Elon Sold More Falling Tesla Stock. Margin Calls? Twitter Failing? Bank Demands? Likely All Three.
Elon Sold More Falling Tesla Stock. Margin Calls? Twitter Failing? Bank Demands? Likely All Three.
Elon sold billions more of Tesla near 2-yr lows, signaling he & Twitter need serious cash NOW. His banks know why & they want Elon to buy back from them billions of Twitter's riskiest LBO debt.
Elon Musk sold another $3.58 billion in Tesla TSLA 0.00%↑ stock last week. That marked $23 billion he’s sold this year, including more than $15 billion to help fund his Twitter buyout in October plus now $7.53 billion sold in just over a month. This dropped his Tesla stake to approximately 13.4% versus 23.5% as of March 31st, per the company’s latest proxy statement.
We don’t know what Elon is doing with the proceeds from his stock sales since the deal closed, but can assume that he is facing a liquidity crisis on several fronts, as I long have warned.
Why? Because he selling, again, with Tesla stock is freefall—now near two year lows at $150 per share as of Friday's close, and still falling. Investors have become alarmed that accelerating weakness in demand, particularly in China, has continued from the disappointing third quarter results as I projected (and last discussed again in Tesla Q3 Missed Drastically Reduced Mkt Ests; And Somehow the Market is Surprised, 10/20/22).
Elon last raised $3.95 billion in November selling 19.5 million shares at between roughly $197-220, again when the stock was falling. He got only $3.58 billion last week selling 22 million shares at $156-176. See the problem?
Which signals Elon has little choice, and even fewer options, but to sell. He’s got to raise cash. Now. And it’s probably not a coincidence that he’s also having his privately held SpaceX (SPACE), of which he owns roughly 33%, sell insider shares at $77 per share.
So where’s the fire? Everywhere. And Elon is the arsonist.
I last speculated here and here that Elon could be paying expensive margin calls on his loans against his Tesla stock given how far and how fast the stock has plunged.
And, of course, there’s Twitter, which I calculated has been running out of cash since Elon took over:
Twitter used the $42 billion collected from the deal to buy back and retire its stock and whatever was left of the $6 billion in cash it reported at the end of June was used to retire the company's $5.29 billion in existing bonds. Tack on the $13 billion in pricey new LBO debt and the roughly $1.29 billion in annual interest costs that Musk's leveraged buyout saddled the company with, and Twitter is running deep in the red as its cash circles the drain.
Vicki Bryan in Business Insider, Elon Musk gambled big on Twitter. Tesla is going to pay the price, 12/5/22.
And this was before Elon began blowing up the company, which he started from day one. Not long after, Twitter started losing its largest advertisers, a block that had contributed some $2 billion of its $5 billion in consolidated annual revenue:
Media Matters reported that at least half of Twitter’s top 100 advertisers stopped ads during Elon’s first two weeks—the number is likely much higher now—over concerns about brand safety. Like having their ads featured next to hardcore antisemitism and porn. Apple AAPL -3.09%↓ and Google GOOG -2.47%↓ may stop distributing Twitter’s app, citing failures in content moderation controls versus their standards…
Elon responded, as he typically does when challenged, with threats to vital advertisers and distributors which may determine Twitter's survival. Not smart. Twitter is not some vital industry juggernaut able to dictate terms, as Elon thinks he is. It’s not even the biggest or richest social media platform.
Elon Is "Saving" Twitter To Death, 11/28/22
Elon has only doubled down in the weeks since then on his own incendiary right wing rhetoric, dangerous misinformation, and failed stunts, including mass banning of journalists. That triggered a warning of sanctions from the European Union Commission which already was alarmed when Elon gutted and dismantled Twitter’s Trust and Safety teams and added back notorious figures and accounts previously banned from Twitter for inciting hate, violence, and dangerous misinformation. On Sunday he changed Twitter’s Terms of Service to prohibit users from mentioning certain social media platforms (Facebook, Instagram, Mastodon, Truth Social, Tribel, Post and Nostr) in their bios (which may also violate US as well as EU rules).
Gee. Who could have seen this coming?
As I warned in April, back when I found it hard to believe Elon was serious about buying Twitter (turns out he wasn’t—he just got caught in his own trap):
Nor has Musk seemed willing to fight for anyone’s free speech except his own, however wrong or false or horrific, especially if that speech came from his critics or regulathttps://www.smartkarma.com/insights/notice-how-tesla-behaves-so-much-better-for-china-than-the-usors or journalists or Tesla employees calling out concerns about safety or persistently toxic working conditions, for example.
Elon Buying Twitter? Probably Not, 4/14/22
So, as I expected, Elon looked even less credible by the time he closed the deal in October:
Oh well, these now are concerns for Twitter’s new investors, who surely must know by now what they’re in for doing business with Elon Musk at the helm. He’s notoriously reckless, ruthless to critics, with a famously fragile ego. He seems to know little to nothing about running Twitter, and is taking on total, largely unchallenged control without a comprehensive turnaround plan or credible performance targets.
Elon Has "Freed" Twitter: Send The Ravens, 10/28/22
Not surprisingly, advertisers continue to leave Twitter—but now they also fear Elon’s retaliation. So not only is Elon driving away critical advertising dollars, he seems to be ensuring they won’t want to come back, at least in size.
Since advertising revenue generates more than 90% of Twitter’s total revenue, it’s hard to see how it can overcome such catastrophic losses for long:
Twitter can’t absorb such a rapid and severe liquidity crunch. After paying off all its stockholders when Elon closed the sale, Twitter used most if not all its cash on hand—last reported at $6 billion—to retire its bonds as expected (see Elon Has "Freed" Twitter: Send The Ravens, 10/28/22). Following that, Twitter has a meager $500 million revolving credit line with a potential $1.7 billion accordion expansion to support liquidity. At the rate the company is deteriorating, it may run through that in a quarter or two.
Elon Is "Saving" Twitter To Death, 11/28/22
Apparently my concerns were on point. Elon has stopped paying Twitter’s bills—a classic move he used for years at Tesla—including severance to fired employees, vendors, bills for chartered flights, and even rent at the company’s headquarters in San Francisco or any of its global offices. He dismantled office kitchens and is selling off kitchen equipment and office furniture, illegally fired janitors, and he turned conference rooms into makeshift bedrooms so workers don’t leave (which violates city building codes).
Not paying bills and flouting labor laws don’t make problems go away—it magnifies them. But, as I have warned, Twitter has few options as its liquidity runs dry.
Unless Elon can feed it more cash. That is, just as he may also be dealing with expensive margin calls.
And let’s not forget about Elon’s unhappy banks. As I last warned:
When I say Twitter's bankers really, really want to unload the $13 billion LBO debt arranged back in April for Elon’s LBO of the company, it's not just because they already were losing more than $500 million before Elon closed the deal in October because interest rates had spike to multiyear highs.
It’s also because Elon is blowing up the company so quickly and so destructively that they couldn’t sell that debt even for 50-60 cents on the dollar. Now they are headed into year-end stuck with the largest chunk of merger debt overhang (left unsold) with 30% of the total $42 billion all US banks are trying to unload at a loss by year-end, as reported by Bloomberg.
Twitter’s Banks Are Stuck With Largest Chunk Of Unsold LBO Debt, 11/29/22
So, the banks are probably not interested in loaning Twitter even more cash now that Elon has run the company so rapidly toward bankruptcy with little chance of recovery any time soon.
The banks also have a close-up view of Twitter’s finances right now. That’s because banks get far more comprehensive operations information and other critical financial details from their borrowers and they get it every month. So the banks already know how much trouble Twitter is in, and whether it can recover any time soon. Knowing what they know, they want out—as I have suspected for a while.
How can they reduce, if not eliminate their exposure to the Twitter dumpster fire?
They want Elon to buy back at least some of Twitter's LBO debt. Bloomberg reported last week that the banks are interested in having Elon buy back the riskiest and most expensive piece: the $3 billion in unsecured bonds the banks had capped at a 11.75% rate—before market rates spiked as high as 17% before the deal closed and before Elon had rendered Twitter insolvent.
Makes sense. I suspect the debt the banks tried—and failed—to sell was the most appealing senior secured debt, with the unsecured debt now (as then) likely worthless (along with Twitter’s equity). And I doubt Twitter can even afford to pay the interest costs on the secured debt, much less the estimated $1.29 billion due per year (including $352.5 million for the proposed $3 billion in unsecured bonds).
The banks reportedly want Elon to replace at least the $3 billion unsecured bond with a new margin loan backed by pledging even more of his Tesla stock. To that, Elon might bargain, for example, that he will buy back some or all $6 billion of the proposed bonds—at a severe discount like, say, 30-50 cents on the dollar (still likely more than the company is worth now). And the banks probably should take that deal.
Getting that margin loan might be tricky, however, given how fast Tesla has fallen as its sales and prospects have sharply deteriorated, as I long have projected (and last discussed again in Tesla Q3 Missed Drastically Reduced Mkt Ests; And Somehow the Market is Surprised, 10/20/22).
Tesla’s rules dictate that Elon can borrow no more than 25% of his stake, which has been reduced to just over $66 billion. This implies roughly $16 billion potentially available for borrowing, less balances outstanding on his existing loans which were last reported near $8 billion per Tesla’s proxy statement in March. That’s cutting it pretty thin, even considering what he may or may not have paid off with margin calls with the stock down 58% since March 31st.
I’ve also voiced my doubts that Elon’s fellow equity owners might pitch in, now that he’s probably wiped out their overpriced equity value:
After crashing the company and its prospects in a matter of weeks, he’s made Twitter a worse credit risk than ever. This also should discourage Elon’s fellow equity owners, who he already stiffed with a price he admitted was “obviously” too high. Good luck getting more cash from that happy camp.
Elon Is "Saving" Twitter To Death, 11/28/22
Yet that’s what Elon is asking Twitter equity holders to do, as reported by Semafor and The Wall Street Journal. The catch? He expects his investors to give him even more money for more Twitter shares at the original price of $54.20 per share. As one does when he’s desperate and running out of options.
Given his latest massive sales as Tesla stock was hitting lower lows on the way down, I’m guessing those conversations haven’t been fruitful so far. Not to mention increasingly disaffected Tesla investors who are past demanding stock buybacks and have moved on to “Why isn’t the Tesla Board DOING something about Elon?”
Hint: Tesla’s board couldn’t/wouldn’t stop Elon from committing securities fraud or defying regulators in every country where Tesla operates. I don’t expect they’ll take any action against him now.
Not that Elon’s concerned about such noise. He needs billions in cash, right now, for margin loans, for Twitter’s draining bank account, and to appease his beleaguered banks who hold all his loans. And, as I’ve said, he’s already burned too many bridges.
So he’s left with selling his shares in Tesla, and maybe SpaceX as well, to make ends meet.
Stay tuned.
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