Echler Solomon Feng

esfpm.com
May 03, 2019

Insolvency Secured

It is a classic case of borrowing more to spend more, and banking [or betting the house] that a future dominated by electric cars will pay for today’s hubris and excess.

In Elon Musk’s world, it has been raising that wager for more than eight years now, as he has likely borrowed close to a billion dollars and has used his 13.4 million Tesla (TSLA) shares against it. It would have been an electrifying call if those TESLA cars were selling like hotcakes and revenues could have provided for enough cash flow to service debt. However, if the earnings reports through the years are any indication, Tesla is continuing to burn investor money faster than it is earning.

Debt Load

Year Total Borrowing Secured by Tesla Shares
2012 $50 million
2013 $300 million
2014 $300 million
2015 $475 million
2016 $486 million
2017 $625 million
2019 Undisclosed
Data sourced from Tesla Prospectus SEC filings

Poor electric vehicle sales are among the least of Elon Musk’s worries. This has likewise contributed to hampering stock performance and should Tesla stock prices tank below the US$213 level it faces an immediate margin call from lenders. Can Musk provide more cash or any other collateral? We highly doubt he is flushed with money, but more ominously neither will lenders accept more underperforming TESLA stock. A likely scenario is that lenders will liquidate their TESLA shares to minimize their risk. Any moderate sell down will likewise create a self-sustaining downward share price pressure that ultimately may lead for us to say goodbye to TESLA shares as Elon Musk falls from his high horse.

What will save Musk - is to post more collateral? The question now is, where is he going to get it? The fact of the matter is that Musk’s wealth is tied up in Tesla and SpaceX shares that are held privately. Will lenders accept more of these shares - we doubt it. We think their exposure has already achieved a maximum and that Musk needs to find new lenders whom he can charm with his vision of a future with electric cars and vacations to the moon. New lenders will not be as embracing to Musk’s Tesla and SpaceX shares, considering its poor performance to service debt. As far as everyone is concerned, all these loans are soaked with diesel waiting to be ignited by a spark.

That spark will have to be collapsing TESLA share prices. Moreover, collapsing TESLA stocks will render the company insolvent.

None of Elon’s problems are helped by his increasingly erratic behavior, occasioned by his tweets and criticisms of the SEC. Further, his comments last year on a Sovereign Wealth fund preparing to help him take Tesla private from the quoted sector at a purported premium proved lacking in veracity.

After an absence of 2 years from visiting the capital markets, it was reported at the end of last week that Tesla would raise $2 billion from stock and bond issuance. This followed surprisingly weak sales figures. Meanwhile, competitors in the electric vehicle sector continue to eat away at Tesla’s market share. Bizarrely, Tesla stock rose over 4% on the news.

We continue to advise to avoid Tesla [quite apart from the possibility of spontaneous combustion with the product] other than a ‘structured’ short of the stock.