Potential Solar City bankruptcy impact on Tesla Stock

[Ingenieur]

Hey there,

as you all know im a Tesla and Solar City bear and i have been sharing my thoughts with you for quite some time.
So my opinion is obviously very negatively biased against both stocks.

Now thats not just stock but also bonds of Solar City are trading at very distressed levels:

Bonds Detail
Bonds Detail

So you can buy SCTY 2018 bonds today and more then double your money in less then 3 years IF they can repay it i wouldnt do it but it seems much better investment then the stock at this point (well as much as Scylla seems nicer then Chalibdis but still)

So now to the actual question:

How much could the bankruptcy damage Musks reputationon ?
Solarcity has some very aggressive and misleading accounting practices (the misleading part is my opinion and not a fact, thus shouldnt be discussed), in case of bankruptcy there will be tears of investors, those retail guys whom he sold Solar Bonds, and Tesla accounting would be looked upon with much more scrutiny. There will also be tons of dirt poured upon Musk.

This is my bear point, i would like to hear counter arguments from Bulls.

Remember Risk is not being right, Risk is being wrong.

 

[TheTalkingMule]

Can we keep it to one "Should we be worried TSLA?" thread?

 

[AudubonB]

Mod note:
We'll leave this to stand alone before deciding to merge or not - thanks for the suggestion.

 

[electracity]

The risk fundamentally depends on the amount of deacceleration they are seeing in sales. Unfortunately, the situation in Nevada masks the cost of sales trend. Solarcity has to grow to have an attractive stock price. They may not have to grow to be solvent.

That said, the CFO situation and the bond yield certainly suggest some deep problems that are perhaps not yet obvious.

A very low stock price and near bankruptcy may actually present an opportunity to Musk and other major stockholders. Net Metering is evolving much faster than generally expected. Perhaps Solarcity can reset with a different business plan.

I doubt Musk can afford to wipe out the bond debt with bankruptcy and still be the greatest entrepreneur of the 21st century. I presume Musk can put together a deal at a very low stock price that avoids bankruptcy. But I'm guessing.

Hey there,

as you all know im a Tesla and Solar City bear and i have been sharing my thoughts with you for quite some time.
So my opinion is obviously very negatively biased against both stocks.

Now thats not just stock but also bonds of Solar City are trading at very distressed levels:

Bonds Detail
Bonds Detail

So you can buy SCTY 2018 bonds today and more then double your money in less then 3 years IF they can repay it i wouldnt do it but it seems much better investment then the stock at this point (well as much as Scylla seems nicer then Chalibdis but still)

So now to the actual question:

How much could the bankruptcy damage Musks reputationon ?
Solarcity has some very aggressive and misleading accounting practices (the misleading part is my opinion and not a fact, thus shouldnt be discussed), in case of bankruptcy there will be tears of investors, those retail guys whom he sold Solar Bonds, and Tesla accounting would be looked upon with much more scrutiny. There will also be tons of dirt poured upon Musk.

This is my bear point, i would like to hear counter arguments from Bulls.

Remember Risk is not being right, Risk is being wrong.

 

[schonelucht]

I'd be interested to learn about the terms under which these bonds were issued. Are these the so called solar bonds or is this from different offerings?

But anyway, isn't SpaceX the Elon Musk company that is more exposed to SolarCity rather than Tesla?

 

[ggr]

But anyway, isn't SpaceX the Elon Musk company that is more exposed to SolarCity rather than Tesla?

First, I think the idea of Solar City going bankrupt is simply ridiculous. If they simply decided to stop growing, they could be profitable for the next 15 years.

But having said that, why would SpaceX be exposed at all? Even Tesla just treats Solar City as a customer for powerwalls, and there's no reason to believe that other installers wouldn't take up the product.

 

[electracity]

Spacex bought a lot of solarcity bonds

 

[SBenson]

The discussion of wether SolarCity is at a bankruptcy risk or not belongs to the Solarcity thread. People who are questioning that risk should read the last 10 pages of so from that thread. I will post some more info on the topic but in summary the risk is very real and quite substantial, I would say higher than probability of 70% within next 12 months.

Having said that, being a Telsa bull with gobs of shares and leaps, I too am interested in the discussion of what would such a negative event mean to TSLA stock. Please don't block this discussion!

 

[ggr]

Spacex bought a lot of solarcity bonds

Ah, forgot that. Thanks.

 

[jhm]

It looks like Musk should pick up some of these bonds for cheap. Usually, he buys stock, just bought $10M worth a few days agao, but he will not cash that in for quite some time. If he buys bonds he can get cash out of them when they expire.

Also these are convertible bonds, so I view much of the price action a simply reflecting the stock price and the value of stock conversion option. So let's say the stock price stabilizes and improves. These bonds will improve in price as well.

 

[drinkerofkoolaid]

This thread is crazy for multiple reasons.
1) It assumes that because there is uncertainty in the bond market, SolarCity will go bankrupt.
2) SolarCity has not been misleading anyone. The same logic was used to claim Tesla would go bankrupt a few years ago.
3) Bond market is reflecting the huge fluctuations in the stock. The stock reflects investor fear, not market reality. SolarCity will not go bankrupt. If SolarCity needs cash, Elon has plenty of allies who will gladly provide a loan. Once the Powerwall is made available to all SolarCity customers, Net Metering will be irrelevant, at least for SolarCity.
4) Aren't those senior convertible bonds? The yield is simply reflecting the PRESENT market sentiment, that has caused the drop in the price of the stock, and the belief that the PRESENT belief that the stock won't be at or above the convertible price at the date of maturity.

Note this chart: The bonds are regularly traded. The yield spiked immediately after the stock fell after the Nevada PUC decision. Also note the quantity and frequency of trades after February 9th, compared to before February 9th.

 

[jhm]

I should have also pointed out that SolarCity’s auditor is not worried about the company as a going concern. I checked the 10-Q yesterday, and there was no going concern warning from the auditor. SolarCity is not in any near term risk of bankruptcy.

 

[Jack6591]

During the 1970s solar panels sold for north of $70/watt. Today, they sell for 70¢/watt give or take. A wide range of analysts project this price trend to continue for the next five years. These projections are based on the continuing construction of solar manufacturing plants, permitted and in progress. This simple reality will disrupt the electric utility business model.

SolarCity's current price action is directly related to the fossil fuel industry's political brinkmanship. Renewable energy makes great sense, environmentally, and financially.

The fossil fuel and electric utility industries will make this a knife fight. They do not have a choice. When American homeowners and business owners discover the value of renewable energy it will be game over. Walmart, Costco, Ikea have figured it out.

 

[SBenson]

Massive confusion in this thread:

The current prices on the convertible bonds is symptom of the problem, not the problem itself!

The actual problem is the amount of capital that is needed by SolarCity over next 12 months. That is certain to risk the company's existence into jeopardy.

More broadly, the is issue is not specific to the next 12 months either, as though if they survive the next 12 months they will thrive forever. The core issue is the business model is fundamentally unworkable. They will need ever increasing amounts of capital each year in the order of Billions of dollars per year. Where will that capital come from? and at what price??

 

[drinkerofkoolaid]

Massive confusion in this thread:

The current prices on the convertible bonds is symptom of the problem, not the problem itself!

The actual problem is the amount of capital that is needed by SolarCity over next 12 months. That is certain to risk the company's existence into jeopardy.

More broadly, the is issue is not specific to the next 12 months either, as though if they survive the next 12 months they will thrive forever. The core issue is the business model is fundamentally unworkable. They will need ever increasing amounts of capital each year in the order of Billions of dollars per year. Where will that capital come from? and at what price??

Your comment is not accurate and doesn't make sense.

1) ~$1 billion isn't a lot of capital. Heck, even $5-$10 billion isn't a lot of capital. There are plenty of companies such as Apple, Microsoft, Google, IBM, and others that would be thrilled to invest a few billion into projects that will yield returns. Many tech companies are running out ways to rationally spend the amount of money they are making.

Google's Larry Page, who is worth about $40 billion has said numerous times that he would happily leave all his money to Elon Musk.

Reminder:

SolarCity Creates Fund to Finance $750 Million in Residential Solar Projects with Investment from Google | SolarCity

SolarCity and Silver Lake Kraftwerk Announce $100 Million Investment

2) The yield was around 6% before the Nevada PUC decision. These are convertible bonds. This is normal.The spike in the bond yield reflects the drop in the stock price and the uncertainty around the situation in Nevada. In my view, this is confirmed by the increase in the trading of SolarCity's convertible bonds. The yield has nothing to do with the amount of capital SolarCity will need. You pulled this comment out of no-where.

The main risk to SolarCity is if Nevada PUC doesn't back down, and higher courts don't find this type of action to be unconstitutional.

Given the recent passing of Justice Scalia, Obama's Green PowerPlant will likely not be stopped, guaranteeing the success of companies such as SolarCity.

“In the environmental realm, as in many others, a number of key Supreme Court decisions over the past decade or more have been 5-4 decisions,” said Robert Stavins, an expert on international climate diplomacy at Harvard University.

Unless approval of a new justice and a Supreme Court ruling on the Clean Power Plan are both delayed until a Republican becomes president, it seems unlikely that the nation’s new climate rules will be struck down.

“If the late Justice Scalia is replaced by an Obama appointee this year, or a Clinton or Sanders appointee after January 20th, the implications will be profound,” Stavins said. “An obvious example is the litigation regarding the Clean Power Plan.”

http://www.climatecentral.org/news/what-scalias-death-means-for-climate-change-20033

The inability of the Republican Party to adapt to reality, is destroying the Republican Party. The only chance the Republican Party has to remain in existence is to support a shift to clean energy. At one point in time, the actions the Republican Party have undertaken to undermine the Obama administration would have been considered treason. I'm amazed those who question the need to shift away from fossil fuels, to address climate change, and benefit everyone, haven't been deemed mentally unfit to hold office.

 

[Jack6591]

While I appreciate all the hand-wringing in this thread, an incontrovertible fact keeps coming to mind.

The state of New York has a tremendous amount of skin in this game. I remain steadfast in my belief that SolarCity will raise any funds that they need.

Gov. Cuomo takes long view on variety of subjects - City & Region - The Buffalo News

I'm thinking New York is one hell of a business partner.

 

[electracity]

It's not hand wringing. It's evaluating the bonds as a potentially excellent speculative value.

I do agree that solarcity can probably raise more cash privately. But they are "eating their seed corn" with regard to future profitability. Maybe their plan is to never have a P/E. Very modern of them.

 

[jhm]

It's not hand wringing. It's evaluating the bonds as a potentially excellent speculative value.

I do agree that solarcity can probably raise more cash privately. But they are "eating their seed corn" with regard to future profitability. Maybe their plan is to never have a P/E. Very modern of them.

An interesting question is whether these convertible bonds now represent a better investment than common stock. I've been puzzling over whether I'd like to sell my shares to buy bonds. In a bankruptcy the bonds are woth more than stock. But as a going concern, locking in a 20% minimum yield for the next three years looks pretty good, potential better than the stock for a wide range of prices.

 

[austinEV]

I can't tease any bond screener to show these bonds. How does one buy them on the secondary market? What do I need to search for?

 

[electracity]

I can't tease any bond screener to show these bonds. How does one buy them on the secondary market? What do I need to search for?

I've never found how to buy bonds on my Merrill Lynch screens. I just call the broker.