + 1.15M interest. If SP high everyone converts, and Tesla pays 920M as part of the Combination settlement, and the rest is covered by their hedge position. Tesla doesn't know whether people will convert or not, but at the end of the day, it doesn't really matter to them. They need to be ready with ~920M on March 1 regardless.
So basically after all that reading, I conclude that it doesn't actually matter what they picked, it'll cost them the same. I think I'm going to go sleep now.
One caveat -- the bondholders have to decide several days before maturity. I think it was three days. It's in the prospectus. Anyway, the effective decision deadline is the second-to-last week in February, not the last week.
Waiting4M3
Active Member
Another potential caveat (if I read below correctly):
If bondholders convert early, and the 20 day VWAP prices average out to be <$360, Tesla could pay less than $920m + interest.
This means 2 things:
1) Since Tesla's payout upside is capped at $920m, it seems to make sense for them NOT to elect now, and wait and see just in case this scenario could happen.
2) bondholder would wait till the very last possible moment (3 days before as you mentioned) to decide to convert, so the VWAP prices of the 20 day period are mostly known, and there will be little risk of that clause kicking in and allow Tesla to pay less.
We knew this weekend that Monday would be something positive when NASDAQ futures were trading up 2.5% on word that Trump and Xi had declared a 90 day truce with the trade war and were going to work on a solution. Then, this morning word came out that China's tariff on imported U.S. vehicles would be cut or eliminated from the current 40% number. These two pieces of news energized TSLA, which was trading above 360 in pre-market trading. Of course the shorts couldn't let such enthusiasm persist and so they engineered a brief MMD which fizzled and TSLA exceeded 365 at 10:21am. The problem with such a run up, however, was that the upper bollinger band sat around 360, and the news wasn't sufficient to hold it above the upper bb with substantial efforts underway by the shorts today (an amazing 61% of selling on a very green day), and so TSLA fell back just below the upper bb and traded there most the day.
At about 1:45pm TSLA fell off a cliff and dipped below 353. The reason? Trump's economic advisor said that the EV tax credit would be eliminated by 2020-21. Since Tesla's credit would have zeroed out before that timeframe but the elimination of the credit would adversely affect some of Tesla's competitors, it was actually a net positive for Tesla, and when that realization came the stock recovered but not to the previous levels as shorts appeared to be selling as necessary to keep TSLA below 360. A likely short-induced dip in the final 10 minutes of trading chipped about $2 off the price. The last-minute dip has now become a common occurrence with TSLA recently.
The NASDAQ closed up about 1 and a half % today. Notice that the NASDAQ did not support the TSLA dip in the final 10 minutes of trading.
We've now seen significantly elevated percentage of selling by shorts during the past 8 trading sessions. Today's 61.46% was unusual for a green day, but when you consider that TSLA was on a downhill run from 10:21am and the high of over 365, the shorts probably made a few bucks with their manipulations. A high opening and a descent through the day is an invitation to short manipulators to not only knock the stock down a bit more, but also profit from the exercise.
One TMC poster discovered these words from Carsonight, who has typically provided accurate information. Gigafactory improvements not only suggest a bottleneck that has been vanquished but also lower costs for creating batteries (more efficient process) and finally the availability of significant numbers of cells for Tesla energy use.
So, considering the good news at the Gigafactory and the likelihood of a substantial cut or even an elimination of tariffs for China-bound vehicles, Q4 and the early quarters of 2019 are looking just that much better. A great number of Model 3s will be destined for China until the Shanghai factory is up and running, and we should see a sufficiently high number of European and Chinese high margin M3 orders to keep the ASP of Model 3 high for the foreseeable future. This is hugely important. When the GF3 in Shanghai begins turning out M3s, they will benefit not only from a lower cost of production and transportation, but also from subsidies the Chinese provide to locally-produced EVs. Truthfully, the news revealed today from various sources is very bullish, but with the combination of the upper bollinger band and very significant manipulations from the shorts, patience is likely needed for the stock price to catch up to the promise that we are seeing lately for Tesla's future.
Looking at the technical chart, the golden cross took place today as the 50 DMA climbed above the 200 DMA. Hurrah! Also, notice today's trading on the chart and realize that TSLA spent most of the day hanging right on the upper bb. I would be careful about buying short term calls until the upper bb has had a chance to give TSLA some headroom again.
Conditions:
* Dow up 288 (1.13%)
* NASDAQ up 111 (1.51%)
* TSLA 358.49, (2.29%)
* TSLA volume 8.3M shares
* Oil 53.62, up 0.67 (1.27%)
* Percent of TSLA selling by shorts: 61.46%
Wow, what a strong day for TSLA compared to the broader markets. TSLA closed up today even though the NASDAQ was down nearly 4% and most tech stocks I follow were down 4-8%. Meanwhile, the NASDAQ opened low and mostly went downhill throughout the day, your worst possible trajectory for affecting TSLA's price, but clearly someone was buying today to take advantage of the selling pressure from the bad macros. Volume, which has recently been as low as 4M per day was about double that amount today. A big day for short covering is typically about 300,000 shares, so an extra 4 million shares traded suggests institutional buyer(s) adding today.
The reasons why someone would be buying TSLA include:
* The December tractor-beam is started to pull in buyers to position for the end of year production numbers and late-Jan, early-Feb 4Q ER
* Estimates from reliable sources of vehicles produced suggest a noticeable Q4 improvement over Q3, suggesting good Q3 financial numbers
* Once resistance at 360 is conquered, some traders believe TSLA has a clear path to the previous ATH in the high 380s
* Yesterday's news about likely reduction or elimination of China tariffs really gives a green light to Q1 and Q2 having plenty of high-margin M3s in the mix and therefore the likelihood of both high production numbers and continued good margins
* TSLA has climbed to 360 despite heavy short manipulations, as evidenced by extremely high percentage of selling numbers the past week and a half. At some point the SP will just go ahead and rise, and that rise will likely lead at last to a lower effort being put forth by the shorts plus more short covering, both of which will aid further climbing
In news today, CFRA raised its price target for TSLA from $375 to $420.
Looking at the trading, I see a high of over 368 today at 10:49am. There was no way that TSLA could hold a number so high above the upper bb without substantial news on a really negative macro day.About 1pm the shorts gave it their best shot with at least two selling sessions exceeding 30,000 shares/minute, pushing the stock into the lower 350s, but it quickly recovered and most of the remainder of the day was seesawing back and forth between red and green. Shorts started their push back towards the red 30 minutes before the end of market trading, but it was too little and too early and TSLA bounced back into the green for the close. Over 100,000 shares traded hands in the final minute, and I expect a good portion of the buying was shorts covering their manipulations for the day.
Look at the climb going into the end of after-hours trading today. Although I see a rise for other tech stocks during this time period, none are as pronounced as TSLA's. Such after-hours trading bodes well for the next trading day, which will be Thursday.
The NASDAQ lost 3.8% today and it was a slide that just got worse as the day went on. TSLA closing green shows incredible strength on a day like this.
No surprise that the shorts were throwing everything they could at TSLA today, trying to keep it below 360. Shorts were tagged with selling 59.73% of TSLA today.
Looking at the tech chart, you can see both today and yesterday TSLA ran well above the upper bollinger band and then slid back below for the close. This is pretty expected since the news is not sufficient enough yet to cause the SP to run away from the upper bb. If the upper bb rises to 364 on Thursday and TSLA holds it, that would be a huge development. Right now we look on track to keep the previous pattern going, which is to close above the highest price reached in the previous climb, which was 366, before any sinking and beginning of a new cycle.
Conditions:
* Dow down 799 (3.10%)
* NASDAQ down 283 (3.80%)
* TSLA 359.70, (0.34%)
* TSLA volume 8.5M shares
* Oil 52.73, down 0.52 (0.98%)
* Percent of selling by TSLA shorts: 59.73%
Great update as always. I love it when TSLA overcomes the macros!
Today will be an acid test - alas, I fear, not the last! - whether TSLA lives up to the Flight to Safety mantle I first promulgated back on November 16 - Daily TSLA Trading Charts
I appreciated that post you made on the 16th. It is strange, however, to put the word "safety" in the same sentence with investing in TSLA. But, it makes sense if you take the old adage my grandfather taught me in chess games that often the best defense is an attack.
Moving Average Crossover Alert: Tesla, Inc. I know this is not news here, but could wider dissemination of it bring some more technical investors to TSLA? TSLA is holding up really well today despite the bloodletting everywhere else.
"Strange", or perhaps "amusing". In my initial post I did in fact write "Flight to Safety/Flight to Quality". Both are pretty standard Wall St chestnuts with effectively the same meaning.
But at what point do the awful macros make everything toxic?
To toot my own horn, I'll remind people that I was describing TSLA as a safe haven in a bear market more than a year ago.
-- if the lunatic's trade war gets so bad that it leads to blanket embargos on exports from the US and causes China to cancel Tesla's permission to operate a wholly owned factory in China?
-- if mass unemployment or wage drops mean nobody can afford to buy cars, trucks, or solar panels at all?
-- if a major financial crisis makes it impossible for anyone to borrow any money?
I don't see any of these as likely right now... I could be wrong though...
.....link or it didn't happen.....
More seriously: Any posting a year or more ago that described TSLA as a safe haven would have been very, verybad ah, untimely, advice, bear market a-coming or no.
More seriously: Any posting a year or more ago that described TSLA as a safe haven would have been very, very
Ahhh, you know I'm a long termer......link or it didn't happen.....
More seriously: Any posting a year or more ago that described TSLA as a safe haven would have been very, verybadah, untimely, advice, bear market a-coming or no.
I'll accept "untimely". Better change stock positions too early than too late...(I also don't consider "volatility" to be "risk")
Hmm...did he? That is a mystery.....at least to me.Fair enough - you did write "Not an Advice", didn't you?
Apparently they decided to split the difference. I just read a bloomberg article that said Tesla elected to go with the Combination 'cash + shares' option, and pay back 50% of the bond value.
So I was wrong when I said "we would have heard by now". I guess the prospectus was a challenging read for the people at bloomberg too, cuz it took them a week to get this article out. Either that, or nobody at bloomberg owns tesla bonds. Both are possible.
Anyway what this means is if the 20 trading day average VWAP in February 2019 is above ~$360 everyone will convert, and get, per bond, $500 cash from Tesla + ~1.39 shares from Tesla + x shares of TSLA dependent on the SP calc above that is theoretically provided entirely by the hedge position.
Note #1: I speak roughly. I can calculate the exact days, and exact price if someone is interested.
Note #2: Yes, I deliberately said average twice (in 20 day avg VWAP), there are two separate averages in the calculation.
What this means for Tesla is if the price is above ~$360, Tesla owes 460M cash and suffers dilution of ~1.28M shares. If the price is below, Tesla owes ~921M cash.
So there's still hope for the shorts, and strong motivation to try hold the price below $360. But most of February will be after Q4 ER, and so that'll really define where we end up. If I were a betting man, I'd say we'll be well beyond $360 by then, and this news of an extra 461M cash on hand will only be positive.
Actually... I am a betting man... =D
So I was wrong when I said "we would have heard by now". I guess the prospectus was a challenging read for the people at bloomberg too, cuz it took them a week to get this article out. Either that, or nobody at bloomberg owns tesla bonds. Both are possible.
Anyway what this means is if the 20 trading day average VWAP in February 2019 is above ~$360 everyone will convert, and get, per bond, $500 cash from Tesla + ~1.39 shares from Tesla + x shares of TSLA dependent on the SP calc above that is theoretically provided entirely by the hedge position.
Note #1: I speak roughly. I can calculate the exact days, and exact price if someone is interested.
Note #2: Yes, I deliberately said average twice (in 20 day avg VWAP), there are two separate averages in the calculation.
What this means for Tesla is if the price is above ~$360, Tesla owes 460M cash and suffers dilution of ~1.28M shares. If the price is below, Tesla owes ~921M cash.
So there's still hope for the shorts, and strong motivation to try hold the price below $360. But most of February will be after Q4 ER, and so that'll really define where we end up. If I were a betting man, I'd say we'll be well beyond $360 by then, and this news of an extra 461M cash on hand will only be positive.
Actually... I am a betting man... =D
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