Tesla's Upcoming Debt Obligations (12 Months)

[bdy0627]

Every time I start considering Tesla's upcoming debt obligations and the effect they will have on Tesla's financials, I find that I don't fully understand it. I'd like to enlist some help from those with knowledge about how these obligations work and how Tesla is likely to fulfill them. I would appreciate some input from anyone who can walk me through how these will affect Tesla. I'm guessing @luvb2b and @neroden could provide some helpful commentary on this. It seems likely to me that the stock will be above $360 by March 2019. It is very unlikely to be above $560 by November 2018. What happens in the situation where the stock is below or above these levels when the obligations come due? My understanding is that if the stock is above these conversion levels, stock is issued at the conversion price, so there is dilution. How much effect would the dilution have? If the stock price is below these conversion levels, what is Tesla likely to do to handle the obligation? What do you think Tesla will do regarding the prom. note of $100M due in August this year and the term loan of $157M due in December? Those seem small enough to simply pay off, particularly if Tesla is not doing a raise this year. How much money is still available for Tesla to access through lines of credit?

Tesla's Upcoming Debt (12 Months)

Type Maturity Size Conv. Price
Convert (SC) 11/2018 $230M $560.6
Convert (TM) 3/2019 $920M $359.8

Type Maturity Size
Prom. Note (SC) 8/2018 $100M
Term Loan (SC) 12/2018 $157M

 

[Reality]

Unbanned!

I am not super well versed on the ABL, so if someone wanted to give a good explanation there it would be appreciated.

 

[luvb2b]

tesla needs to start making money in q3 and continue in q4. if they do that, credit worries won't matter as they will be able to readily raise equity or debt capital.

just imagine the gigantic improvement in credit perception if they start printing north of $1/share gaap eps (which implies hundreds of millions in +ve operating cash flows).

you're right about the conversion: above the price common is issued and below cash is needed. assuming they are profitable by 2019q1 those bonds could be refinanced if they weren't being converted.

if they're not profitable in q3 and q4 2018, there's going to be many problems around cash and debt. the details are perhaps not as important as the severity at that point.

Every time I start considering Tesla's upcoming debt obligations and the effect they will have on Tesla's financials, I find that I don't fully understand it. I'd like to enlist some help from those with knowledge about how these obligations work and how Tesla is likely to fulfill them. I would appreciate some input from anyone who can walk me through how these will affect Tesla. I'm guessing @luvb2b and @neroden could provide some helpful commentary on this. It seems likely to me that the stock will be above $360 by March 2019. It is very unlikely to be above $560 by November 2018. What happens in the situation where the stock is below or above these levels when the obligations come due? My understanding is that if the stock is above these conversion levels, stock is issued at the conversion price, so there is dilution. How much effect would the dilution have? If the stock price is below these conversion levels, what is Tesla likely to do to handle the obligation? What do you think Tesla will do regarding the prom. note of $100M due in August this year and the term loan of $157M due in December? Those seem small enough to simply pay off, particularly if Tesla is not doing a raise this year. How much money is still available for Tesla to access through lines of credit?

Tesla's Upcoming Debt (12 Months)

Type Maturity Size Conv. Price
Convert (SC) 11/2018 $230M $560.6
Convert (TM) 3/2019 $920M $359.8

Type Maturity Size
Prom. Note (SC) 8/2018 $100M
Term Loan (SC) 12/2018 $157M

 

[bdy0627]

tesla needs to start making money in q3 and continue in q4. if they do that, credit worries won't matter as they will be able to readily raise equity or debt capital.

just imagine the gigantic improvement in credit perception if they start printing north of $1/share gaap eps (which implies hundreds of millions in +ve operating cash flows).

you're right about the conversion: above the price common is issued and below cash is needed. assuming they are profitable by 2019q1 those bonds could be refinanced if they weren't being converted.

if they're not profitable in q3 and q4 2018, there's going to be many problems around cash and debt. the details are perhaps not as important as the severity at that point.

Thank you. It all comes down to whether or not Tesla is able to be profitable in Q3 and Q4, since that will essentially eliminate the risk these debt obligations pose.

 

[neroden]

So, the Q4 2018 (SolarCity) convertible, $230 million, will be paid off in cash. You can simply assume that.

The March 2019 convertible, $920 million, will be converted if the stock is over ~$360. (If Tesla has tons of cash, they can decide to pay part of it off in cash at that time to reduce dilution, but they probably won't.)

The March 2019 convertible will be paid off in cash if the stock is below ~$360 and Tesla has enough cash to be comfortable doing that. If Tesla doesn't have enough cash to be comfortable doing that, Tesla can lower the conversion price and induce conversion -- all the way down to ~$250. (Thanks to brian for spotting this.)

The November 2019 (SolarCity) convertible, $566 million, will likely be paid off.... but that's more than 12 months from now, so I won't consider it for now.

If you look at Tesla's current cash and assume that Q2 investing and operating cash flow is roughly like Q1, and that Q3 and Q4 break even on investing + operating cash and they keep breaking even on investment + operating cash during 2019 (this is a super pessimistic scenario), they can just pay this all off, and still have $942 million cash in March 2019. If they also had to suddenly pay up the difference between accounts payable and accounts receivable (unlikely, but worth looking at as a scenario in case suppliers squeeze them on terms), they'd be about $1007million short. They have $542 million in uncommited non-recourse loan accessible under their line of credit, and another $763 million uncommitted under the Warehouse Agr eement (much of which is probably going to be accessible as they produce more cars).

So even if all they do is get operating cash flow + investing cash flow to breakeven for the last half of 2018, they can pay off the debt.

Now, obviously, if they are generating any positive operating cash flow, that makes things much easier. And I'm pretty darn sure they will.

Now, back to next November: I think there is no doubt that Tesla can make enough profit before November 2019 to pay off the $566 million.

 

[neroden]

What do you think Tesla will do regarding the prom. note of $100M due in August this year and the term loan of $157M due in December?

Musk's been refinancing the promissory note (it's to him).

The term loan is financing for a special purpose vehicle which backs solar leases; they've been refinanced before and will be refinanced again. In the old days those things weren't even on the balance sheet, but after 2008 they are on the balance sheet. There's still zero problems refinancing them, it's standard business practice.

 

[bdy0627]

So, the Q4 2018 (SolarCity) convertible, $230 million, will be paid off in cash. You can simply assume that.

The March 2019 convertible, $920 million, will be converted if the stock is over ~$360. (If Tesla has tons of cash, they can decide to pay part of it off in cash at that time to reduce dilution, but they probably won't.)

The March 2019 convertible will be paid off in cash if the stock is below ~$360 and Tesla has enough cash to be comfortable doing that. If Tesla doesn't have enough cash to be comfortable doing that, Tesla can lower the conversion price and induce conversion -- all the way down to ~$250. (Thanks to brian for spotting this.)

The November 2019 (SolarCity) convertible, $566 million, will likely be paid off.... but that's more than 12 months from now, so I won't consider it for now.

If you look at Tesla's current cash and assume that Q2 investing and operating cash flow is roughly like Q1, and that Q3 and Q4 break even on investing + operating cash and they keep breaking even on investment + operating cash during 2019 (this is a super pessimistic scenario), they can just pay this all off, and still have $942 million cash in March 2019. If they also had to suddenly pay up the difference between accounts payable and accounts receivable (unlikely, but worth looking at as a scenario in case suppliers squeeze them on terms), they'd be about $1007million short. They have $542 million in uncommited non-recourse loan accessible under their line of credit, and another $763 million uncommitted under the Warehouse Agr eement (much of which is probably going to be accessible as they produce more cars).

So even if all they do is get operating cash flow + investing cash flow to breakeven for the last half of 2018, they can pay off the debt.

Now, obviously, if they are generating any positive operating cash flow, that makes things much easier. And I'm pretty darn sure they will.

Now, back to next November: I think there is no doubt that Tesla can make enough profit before November 2019 to pay off the $566 million.

That's great info! Thanks. It certainly appears that betting on these near-term debt obligations taking Tesla down is a VERY unlikely bet. Twitter shorts seem to think it's very likely. That and a hidden SEC investigation that will prevent Tesla from raising capital.

 

[Boomer19]

i asked about this as well a handful of weeks ago and here’s some detail

Short Squeeze Strategy

Short Squeeze Strategy

thanks @bdy0627 for collecting this all in one place

 

[Reality]

The March 2019 convertible will be paid off in cash if the stock is below ~$360 and Tesla has enough cash to be comfortable doing that. If Tesla doesn't have enough cash to be comfortable doing that, Tesla can lower the conversion price and induce conversion -- all the way down to ~$250. (Thanks to brian for spotting this.)

This is interesting, seems like they would 'have' to do this unless they are super cash flow positive before then.

Do you have a link to this? I definitely didnt know that and that is material.

 

[Reality]

Just saw link in thread Boomer linked

 

[neroden]

I should remind any bears that estimated incremental profit from Model 3 for the second half of the year is on the order of 1 billion dollars. If you compare this to Tesla's steady-state operational profit and capital expenditure before the Model 3 rampup started, you'll see that it exceeds it. There are substantial documented cuts in capital expenditures on top of the obvious "We're not currently ramping up a brand new production line" difference from Q1. It's clear to me that they'll be able to pay off the bonds as they come due.

How much profit they make will determine how tight the situation is, which will determine how much capex expansion they can do in 2019. But even in the worst plausible case, they pay the bonds off and manage to stay self-financing.

 

[Reality]

I should remind any bears that estimated incremental profit from Model 3 for the fourth quarter is on the order of 2.2 billion dollars. Along with documented cuts in capital expenditures, it's clear they'll be able to pay off the bonds as they come due.

estimated by who? ValueAnalyst?

I think the most reasonable bull case I have seen wrt cash flow is @luvb2b model here: q2-q4 2018 financial projections

And that puts them at slightly CF positive for Q4 with 2b cash on hand.

I think he is being a bit optimistic peresonally, but the thought process is reasonable. No idea where you are getting 2.2b CF in a quarter.

 

[neroden]

I corrected my number, it was a thinko.

 

[Reality]

I corrected my number, it was a thinko.

gotcha

1b CF+ in 2H would definitely scare us bears, im not going to say it is 0% chance, but i definitely think it is very unlikely

 

[Boomer19]

i asked about this as well a handful of weeks ago and here’s some detail

Short Squeeze Strategy

Short Squeeze Strategy

thanks @bdy0627 for collecting this all in one place

i’m pretty sure that response was to the march maturity

No dilution until >$512.66/share.
see;
From WSJ: Tesla asking suppliers for refund/cash to become profitable

 

[schonelucht]

Thanks for opening up a debt investor thread!!!!

I just want to chime in that Tesla still has the option to settle in cash even when the stock price is over $360 (obviously it will then pay over par). Not sure why Tesla'd want to do so, but it did for a small portion of the 2018 bonds already

In the third quarter of 2017, $42.7 million in aggregate principal amount of the 2018 Notes were exchanged or converted for 250,198 shares of our common stock (see Note 14, Common Stock) and $32.7 million in cash. As a result, we recognized a loss on debt extinguishment of $0.3 million.

Next, don't forget the warrants and hedges connected with the convertible which will actually RAISE money for Tesla.

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. [...] 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

Let's say the stock price is $400 by then. Tesla will exercise its call option, surrendering $359.87 * 2.7788 ($1000) to the underwriter of the call and receive back 2.7788 shares. Now there are two options

1) Tesla passes those 2.7788 shares on to a holder of $1000 of convertible debt. Everything is settled. Total outstanding shares in the market are exactly the same (no dilution) BUT Tesla is out $1000 of cash
2) Tesla creates 2.7788 new shares, gives those to the bond holder. Then Tesla just settles the call with the underwriter for cash (basically receiving $40.13 * 2.7788 = $111 in cash BUT there is dilution for 2.7788 shares.

Tesla describes this hedge/warrant pair as anti-delutive, so the intent would be 1). But when we look at what actually happened with the 2018 convertible it's clear Tesla took 2) instead (resulting in dilution but netted extra cash)

During 2017, we issued 1,510,274 shares of our common stock and paid $32.7 million in cash pursuant to conversions by or exchange agreements entered into with holders of $199.5 million in aggregate principal amount of the 2018 Notes (see Note 13, Convertible and Long-Term Debt Obligations). As a result, we recorded an increase to additional paid-in capital of $163.0 million. In addition, we settled portions of the bond hedges and warrants entered into in connection with the 2018 Notes, resulting in a net cash inflow of $56.8 million (which was recorded as an increase to additional paid-in capital), the issuance of 34,393 shares of our common stock and the receipt of 169,890 shares of our common stock.

And I will leave with a funny thing re the discovery that Tesla can lower the conversion price if necessary to avoid having to pay up (at a cost of more dilution). It seems Tesla is not comfortable with making that very clear to their shareholders. Their disclosures about convertible debt from their subsidiaries explicitly mention the range at which they can convert

Moreover, our subsidiary’s 2.75% Convertible Senior Notes due 2018, 1.625% Convertible Senior Notes due 2019 and Zero-Coupon Convertible Senior Notes due 2020 (collectively, the “Subsidiary Convertible Notes”) are convertible into shares of our common stock at conversion prices ranging from $300.00 to $759.36 per share.

But when it comes to their own proper convertibles from the same paragraph it doesn't mention that conversion range anymore.

Pursuant to their terms, holders of our 1.50% Convertible Senior notes due 2018, 0.25% Convertible Senior Notes due 2019, 1.25% Convertible Senior Notes due 2021 and 2.375% Convertible Senior Notes due 2022 (collectively, the “Tesla Convertible Notes”) may convert their respective Tesla Convertible Notes at their option prior to the scheduled maturities of the respective Tesla Convertible Notes under certain circumstances. Upon conversion of the applicable Tesla Convertible Notes, we will be obligated to deliver cash and/or shares in respect of the principal amounts thereof and the conversion value in excess of such principal amounts on such Tesla Convertible Notes

Why be explicit with some but not with other convertibles? Anyone going to dive into the subsidiary convertibles to see if they have a 'lower conversion rate clause' as well?

PS. From a price of $425 and onwards the 2022 Convertible holder will also start to knock on Tesla's door...[/QUOTE][/QUOTE]

 

[bdy0627]

i asked about this as well a handful of weeks ago and here’s some detail

Short Squeeze Strategy

Short Squeeze Strategy

thanks @bdy0627 for collecting this all in one place

I didn't see those before. Thanks!

 

[bdy0627]

gotcha

1b CF+ in 2H would definitely scare us bears, im not going to say it is 0% chance, but i definitely think it is very unlikely

What part of luv's forecast do you find highly unlikely? The revenue predictions look very reasonable to me.

 

[Boomer19]

more info

Short Squeeze Strategy

 

[luvb2b]

wow, i didn't know about this. can someone post a link so i can read about it?

The March 2019 convertible will be paid off in cash if the stock is below ~$360 and Tesla has enough cash to be comfortable doing that. If Tesla doesn't have enough cash to be comfortable doing that, Tesla can lower the conversion price and induce conversion -- all the way down to ~$250. (Thanks to brian for spotting this.)