Solarcity was essentially a finance company. They installed solar panels on people’s houses and financed the entire install (cost of materials, labor) over 20 years. The homeowner was charged under a power purchase agreement which effectively paid off the installation over 20 years (plus a profit for Solarcity of course). So Solarcity was a prolific borrower on the financial markets. They were growing 100% per year, so they would issue equity and bonds on a routine basis to keep financing the installs.
One of the things they did is that they issued relatively short term debt to cover these 20 year projects. Short term debt at the time was almost free.
This was a perfect company for short sellers to attack. Shorts did a concerted attack questioning the company’s credit (will homeowners continue to pay for power if we hit a recession), and interest rate rise fears (hey, the fed is about to raise rates meaning Solarcity will have to refinance at higher rates). Neither scenario came to pass, by the way.
Anyways, the bear raid worked in that Solarcity’s cost of capital shot up. When Tesla acquired them, Solarcity’s 1.5% coupon 3 years bond was trading at 20% yield (not 100% accurate numbers, this is from memory, but you get the idea). Meaning that if solarcity wanted to borrow more money, they would have had to pay 20% interest for it, which effectively shut them out of the debt market.
But they were growing at 100% per year and had short term debt to refinance, so they were absolutely going to go bankrupt had Tesla not acquired them. As I recall, their cash needs were so large, they couldn’t issue enough equity to cover it.
This was a classic bear raid against a financial company. Normally such raids are against banks. Create enough FUD about the banks and customers start to leave, liquidity dries up and it snowballs. Solarcity had a similar enough financial structure (minus depositors who could withdraw money), that the bears could attack it.
So while Elon gave a giant FU to the bears when he acquired Solarcity (and thus depriving the bears of a bigger payday), they have been making his life miserable since their short positions effectively got moved from Solarcity to Tesla during the acquisition. I don’t know enough about acquisition mechanics to know if the shorts had to close out their positions when Solarcity was acquired, or whether they just decided to raid Tesla out of spite/malice/hatred of Elon for depriving them of their oh so smart, can’t lose, payday. Either way, that’s how Tesla acquired so many shorts betting against it.
And this matters since Tesla is NOT the kind of company that you normally mount a bear raid against. Financial companies are a lot more vulnerable. Having said that, as a growth company, Tesla does need a lot of capital to grow, and the bear raids of the last few years have effectively raised the cost of capital to Tesla. Not to the point of bankruptcy, but certainly to a meaningful, annoying extent. Elon appears to be on the cusp of having the last laugh however. 2019 should put to bed the “Tesla is running out of cash” meme.
So if you see Elon being a little bit touchy against the SEC and financial markets, it’s because he’s been in a multi year death struggle with parts of them.
