Thumper
Active Member
Lots of tax cutting didn't work well in Kansas.
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The ABS proceeds will be repaid to the Warehouse Line creditors--the ABS swaps one form of debt for another, while transferring rights to the lease payment streams and residual values to the new entity. No new cash becomes available, but it does provide additional uncommitted capacity under the WL for funding new leases.
RobStark
Well-Known Member
Kansas already had very low taxes and low regulations with no real high tech or industrial base to work from.
Kansas economy is not a microcosm of the USA as a whole.
What Kansas needs is global class Universities to attract the Elon Musk of the world to make a Silicon Prairie like Texas. Austin amenities like great bars, night clubs and restaurants wouldn't hurt either.
BTW No offense intended to graduates of the Kansas State or the University of Kansas.
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> Kansas already had very low taxes and low regulations with no real high tech or industrial base to work from.
Maybe if they added some regulations so it was a safe & nice place to be, raised some taxes so they could afford good schools and roads, then they could attract some high tech and industry. Instead they doubled down and made their situation even worse.
Maybe if they added some regulations so it was a safe & nice place to be, raised some taxes so they could afford good schools and roads, then they could attract some high tech and industry. Instead they doubled down and made their situation even worse.
Depending on the required credit enhancement of the warehouse we could see some cash being released. However it would likely not be a great deal given the structure of the term securitisation.
Actually in this deal, not a warehousing deal BTW, the requirements due to the Moody's evaluation may produce over-collaterlization of 30% or more. There should be some major gains for Tesla Auto lease 2018-A as the portfolio liquidates. The issue is projected real proceeds from vehicle resale on lease termination at maturity. Moody's set a 50% "haircut" (their term) on resale at lease termination because of their fear of BEV's in general and Tesla, specifically.
dc_h
Active Member
Part of me wishes Moody’s has a more valid rationale. If the residuals were this bad, I’d have bought a used Tesla already.
bdy0627
Active Member
For those looking to try to understand/anticipate market action for the coming week, take a look at the thread by @Papafox. His analysis for yesterday and last week's trading is helpful. I thought the Q4 ER was going to likely be more negative than positive for the stock, but I'm softening on that. Obviously, information about the ramp will be of primary importance. Thoughts on the upcoming ER?
My only thought is they may have held on to more cash than expected through customer deposits and inventory sales. I just don't know otherwise.
I really dislike justifying a rating agency, especially when I know they are 'sandbagging'. However, Moody's has in this case used quite defensible logic, most fo which is lifted from their BEV policy paper (another expensive document). Since the document costs $250 and direct quotations aren't likely to be well-received I'll explain their logic as well as I can:
1. BEV resale values have been very poor. True, but, not so for Tesla which they ignore.
2. Tesla is rated junk, so survival is questionable, thus high residual value risk.
3. Tesla does not use dealers and also mostly controls the resale market, forcing Moody's to use retail used prices rather than NADA (National Automobile Dealer Association) auction data because Teslas aren't sold at auction very much.
4. ALG (Automotive Lease Guide) published residual values aren't really usable since Tesla controls the market, not dealers and commercial lessors.
5. "Risk is exacerbated" because Tesla does not use dealers.
6. There is very short history of Tesla resale values anyway.
They do do a comparison with comparable lease deals including Mercedes Benz and BMW which show roughly comparable quality (i.e. FICO 780 for the other two and FICO 767 for Tesla) they did not adjust for geography or commercial vs personal. Had they done that Tesla would have looked better that the others BUT even leaving it as is there is minimal credit quality difference between those two scores, they're within the same highest quality band anyway. In teh end the credit loss rate Moody's assigned was the same as their estimates for the others.
Basically it all came down to resale values. Since Tesla gained 26.2% on lease end vehicle disposition in the first nine months of 2017 the odds of losing anything at all are vanishingly low, explaining the massive over subscription.
Moody's must be properly very cautious when there is no established history and the ultimate source is unprofitable and high risk.
Honestly, it is not FUD, but it is very, very cautious. They lose zero by being excessively cautious and lose greatly when they are overly favourable.
They were strongly influenced because all the other BEV's do indeed have horrible resale values.
I was referring to the impact to Tesla's cash position on closing. If the CE in the term deal is lower than required in the warehouse there will be a net release of equity to Tesla. It is unlikely to be much given moody's conservative assessment of the term transaction, and could well be more conservative that the warehouse - meaning that Tesla would have to find $ upon closing to make up the difference. I don't know enough about the warehouse facility to be able to compare the CE requirements to the term transaction.
I agree there should be plenty of residual income falling out of this deal given the OC, however that will happen over time. The haircut that moody's applies really only affects the cap stack at closing - meaning that Tesla can sell a smaller amount of bonds off the pool of assets than would otherwise be the case if Moody's hadn't been so conservative. The bondholders will be entitled to the same stream of principal payments as is received by the underlying leases. To the extent that Tesla can purchase their vehicles for the contractually required amount at the end of the lease, then turn around and sell the vehicles for a profit then that profit would be received outside of the term transaction.
Thanks. I am so worried about being stupid I was afraid to ask.
There is cash impact to Tesla from this deal mostly because of placing most well-seasoned leases in the deal.you should read the entire Moody's opinion and their BEV opinion paper rather than equating this to a 'bond' which it is not, partly because the contingency pooling process differs between a secured financing credit line, a bond issuance and an Asset Sale. The largest short-term advantage to Tesla is reduced GAAP leverage, coupled with increased borrowing capacity. The actual cash proceeds has a few too many non-disclosed moving parts to be accurately judged right now. My guess is that they'll see cash proceeds in the range of $125mm or so, but this is certainly a guess, not an estimate.
As usual, this is a wonderful exposition. I tend to underate rating agencies since the most recent actual government shutdown. Nate Silver at Five Thirty-Eight commented on their downward ratings for the US pointing out such actions are inherently ex post.
Somewhere today there was expressed concern about financing infrastructure spending during the Obama years because of increases in debt. As Paul Krugman argues, it is very important to know whether your debt is in your own currency. What matters too is who owns it. I recently took a look at the Fed's figures on this and was relieved to know most of our debt is still in the hands of US nationals, which is not a worry unless we all move to Canada due to desertification of U.S., for example. Foreign debt is in good hands, though the tradition of most of it in UK or Canadian hands is changed somewhat with the growth of the usual suspects, Japan and China. The latter, of course, is because that is essential to support our purchase of Asian products. If China calls in all the debt, what is the likely price of the dollar, the value of its holdings converted into its currency?
But these are logical arguments and assume pricing is based on supply and demand, merely logical arguments. Reality/logical dissidence is always a possibility.
Edit: Also, my logic here may be foul, I'm sinking into "extinguished mode" as we speak, but maybe its time for breakfast.
But these are logical arguments and assume pricing is based on supply and demand, merely logical arguments. Reality/logical dissidence is always a possibility.
Edit: Also, my logic here may be foul, I'm sinking into "extinguished mode" as we speak, but maybe its time for breakfast.
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Agreed (Rather than "No new cash," I should have said "Not much new cash" ) I tried to find the credit enhancement in the Warehouse Line but gave up because I think the substantive details are in an undisclosed Fee Letter. Here's a summary of what I could find:
IIRC, Tesla direct leases began in 1Q14 when Tesla had excess cash from nearly $2.3 B in proceeds from the 2019 and 2021 Convertible Note offerings.
In March, 2015 Tesla began hypothecating the lease rights to the first Warehouse Line. Commitments under the initial WL grew to $150 MM. The rates were LIBOR + 1.65% on borrowings and 0.5% on undrawn commitments. "Borrowings under the Warehouse Facility are generally limited to up to 72% of the net present value of the remaining lease payments and the residual vehicle values under eligible lease contracts." The initial WL was fully repaid and terminated by 12/31/15. Tesla - Annual Report (p64).
In August, 2016, Tesla entered into a new WL. The initial commitment was $300 MM amended to $600 MM in December, 2016. At year end 2016, $390 MM had been borrowed. The rate was LIBOR plus a fixed percentage (The rate details and over-colateralization % were not summarized in the 10Qs/10K.)
On August 17, 2017, the Warehouse Agreement was amended to modify the interest rates and extend the availability period and the maturity date, by appending another Warehouse Agreement with substantially the same terms and that shares the same committed amount. Amounts drawn under the Warehouse Agreements generally bear interest at (i) LIBOR plus a fixed margin or (ii) the commercial paper rate. ...We retain the right to receive the excess cash flows not needed to pay obligations under the Warehouse Agreements.
On October 18, 2017, the total committed amount under the Warehouse Agreements was increased from $600.0 million to $1.1 billion. Tesla - Quarterly Report p22
The latest 10Q shows the WL at 2.8% and borrowings of $557 MM, but does not mention the over-colateralization percentage.
From the 8k filed in August 2017:
As of August 23, 2017, a portion of the lender commitment has been reallocated to the 2017 Warehouse Agreement, such that the commitments under the A&R 2016 Warehouse Agreement and the 2017 Warehouse Agreement are $525.0 million and $75.0 million, respectively....
In addition, the A&R 2016 Warehouse Agreement amended certain terms of the 2016 Warehouse Agreement to be substantially similar to the 2017 Warehouse Agreement, including by extending the loan maturity date to September 20, 2019. However, unlike the 2017 Warehouse Agreement, the A&R 2016 Warehouse Agreement provides that following the next drawdown of funds thereunder, additional drawdowns will require the consent of the lenders.
Many of the initilal lenders on the 2nd WL appear to also be creditors on the Asset Based Line.
Break fast eggs before fowl!
From the glorious TV series West Wing:
Why do the French only have one egg for breakfast?
--??
Because in France, one egg is an oeuf!
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