TSLA Market Action: 2018 Investor Roundtable

[JBRR]

I believe the hedges were specified as generating cash. Call options also default to cash settlement.

Under the construct you outline, why would Tesla ever pay the conversions in 50% cash? The hedges cover 100% of the notes, they might as well utilize it - and communicate it well in advance that the conversion is non-dilutive as the shares come from the open market.

Furthermore, Tesla already registered 2.5 million new $TSLA shares back in 2014 when the notes were sold.

So I think the most probable interpretation is that Tesla will use up to 1.2m of those new shares, plus $460m in cash, plus half of the hedge income. Note that they can probably keep the hedge income even if they settle in new shares.

I.e. the hedges will probably generate about $25m of cash for Tesla, for every $10 Tesla exceeds $360 - up to a $560 limit or so, IIRC?

If they settle half in shares then Tesla can keep half of that cash.

If $TSLA reaches about $544 by March then the 50% hedge income will entirely pay for the $460m principal debt (!), AFAICS. "Debt crunch" turns into "Zero debt". Take that shorties!

Quite clever, if my interpretation is accurate.

I believe the call options are European. EDIT: Not certain on this. Can anyone find the original SEC filing that specifies these calls?

By doing 50/50 they are taking middle road between reducing risk by giving notice now to paying 50% cash and utilizing their high stock price to pay off via that at march 1st. They are taking a risk with that part though, given that, if Tesla is below 360 on march 1st their options will be worthless and they will have to dilute shares when converting to pay off bond.

 

[Artful Dodger]

I think the underwriter of the hedges was probably smart enough to buy 25,000 call options during one of the dips to under $250, for a couple of million dollars, to properly hedge this billion dollar risk.

If not they are certainly sweating now...

haha, that's awesum! Should be visible in Open Interest in the Mar 2019 Calls for the $360 strike price right? Or would you want to buy at a different stike as the hedge?

Cheers!

EDIT: March 15, 2019 TSLA Options Open Interest -

Highest Call Strike: $360
Highest Call Open Interest: 6,921​

EDIT2: I see there are 23.4K open Calls at the $400 Strike for Jan 18, 2019. That is a *sugar* ton.

So it appears the Underwriter might not be fully hedged, but its unknown who holds these calls or the Jan 2019 $400 Calls @Fact Checking

Cheers!

 

[Fact Checking]

I believe the call options are European.

By doing 50/50 they are taking middle road between reducing risk by giving notice now to paying 50% cash and utilizing their high stock price to pay off via that at march 1st. They are taking a risk with that part though, given that, if Tesla is below 360 on march 1st their options will be worthless and they will have to dilute shares when converting to pay off bond.

I don't think the last part is true: if by March 1 the stock is below $360 then the note holders won't be asking for stock conversion - they'll be asking for the $360 principal amount back on maturity, using the bond features of the notes.

 

[JBRR]

Help me to understand here: does this explain why the Underwriter might be motivated to act to keep the SP under $360?

If someone sold 2.2 million naked 360$ calls they would have 2.2 million reasons to keep it under 360. Another 2.2 million to keep it under 361.. etc.

Or they could hedge this risk by buying 2.2 million TSLA shares and holding them till expiry on march 1st. (Or buy the march 19 360 calls in the market.)

 

[Fact Checking]

haha, that's awesum! Should be visible in Open Interest in the Mar 2019 Calls for the $360 strike price right? Or would you want to buy at a different stike as the hedge?

Cheers!

Yeah, they'd probably spread it out some, use different strike prices and even maturities, maybe even buy more and profit from it. Jan 18 2019 has over a hundred thousand call options open interest.

Or they might simply have delta hedged it and might be owners of 2.5m or more $TSLA shares already.

 

[JBRR]

I don't think the last part is true: if by March 1 the stock is below $360 then the note holders won't be asking for stock conversion - they'll be asking for the $360 principal amount back on maturity, using the bond features of the notes.

Are the bondholders not tied by teslas notice of settlement method?
If they wanted something different would they not have had to give notice too, before 1st of december 18?

 

[Fact Checking]

I believe the call options are European. EDIT: Not certain on this. Can anyone find the original SEC filing that specifies these calls?

When I parsed the 2014 prospectus I didn't see any details about the hedges, only that they will be purchased by Tesla separately from a subset of the notes underwriters, and that the hedges will make share conversion antidilutive up to a limit of $560 (?).

Could be misremembering it though.

 

[Fact Checking]

So it appears that the Underwriter can't be fully hedged, if I'm interpreting the play correctly @Fact Checking

They could be hedging via the January expiry: they'd excercise the options and hold the 2.5m shares for 1.5 months.

Or they might have built up a delta hedge already.

 

[Fact Checking]

Are the bondholders not tied by teslas notice of settlement method?
If they wanted something different would they not have had to give notice too, before 1st of december 18?

Here's the prospectus of the 1 March 2019 and 1 March 2021 notes:

Prospectus Supplement to Prospectus dated May 15, 2013,​

 

[JBRR]

When I parsed the 2014 prospectus I didn't see any details about the hedges, only that they will be purchased by Tesla separately from a subset of the notes underwriters, and that the hedges will make share conversion antidilutive up to a limit of $560 (?).

Could be misremembering it though.

Jea, it's not specified in the main filing.

It's this one we need to find:
"The Issuer has filed a registration statement (including the Preliminary Prospectus Supplement and accompanying prospectus) with the Securities and Exchange Commission (the “SEC”) for the offering to which this communication relates. Before you invest, you should read the Preliminary Prospectus Supplement and accompanying prospectus in that registration statement and other documents the Issuer has filed with the SEC for more complete information about the Issuer and the offering. You may get these documents for free by visiting EDGAR on the SEC’s website at www.sec.gov. "

 

[JBRR]

Jea, it's not specified in the main filing.

It's this one we need to find:
"The Issuer has filed a registration statement (including the Preliminary Prospectus Supplement and accompanying prospectus) with the Securities and Exchange Commission (the “SEC”) for the offering to which this communication relates. Before you invest, you should read the Preliminary Prospectus Supplement and accompanying prospectus in that registration statement and other documents the Issuer has filed with the SEC for more complete information about the Issuer and the offering. You may get these documents for free by visiting EDGAR on the SEC’s website at www.sec.gov. "

I found this and havent found this language it in the main prospectus filing:

Chart of Tesla's convertible debt : RealTesla

"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. The total cost of the convertible note hedge transactions was $524.7 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) 2.2 million shares of our common stock at a price of $512.66 per share for the 2019 Notes and 3.3 million shares of our common stock at a price of $560.64 per share for 2021 Notes. We received $338.4 million in total cash proceeds from the sales of these warrants. Similarly, in connection with the issuance of the additional notes in April 2014, we entered into convertible note hedge transactions and paid a total of $78.7 million. 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 and 0.5 million shares of our common stock at a price of $560.64 per share for the 2021 Notes. We received $50.8 million in total cash proceeds from the sales of these warrants. Taken together, the purchases of the convertible note hedges and the sales of the warrants are intended to reduce potential dilution and/or cash payments from the conversion of these notes and to effectively increase the overall conversion price from $359.87 to $512.66 per share for the 2019 Notes and from $359.87 to $560.64 per share for the 2021 Notes. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant transactions was recorded as a reduction to additional paid-in capital on the consolidated balance sheet."

 

[avoigt]

Seeing talk of a Jefferies upgrade on Twitter: $360 to $450.

"Tesla price target raised to $430 from $410 at Wolfe Research Wolfe Research analyst Rod Lache raised Outperform rated Tesla's price target to $430 from $410 saying if the $4B+ of annualized EBITDA generated in Q3 is sustainable, than ROIC north of 25%, and substantially lower debt leverage becomes very clear, leading to a major expansion in the investor base and valuation upside."

Tesla price target raised to $430 from $410 at Wolfe Research TSLA - The Fly

Vincent on Twitter

 

[mongo]

OT

Ramps have advantages and disadvantages. Elevators can be built with very little surface real-estate, which in most areas is quite valuable. Ramps of sufficient length will take up far more area (not just surface area but area near enough the surface to require purchasing the surface area above). You would need to go down probably dozens of feet before going under other properties, and even then might require some form of right-of-way purchase/license to do so. So far TBC seems to be sticking to public right of ways that they have received permission to do so, and private properties they own. At some point realistically a large tunnel network will require some boilerplate method of getting the rights to tunnel at some 'safe' depth below private property simply because public right of ways are not enough just to fit the merging/exit tunnels etc, and how that interacts with mineral rights may be interesting... and perhaps once that is established ramps may be preferable in some areas when real-estate is available to do so.

A single vehicle width wide ramp might require 100's of linear feet of real-estate which instead could supply dozens of bi-directional elevators (well, operating either up or down at a given time, but any could be operating in either direction).

Of course, elevators have more to potentially go wrong (not much can go wrong with a ramp), and their own expenses separate from real-estate. Even most suburban areas may favor elevators vs ramps, though in rural areas there's probably no reason not to use ramps.

Agreed.

Elevators can also access multiple levels in a single shaft. With rotary platform, they don't even need to point the same direction.

Much easier to dig a verticle hole than an angled one (ceiling support needed for all surface loads)

 

[Cobbler]

SP will now take off, we're reaching maxQ soon!

I dedicate this song to the best known $TSLA shorter: Mark B. Spiegel (the singer even looks a bit like him)

 

[Vitold]

Yes, yes and yes: help preserve America, stars and stripes, the veterans that work at Tesla, the exciting projects, and maybe Starman in a Tesla, riding the Heavy ...

If done right it could be a Superbowl ad for the history books.

Tesla has Worldwide aspirations and I do not think that playing to nationalism would be the right thing.

 

[Fact Checking]

Tesla has Worldwide aspirations and I do not think that playing to nationalism would be the right thing.

This would be a Superbowl ad, seen mostly by Americans [in European broadcasts of the SB they usually don't even show the ads, only the halftime show - they have their own European ads to play ...] - and displaying patriotism and being proud of Tesla's American roots is an entirely positive message. Being global doesn't mean to ignore national and regional identities and characteristics.

 

[brian45011]

Dane Butswinkas, chairman of the Washington-based law firm Williams & Connolly, will succeed Maron,

Dane Butswinkas - Williams & Connolly LLP

 

[brian45011]

I found this and havent found this language it in the main prospectus filing:

Chart of Tesla's convertible debt : RealTesla

"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. The total cost of the convertible note hedge transactions was $524.7 million. In addition, we sold warrants whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) 2.2 million shares of our common stock at a price of $512.66 per share for the 2019 Notes and 3.3 million shares of our common stock at a price of $560.64 per share for 2021 Notes. We received $338.4 million in total cash proceeds from the sales of these warrants. Similarly, in connection with the issuance of the additional notes in April 2014, we entered into convertible note hedge transactions and paid a total of $78.7 million. 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 and 0.5 million shares of our common stock at a price of $560.64 per share for the 2021 Notes. We received $50.8 million in total cash proceeds from the sales of these warrants. Taken together, the purchases of the convertible note hedges and the sales of the warrants are intended to reduce potential dilution and/or cash payments from the conversion of these notes and to effectively increase the overall conversion price from $359.87 to $512.66 per share for the 2019 Notes and from $359.87 to $560.64 per share for the 2021 Notes. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant transactions was recorded as a reduction to additional paid-in capital on the consolidated balance sheet."

General Discussion: 2018 Investor Roundtable

 

[Words of HABIT]

Shorts this morning....

 

[JoaoD]

The stock is still holding near 370 in the premarket +6-8 (1.8-2.1%), which is a little more than double the % gain from yesterday trading day +3.36 (+0.93%).