In the case at hand the right to convert is not perpetual. It is only during quarters in which the conversion criteria were met toward the end of the previous quarter. It's possible that conversion will be permissible during the fourth quarter this year but not during the first quarter next year.
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In the case at hand the right to convert is not perpetual. It is only during quarters in which the conversion criteria were met toward the end of the previous quarter. It's possible that conversion will be permissible during the fourth quarter this year but not during the first quarter next year.
If the criteria for conversion is met in this period, and the note holders convert their notes to stock - didn't TESLA essentially remove $600 million + debt from their balance sheet, or, in other words complete a non-dilutive secondary offering at an effective $124/share cost, but potentially offset any potential dilution by warrants and options to protect shareholder value? Would that be equivalent to about $5/share in shareholder value ($600 million/118 million shares) or the equivalent of 2-3 years of expected earnings?
Tesla could potentially enter 2012 with approx. $500 million in debt, $225 million in cash and a negative EPS of more than -$2.00/ share and exit the year with no debt, $750 million in cash, $1.00+/share EPS. I could refer to the balance sheets for more accurate numbers, but isn't that about a $1.0 billion increase in shareholder value for essentially a roughly 3.0 million share dilution/secondary offering?
Am I missing something?
Tesla could potentially enter 2012 with approx. $500 million in debt, $225 million in cash and a negative EPS of more than -$2.00/ share and exit the year with no debt, $750 million in cash, $1.00+/share EPS. I could refer to the balance sheets for more accurate numbers, but isn't that about a $1.0 billion increase in shareholder value for essentially a roughly 3.0 million share dilution/secondary offering?
Am I missing something?
That's sort of the point of this discussion. The key point is whether the note holders convert. I don't see why they should let Tesla off the hook for paying them.
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I did note that in my previous post. People will know for sure whether they will be convertible the following quarter right at the end of the quarter, so I assume that will be the point when they would be converted, if at all.
I haven't really done that much research on this topic, because it is immaterial in my opinion, so could you please answer this:
Even if your scenario comes to fruition that they are able to convert in Q4, but not Q1, they will still be able to convert for a full year beginning in Q2 of next year no matter what, right?
The second reason I don't see anyone in a hurry to convert these shares is because the people/funds who bought these shares most likely already hold TSLA, so they can sell of those shares instead of converting to sell.
And third as somebody already mentioned you will get more money on the market by selling your convertible bond than converting it and selling the shares.
This issue is somewhat irrelevant in my opinion, and you shouldn't base your trading off this. The only way it becomes relevant imo is if everything starts believing that it is relevant, which would be illogical but not unlikely.
I've seen Sleepyhead, Greg and Kevin discuss holding the notes as being more financially advantageous than converting. How? The notes are for 1.5% interest until 2018, or 7.5% total interest (whether simple or compounded) over 5 years. The shares are convertible at 124 theoretically in September and immediately saleable for a profit of over 30% a 4 month holding period. I would guess most of the notes are held by large investors/institutions & hedge funds who are more interested in realizing a 30% return over 4 months or an annualized return of 120% than holding notes at 1.5% (or below nominal inflation) for 5 years - the definition of dead money. They may be able to convert later...but why wait - to collect interest? 1.5% is now a full percent lower than you can get for a 10yr Treasury note. A 120% annualized return on $100 million invested will get you a bonus, a 1.5% return every year for 5 years will get you fired.
I believe they will convert if they are able - I'm not convinced they will sell all the shares on conversion.
Converting and not selling the shares would be really silly. You are still sitting on the money, and now the money is earning zero interest. And instead of converting and selling, you can make more money just selling the notes. Converting always ends up getting you less money, so why convert? Once they are convertible, the value of the notes should track the stock except be worth a little more, so I can't see why anybody would want to destroy the extra value by actually converting them. If they are in danger of reverting to non-convertible I'm not so sure what happens.
If you could convert the note today and sell the stock, lets say that you will get $1400 for the stock. But if you sold the note, you would get $1420 instead. So why would you convert and sell when you can simply sell the note for more (numbers are made up by me). The note is worth more than the stock itself, because the note has that same stock but also allows you collect interest at 1.5%.
Greg, thanks for the clarification, but from my reading of Curt's posting of the 8k, the notes are only convertible IF the criteria of 20 out of 30 days is met AND (only during such calendar quarter).
If 161.88 for 20 of 30 is met, I don't think the notes are convertible in perpetuity until March 1, 2018, but only during the calendar quarter...so I'm back to 30+% in 4 months or the potential for 7.5% in 5 years or hopin for another quarter that meets the criteria from the 8k.
If I am reading this right there are reasons to convert because of interest rates, the time value of money, risk of being unable to convert until March of 2018....or ever.
I would appreciate your feedback.
Edit: I guess it is March 2018 and not 2014, so the notes will not be convertible automatically beginning in Q2 to answer my own question.
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I still think that the notes are worth more than converting them, because you will always find someone willing to buy TSLA with a plan to hold for a minimum of 5 years. Such an investor will gladly take the notes off your hands to collect interest knowing that he doesn't plan on selling the stock until 2018 at the earliest. That is why they will always have a premium to them.
Heck, I will gladly buy the notes myself and I will pay a 1% premium to the intrinsic value of the underlying shares associated with the note.
Also note there is never an uncertain risk of the shares becoming non convertible. In any quarter where you can convert, you can convert until the last day of the quarter. At that stage you will know absolutely whether the shares will be convertible in the following quarter or not. I do think as sleepyhead says that there is a chance the notes will still be worth more than converting, but I'm less certain in that case. However, that case would only be if the shares became convertible and the next quarter they would not be (and the stock was still over the conversion price).
Thanks for the input, and I would agree with those of us on this board being willing to take a portion of the convertible notes and holding them for 5 years at a conversion price of $124 and getting a little interest along the way...but how much? It is an illiquid market as these are not in $10,000 and $20,000 tranches. This is a game for institutions, and I'm not convinced that institutions are as sanguine about the 5yr probability of success for a startup, EV technology, auto manufacturer as we are. I'd like to lay out some scenarios/ideas for a hypothetical $6.6 million investment and see what you think:
1. The conversion criteria (20/30 at 161.88+) is not met in Aug/Sept of 2013....moot point, bonds stay in place and holders collect 1.5% interest. If TESLA never meets the conversion criteria the $6.6 million bondholder makes $495,000.00 on their $6.6 million over 5 years.
2. The conversion criteria is met and bond holders keep the bonds and collect the interest until March of 2018, then convert at the stock price in March 2018. Tesla keeps the liability on their books until 2018 and:
a) The stock price is 167 - same as today. The bondholders get $495,000 in interest over 5 years and their shares are worth $8,851,590 for a total gain of about $2,750,000...or 41% over 5 years or just over 8%/yr. (8% not being too sexy for a 5yr ROR)
b) The stock price is less than 167 - The bondholders get $495,000 interest over 5 years and their shares are worth less than they were 4.5 years ago. If they want to sell their bonds at any time, they need to find another institution/individual to purchase their investment.
c). The stock price is greater than 167 - the bondholder get $495,000 interest over 5 years and 53,000 (# of shares) x difference in stock price.
3. The bondholders exercise the conversion option and get 8.0306 shares at $124.52 strike price, and TESLA removes $600 million+ from its balance sheet and:
a.) They sell the shares immediately and realize about $2,750,000 in gain for a 5 month investment for an annualized ROR of about 100% (pretty sexy).
b.) They hold their shares for 5 years and sell them at whatever the price is in March 2018 and receive $495,000 less than if they had exercised their conversion option in September of 2013....but they also could sell them anytime into an extremely (11 million shares/day) market, based on when they thought was the best timing.
While this is hyperbole, I believe many of the hedge fund guys would sell their own sisters into bondage to make 1.5% on a deal....but not 1.5%/year, with restricted liquidity. Bond interest of $495,000 is their bar bill at the club - and they would prefer to go in and out, hedge, etc. with their money rather than have it tied up for 5 years in a startup, EV, auto company's bonds. I think it is more likely that they are hoping for a 100% or greater short-term return to help their (really poor ytd) stats to keep attracting new money, but also on the chance that removing $600 million from TESLA's balance sheet might spur the stock to even higher levels, further amplifying their short-term return (either through short-squeeze, people/institutions wanting a company with rapidly increasing earnings, no debt and ample cash and a history of a 1 year 1000% increase in shareholder equity). In comparison, Netflix at $283 looks sad with $3.3 billion in debt, (-$576 million) in tangible assets and similar forward P.E. at $1.49 for this year and $3.30 for next year.
Sorry about the length, but I would value your opinions. I don't think this is a conspiracy, but I think this particular convertible offering, with its warrants and non-dilutive nature and low bond interest rates is designed as a elegant secondary offering and, if completed, could cause another run...but at the cost of stock/options, I am less interested in being on the wrong side of the trade.
I've enjoyed the back and forth, and would appreciate your opinions.
1. The conversion criteria (20/30 at 161.88+) is not met in Aug/Sept of 2013....moot point, bonds stay in place and holders collect 1.5% interest. If TESLA never meets the conversion criteria the $6.6 million bondholder makes $495,000.00 on their $6.6 million over 5 years.
2. The conversion criteria is met and bond holders keep the bonds and collect the interest until March of 2018, then convert at the stock price in March 2018. Tesla keeps the liability on their books until 2018 and:
a) The stock price is 167 - same as today. The bondholders get $495,000 in interest over 5 years and their shares are worth $8,851,590 for a total gain of about $2,750,000...or 41% over 5 years or just over 8%/yr. (8% not being too sexy for a 5yr ROR)
b) The stock price is less than 167 - The bondholders get $495,000 interest over 5 years and their shares are worth less than they were 4.5 years ago. If they want to sell their bonds at any time, they need to find another institution/individual to purchase their investment.
c). The stock price is greater than 167 - the bondholder get $495,000 interest over 5 years and 53,000 (# of shares) x difference in stock price.
3. The bondholders exercise the conversion option and get 8.0306 shares at $124.52 strike price, and TESLA removes $600 million+ from its balance sheet and:
a.) They sell the shares immediately and realize about $2,750,000 in gain for a 5 month investment for an annualized ROR of about 100% (pretty sexy).
b.) They hold their shares for 5 years and sell them at whatever the price is in March 2018 and receive $495,000 less than if they had exercised their conversion option in September of 2013....but they also could sell them anytime into an extremely (11 million shares/day) market, based on when they thought was the best timing.
While this is hyperbole, I believe many of the hedge fund guys would sell their own sisters into bondage to make 1.5% on a deal....but not 1.5%/year, with restricted liquidity. Bond interest of $495,000 is their bar bill at the club - and they would prefer to go in and out, hedge, etc. with their money rather than have it tied up for 5 years in a startup, EV, auto company's bonds. I think it is more likely that they are hoping for a 100% or greater short-term return to help their (really poor ytd) stats to keep attracting new money, but also on the chance that removing $600 million from TESLA's balance sheet might spur the stock to even higher levels, further amplifying their short-term return (either through short-squeeze, people/institutions wanting a company with rapidly increasing earnings, no debt and ample cash and a history of a 1 year 1000% increase in shareholder equity). In comparison, Netflix at $283 looks sad with $3.3 billion in debt, (-$576 million) in tangible assets and similar forward P.E. at $1.49 for this year and $3.30 for next year.
Sorry about the length, but I would value your opinions. I don't think this is a conspiracy, but I think this particular convertible offering, with its warrants and non-dilutive nature and low bond interest rates is designed as a elegant secondary offering and, if completed, could cause another run...but at the cost of stock/options, I am less interested in being on the wrong side of the trade.
I've enjoyed the back and forth, and would appreciate your opinions.
The ability of note holders to easily trade them is definitely something I don't have any insight into. If these were freely traded TSLA-B shares or something, I think it would be clearer. Here's what the prospectus has to say:
The notes are new securities and there is currently no established market for the notes. Accordingly, we cannot assure you as to the development or liquidity of any market for the notes. The underwriters have advised us that they currently intend to make a market in the notes. However, they are not obligated to do so, and they may discontinue any market making with respect to the notes without notice. We do not intend to apply for a listing of the notes on any securities exchange or any automated dealer quotation system.
The notes are new securities and there is currently no established market for the notes. Accordingly, we cannot assure you as to the development or liquidity of any market for the notes. The underwriters have advised us that they currently intend to make a market in the notes. However, they are not obligated to do so, and they may discontinue any market making with respect to the notes without notice. We do not intend to apply for a listing of the notes on any securities exchange or any automated dealer quotation system.
I admit I didn't read every single word in this conversation, but i believe converting early would be a bad decision. The convertible should be more valuable than the stock, because it has downside protection.
If you convert, then you get today's share price for every $124.52 of principal. You could do better by writing a $124.52 call expiring in March 2018. You would then get the value of that call today + the principal of the loan + 1,5% interest (the two latter cash flows discounted).
I am aware that there are no standardized contracts such as this, but an institutional could synthesize them or write a custom contract.
UPDATE:
I did some math. A $100,000 principal, if converted at $166, pays $133,320.
Alternatively, the holder writes 803 $124.51, March 2018 calls. Each call yields $105.47 (assuming 4.5 years to maturity, 3% risk free rate and 70% annualized volatility). His cash flow is then:
Today: $84,708
Each year to maturity: $1,500
At maturity: $100,000*
Discounting by 3% gives a net present value of $180,887.
You would be quite foolish to exercise.
This calculation disregards credit risk, but buyers of the convertible were clearly not worried about that in May, so why would they be worried now. Besides, the yield of not converting is far beyond what you could get on the worst junk bond.
* You either get $100,000 from Tesla returning the principal (if the share price in March 2018 is below $124.51). Alternatively you convert, and then hand all the shares off to they guy exercising the calls you sold. You then get paid $100,000 for the shares.
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Oh, and by the way, if someone exercises now, then Tesla can exercise their options with Goldman. Effectively, they would be issuing stock at $161.88 and not at $124.51. That is not a dilution I would feel bad about at the moment - if they can raise cash at that valuation I am quite happy as a shareholder.
If you convert, then you get today's share price for every $124.52 of principal. You could do better by writing a $124.52 call expiring in March 2018. You would then get the value of that call today + the principal of the loan + 1,5% interest (the two latter cash flows discounted).
I am aware that there are no standardized contracts such as this, but an institutional could synthesize them or write a custom contract.
UPDATE:
I did some math. A $100,000 principal, if converted at $166, pays $133,320.
Alternatively, the holder writes 803 $124.51, March 2018 calls. Each call yields $105.47 (assuming 4.5 years to maturity, 3% risk free rate and 70% annualized volatility). His cash flow is then:
Today: $84,708
Each year to maturity: $1,500
At maturity: $100,000*
Discounting by 3% gives a net present value of $180,887.
You would be quite foolish to exercise.
This calculation disregards credit risk, but buyers of the convertible were clearly not worried about that in May, so why would they be worried now. Besides, the yield of not converting is far beyond what you could get on the worst junk bond.
* You either get $100,000 from Tesla returning the principal (if the share price in March 2018 is below $124.51). Alternatively you convert, and then hand all the shares off to they guy exercising the calls you sold. You then get paid $100,000 for the shares.
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Oh, and by the way, if someone exercises now, then Tesla can exercise their options with Goldman. Effectively, they would be issuing stock at $161.88 and not at $124.51. That is not a dilution I would feel bad about at the moment - if they can raise cash at that valuation I am quite happy as a shareholder.
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The bond is freely traded. Please check the following link for the TESLA corporate bond details: Bonds Detail
and the following link for the historical trade activity: Bond Trade Activity Search Results
Ok, there you go. Currently trading at 155 and you would get .8 of a regular share per share, which would be worth 138.
That's cool to see the bonds being freely traded. This means there's even less motivation to manipulate the stock price to try to convert the bonds to stock.
I wish I could find the 2018 warrants as freely traded. Anyone have any info on this?
I don't see why, could you please elaborate?
The bonds are currently trading at a 10%? premium to the stock price (based on 0.8 shares per bond), so it makes no sense to convert.
Since there is a 10% premium, the price of the bond will not go up by a material amount if you meet the conversion criteria; because it doesn't make sense to convert anyway when you can sell it for more.
Mario Kadastik
Active Member
Maybe it's trading at 10% premium because it's anticipating the movement up to continue and well basically acts like a call
Anyway, the reason to want to covert is if the holders don't believe in the value to be as high in 2018 and would prefer to hold common stock and ride it up. Or if there isn't enough liquidity in the market for the bonds. Then getting a go-ahead to covert as an option would be nice, no? Then again, if there is liquidity I'd just sell with 10% premium and buy 10% more common stock on open market, so indeed...
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