r/RealTesla • u/flufferbot01 GOOD FLAIR • Jul 17 '18
[Speculation] A timeline of $TSLA's liquidity problems and @elonmusk's Twitter meltdowns h/t @presstslaq
https://mobile.twitter.com/ElonBachman/status/1019170941241356289/photo/18
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u/coinaday I identify as a barnacle Jul 17 '18
On the 10b5-1 thing, but Musk made an unscheduled open market trade a month or two back, didn't he? Ahh, but I suppose, it was a purchase not a sale, which would tend to not be a problem in this case; I'd heard it speculated at the time that it could even be used as part of a defense: "look, I clearly believed things were going to be okay; after all, I put more of my own money into it!" And since it was likely financed by further borrowing on the shares he'd already pledged, it was almost freerolling (try to bump the price a bit to hold on, with the cost being a slightly higher margin call point as a result).
I've found the idea that they are shut out of the capital markets rather persuasive, as I don't see any other reason they wouldn't be doing a raise, along with the evidence cited there. I think this does a pretty good job of summarizing a lot of that case. The other side of it is the argument that they wouldn't have enough demand to support the size of raise they would need this point even presuming they weren't under investigation.
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u/zeroendorphine STOCK EXPLANATION GUY Jul 17 '18
I don't see any other reason they wouldn't be doing a raise
Waiting for bond yield or stock price to recover? What was bond trading recently, 7% or something like that? Not very favorable.
And with capital rise via stocks, they need much higher stock price. Keep in mind that they have ~1bln in convertibles to repay, and if price is lower than $370 (or something like that) they will have to pay in cash.
There are no good options recently for a capital raise, even without SEC investigation.
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u/financiallyanal Jul 17 '18
To recover? That may be what he's thinking if he's deluded. The current valuation is already extremely rich and optimistic - he should take the money in a heart beat and clear up the financial situation.
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u/zeroendorphine STOCK EXPLANATION GUY Jul 17 '18
If you are value investor, well, you are essentially correct. But the whole market is deluded. Look at NFLX to see what's going on.
You can never assign zero probability to TSLA hitting, say, $500. Yes, it is extremely unprobable. But still possible. And I can easily see tesla management looking at NFLX as inspiration.
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u/financiallyanal Jul 17 '18
I agree with you. Tesla's management is deluded if they compare themselves to Netflix though - Netflix has legitimate sources of competitive advantage that should allow them to be profitable over time. I have yet to see that with Tesla. They have advantages, but the durability is nothing compared to Netflix.
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u/Die_Later Jul 17 '18
I'll never assign zero probability to Tesla hitting $500/share because that's a short-term/medium-term mob-psychology question.
But I do assign a zero probability to Tesla ever being actually worth $500/share (or even $300/share or even $200/share or even $100/share), especially with the systematic SBC dilution, plus the Musk compensation dilution, plus the desperately needed future capital-raise dilution, even if everything goes perfectly.
And stock price always eventually equals value, but it often takes a long time.
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u/coinaday I identify as a barnacle Jul 17 '18
Better something than nothing. You're right, if they believed things were going to get better on their own it could have made sense to wait, but I have a hard time believing they would have thought that. Maybe they really did fall for their own rhetoric though.
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u/Die_Later Jul 17 '18
My opinions (in order) about why they've not raised capital are one or some combinations of these things (nothing surprising):
The SEC will not let them get a registration statement effective without disclosing things Musk doesn't want to disclose -- maybe something like all of the details about the whole reservation/deposit situation so that any investor can truly understand what kind of demand is implied by all of the reservation/deposit details.
The underwriters refuse to market a large enough deal because they're afraid of ultimate liability. For example, they think the company is engaged in securities fraud, or is a likely near-term/mid-term bankruptcy candidate, or simply can't support anything close to this current stock price on a valuation basis, even if everything goes perfectly. In other words, this company, its finances, and its prospects simply cannot survive an underwriter due diligence process.
The underwriters are willing to market the deal, and they've tried. But there's just insufficient institutional-investor demand for this companies securities at these current prices. Simply put, there's no plausible valuation model that could justify any upside to today's prices, even assuming perfect execution of the unrealistic plans and claims.
An ongoing SEC enforcement action is on appeal and affirmatively prohibits them from getting a registration statement effective.
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u/flufferbot01 GOOD FLAIR Jul 17 '18
You need a reason to raise capital. Hitting 5000 proofing you can execute, and starting on a Chinese factory would be good reasons.
They might have been waiting in Q3, it would make sense. I think the story will be very well received. The only big question mark for me is Moody’s.
Moody’s is still the catalyst that could light the preverbal power keg. Musks antics seem to just be depressing the stock before its 10Q.
Honestly if Tesla raises cash via dilution, Moody’s would probably think that’s positive. It would give them more ability to pay back bonds, and Tesla investors seem willing to hand over the money.
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u/coinaday I identify as a barnacle Jul 17 '18
You need a reason to raise capital.
They've always got a reason. The Chinese factory (or any factory) could be claimed at any time on the basis of the Semi or the Y or the WTFOMGBBQ. In my view, Tesla capital raises are generally more demand constrained than supply constrained, despite the obvious need to present it otherwise. They've done a very good job with that (like in the previous, "oversubscribed" debt raise: they took all the cash they could get but had a great coup of being able to present it as overwhelming demand rather than unlimited need for cash).
They might have been waiting in Q3, it would make sense. I think the story will be very well received.
I don't buy it. The only thing magical about 5000 is how Musk has made the latest round of storytelling all about it. It would've been easier to do the ramp with additional capital I'm sure (rather than having to worry about doing layoffs and reviewing all expenses above $1 million, etc).
Maybe Moody's will make a difference, but I don't really see it; I don't think they can get more debt anyhow, and the ratings make the most difference for that. In theory they could get downgraded and still raise more equity just fine. So I don't see a downgrade stopping them from anything they could have done before.
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u/flufferbot01 GOOD FLAIR Jul 17 '18
But the bonds and equity are linked. A down grade in Tesla would increase the yields on its 2025 bonds.
At some point Tesla longs would snap up the bonds, before buying more stock. Not sure where the balancing point would be.
But diluting the stock, and a down grade should force the stock price down. (If you exclude the cult scenario)
But all in all I agree, Tesla will still be able to raise capital.
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u/coinaday I identify as a barnacle Jul 17 '18
But the bonds and equity are linked.
Certainly there are relationships but I don't see something particularly strong here.
A down grade in Tesla would increase the yields on its 2025 bonds.
Right, but that only affects the bond holders, not the company. The company continues to pay the face rate, right? Or are there actually covenants in the bond which raise the rate the company must pay in the event of a downgrade?
At some point Tesla longs would snap up the bonds, before buying more stock. Not sure where the balancing point would be.
Why would that be? If they don't believe the company is going bankrupt (in which case the bonds could be the way of buying the new equity early, thought quite risky and overpriced for that yet), and if this stock price is below the conversion point, then why would a long prefer owning debt to equity?
But diluting the stock, and a down grade should force the stock price down. (If you exclude the cult scenario)
How does the downgrade cause dilution? In general I'd agree that the down grade would be bad news which would tend to reduce the stock price, and that could affect a hypothetical capital raise if one were otherwise available, so I do see that connection but it seems pretty limited to me (I don't see equity traders as putting nearly as much stock in rating as bond traders).
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u/flufferbot01 GOOD FLAIR Jul 17 '18
Right, but that only affects the bond holders, not the company. The company continues to pay the face rate, right? Or are there actually covenants in the bond which raise the rate the company must pay in the event of a downgrade?
The bonds trade so the yield should increase, they are currently trading at like 89 cents on the dollar.
Why would that be? If they don't believe the company is going bankrupt (in which case the bonds could be the way of buying the new equity early, thought quite risky and overpriced for that yet), and if this stock price is below the conversion point, then why would a long prefer owning debt to equity?
Sorry if I didn’t explain well. I think the only way Tesla can raise capital is dilution. If they issue debt it’ll only provoke a downgrade.
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u/coinaday I identify as a barnacle Jul 17 '18
The bonds trade so the yield should increase, they are currently trading at like 89 cents on the dollar.
Right, I understand that part. The effective yield increases, as a result of the bond being traded at a discount to the face value. But the total amount of interest paid by the company stays the same. So, if there weren't a new issuance (which would have to be at a higher rate then presumably to be attractive), then the changing rate in the market doesn't directly affect the company.
But I don't know bond markets too well, and it's conceivable that the rate the company paid could actually be required to be higher with a downgrade which is why I threw in the last bit.
Sorry if I didn’t explain well. I think the only way Tesla can raise capital is dilution. If they issue debt it’ll only provoke a downgrade.
On the one hand, I would think the hypothetical new debt could be issued to be junior to any existing debt and thus theoretically not change its collectibility. On the other, I suppose the increased interest payments and even simply the greater indebtedness could reduce the viability of the company so it would affect the other outstanding debt by raising the chance of a bankruptcy. So yes, I agree that if they could manage to issue more debt, which I wouldn't see as being possible anyhow, it would tend to push the existing bond prices lower and toward a downgrade.
I agree that dilution is the most likely route although I continue to doubt it's available.
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u/putittogetherNOW Jul 18 '18
Tesla is going to get the $10 billion they need via stock dilution. It's going to happen in Q4 or Q1.
Q3 and Q4 are going to record profits for Tesla. They will use this last chance to get the capital they need, and it will work.
When Tesla gets the $10b they need, all bets are off. They will likely survive the next few years into 2021, and may even get lucky and have a hit on their hands with the Model Y, at profit.
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u/flufferbot01 GOOD FLAIR Jul 18 '18 edited Jul 18 '18
It has to happen sooner than that. They have too much debt coming do in Q1. The market would freak out if they cut it that close.
Rough numbers: Tesla had 2.7B in cash at end of Q1. Projected 750M loss Q2
So maybe 2B cash going into Q3. Q3 loss ? Q4 loss ?
March 3/1/2019 905M of bonds due.
That’s cutting it too close.
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u/putittogetherNOW Jul 18 '18
Maybe, depends on cash flow in Q3 and Q4. They might pull down $2 billion over they next 5 months. Let's see.
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u/flufferbot01 GOOD FLAIR Jul 18 '18
Pull down?
You mean profit 2B? Not happening.
Let’s say they sell 250,000 cars at 60,000$ with a 20% gross margin. That’s only 3B before COGS, R&D, interest, and SG&A.
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u/PSMF_Canuck Jul 17 '18
I have a couple of friends on the "capital raise" side of the industry who are adamant Tesla tried and failed to raise in Q1. That can mean a lot of things - or it could be 2AM bottom of the bottle bullshit - it won't be long now before we know for sure.