Is Elon About To Tap Tesla For Billions in Debt To Bolster Cash—And Help Him Buy Twitter?
Tesla is burning billions as sales are slowing in its most important markets. Elon also owes billions to pay for Twitter & investors are wary of its LBO bonds. Time to sell now BBB-rated Tesla bonds?
Market analysts now expect Tesla TSLA -1.87%↓ may “beat” consensus estimates for Q3 revenue and profit which have been drastically reduced in recent weeks after deliveries trailed expectations—again (see my report Tesla Q3 Deliveries Trail Even Sharply Reduced Market Consensus—And Its Own Best Guess, 10/3/22).
Indeed, substantially lower market estimates as adjusted now track my formerly below-market forecast for revenue at $22 billion (up 61%) and reported EBITDA at $4.4 billion (20% margin, down 330 bps y/y on softer China performance and weaker margins overall).
Never mind that expectations have plunged because Tesla sales have come in dramatically lower for the second straight quarter—as I expected, again (see Soft Tesla Q2 Deliveries Disappoint on 7/2/22 and Tesla Splitsville 8/8/22).
In any case, an earnings beat would help CEO Elon Musk, who needs slumping Tesla stock to pop so he can get a better price when he sells to raise the billions in cash he still needs to fund his embattled buyout of Twitter TWTR 0.10%↑ (see Elon v. Twitter: Elon Caved...For Sure...Maybe, 10/5/2022).
If you remain skeptical Elon Musk will close his buyout of Twitter as agreed, without further nonsense, you’re not alone. I warned last week that Twitter can’t be certain it’s sold until Elon’s “check has cleared.”
Nevertheless, the court has ordered Elon to close the deal by October 28th.
That means he must come up with the total amount due before then, or explain to an already fed-up court judge exactly why he didn’t.
That could prove exponentially more expensive.
Yet Elon still is far short—by billions—of the cash he owes in less than two weeks to close the deal.
The $46 billion financing package Elon promised to deliver comprises the $44 billion price for Twitter plus fees and expenses to execute the deal Twitter: Take the Money And Run, 4/26/22).
However, pressure to produce that funding has skyrocketed since April, when deal terms were struck, as market conditions have deteriorated, and alternative sources have dwindled:
Elon’s bankers already expect to incur $500 million or more in losses on the $13 billion debt component, which was priced before interest rates spiked and buyers got spooked. The offering comprises term loans priced with now sharply higher floating rates, plus $6 billion in triple-C rated high yield bonds that were capped at 11.75% when rates were 9.9% versus 17%, and climbing, today (see Twitter: Take the Money And Run, 4/26/22).
@VickiBryanBondA, 10/5/22
It’s unclear how much still remains committed with the $7.1 billion Friends-Of-Elon bucket raised back in May (see Elon Gets a Boost From Friends For His Twitter Buyout—And Takes *Some* Of The Heat Off Himself, 5/5/22).
That was before Elon’s destructive antics sent the whole deal off the rails and landed in court—where he then gave up the fight he started (see Elon v. Twitter: Elon Caved...For Sure...Maybe, 10/5/22).
Recall the deal funding had originally included a pricey $12.5 billion margin loan to Elon backed by $62.5 billion (as then priced) of his Tesla stock—an inordinately high 5-1 collateral to loan ratio and roughly a third of his stake at the time.
Elon was able to replace that margin loan requirement by raising the $7.1 billion in outside equity, selling Tesla stock to raise immediate cash, and providing additional guarantees to the banks to supply the additional cash himself on top of his initial $21 billion equity commitment to be materialized from somewhere at or just before the deal closed (see Elon's Trying To Get Out Of Buying Twitter—As We Knew He Would, 6/7/22).
But so far Elon has sold only about $15 billion in stock. This plus $13 billion to be delivered by the banks from debt sales plus the $7.1 billion committed in outside equity (assuming they all come through) comes to roughly $35 billion—about $11 billion short of $46 billion he must deliver at or before closing the deal on October 28th.
Now let’s see, where might Elon find a few extra billion dollars?
Hello Tesla Piggy Bank? Elon calling.
I’ve written before about Elon’s propensity to treat his companies like his own personal slush funds:
Musk likes to shuffle cash and resources between his companies. As he told The Wall Street Journal, “There were a few cases where one company was doing considerably better than another, and I borrowed money.” Typically, this also means Musk borrows heavily against credit lines secured by stock in his companies to fund cash infusions into other of his companies.
Indeed, Musk borrowed $20 million from SpaceX, where he also is Chairman, CEO, and the largest shareholder, to help fund his purchase of Tesla in 2008.
He also directed SpaceX in 2014 to buy a significant chunk of bonds in struggling SolarCity, where Musk also was Chairman and the largest shareholder. Musk directed Tesla to buy SolarCity when it seemed likely to fail in 2016, a move vehemently criticized by Tesla's investors as self-dealing as well as detrimental to Tesla's financial health. SolarCity's foundering assets and operations, and especially its bloated debt load, continue to impair Tesla's struggle to improve profitability and financial stability.
Musk said The Boring Co. was started in January 2017 as a joke, albeit the kind of game only billionaires can afford. Spun off from SpaceX, Boring managed to raise $112 million in funding in April 2017, but a few months ago in late 2018 investors in SpaceX were surprised to learn that SpaceX cash, equipment, and employees had been diverted to Musk's pet company.
Tesla: Shanghai Surprise, 1/29/2019
It’s not a stretch to consider Elon might also to direct Tesla to "invest” several billion into Twitter.
Why, he might argue, there are perfect synergies to be explored! For example, he might say Twitter and Tesla can share and develop Tesla’s dubiously endowed AI technology to help evolve Twitter into Elon’s newly invented “X, the everything app:”
Notice Elon announced his idea, by pure coincidence I’m sure, just as he decided to stop fighting and close the Twitter deal as agreed—when he likely realized he was about to lose his case to break the deal (Elon v. Twitter: Elon Caved...For Sure...Maybe, 10/5/2022).
So why not have Tesla sell bonds to raise billions in cash to “invest” into Twitter?
Just then, by another happy chance, S&P Global just increased Tesla’s credit quality rating to investment grade, lowering its prospective interest costs on new debt by roughly 100 bps to 6.3%.
Recall S&P Global has been a helpful—and timely—friend to Tesla in the past, bumping Tesla’s credit quality rating to “BB” just one day before it slotted Tesla into its S&P 500 Index in sixth place as the most expensive company ever added (see Tesla: The Sky's The Limit...Until, 1/25/2021):
S&P Global accelerated Tesla’s equity trajectory—and its own—when it announced plans in mid-November to add Tesla stock to its S&P 500 Index in December as the sixth most expensive company. S&P’s criteria only requires profitability to exist “as reported” which gets it around Tesla’s core unprofitability versus its astronomical market value which has topped $800 billion—the clear attraction to S&P.
And just to be sure, S&P also recently bumped up Tesla’s credit quality ratings to within a rock’s throw of investment grade at “BB” in two moves just two months apart near the end of last year: in mid-October and in mid-December, one day before Tesla stock was added to the S&P 500.
Very convenient—and remarkably fast considering that the more typically lethargic S&P had previously kept Tesla at its low “B-” rating for more than five years since its 5.3% senior notes were issued in June 2015
Tesla: The Sky's The Limit...Until, 1/25/2021
Tesla not only has much cheaper borrowing costs—about a third lower than Twitter—it can borrow $10 billion to maybe up to $20 billion or so without even threatening its newly minted investment grade credit quality rating.
How? Tesla currently has only $7 billion in debt and leases, indicating leverage at 0.4x current and likely year-end EBITDA, which I project at roughly $18.5 billion.
Adding $10 billion in debt nudges pro forma leverage to just 0.9x; adding $20 billion ups leverage to only 1.5x.
Peanuts, by comparison to Twitter’s pro forma, post-deal leverage at nearly 20x on nearly $20 billion in total debt, serviced by $1.2 billion in annual interest cost.
Tesla can definitely afford to bolster its own cash by billions via borrowing at comparatively cheaper rates—which it could easily refinance later when rates fall—and it probably should.
As I long have warned, it is consuming exceedingly more cash as its own operations come under increasing pressure—a problem that’s only getting worse.
Why not, Elon might say, throw a few extra billion Twitter’s way as well?
Most to the point, I’m sure Elon would find this option infinitely cheaper than selling another $5-10 billion of his own Tesla stock as the price falls ever lower.
Who’s going to stop him from executing such a plan? Tesla’s board?
Please. Tesla’s board doesn’t even stop Elon from committing securities fraud, much less move cash around between companies he seems to totally control, unchallenged.
Tesla shareholders? They already tried and failed to hold Elon accountable when they claimed he used Tesla to bail out his failing SolarCity venture, which also supposedly had “synergy” with Tesla. It’s still losing millions to this day.
So I wouldn’t be surprised if Tesla is preparing right now for a king-sized drive-by bond sale which could be offered any day now.
Elon can direct cash from Tesla’s bond sale to buy some or all of the Twitter LBO bonds his bankers are still scrambling to sell, for example.
Elon can have Tesla buy Twitter equity. I hear there’s up to $11 billion available.
Elon could have Tesla do both.
Stay tuned.
Tesla repurchased its 5.3% senior notes in the third quarter of 2021 as I projected, though I doubt we’ve seen the last of Tesla as a bond issuer. Until then, I have Tesla: Not Rated.
"With A Little Help From My Friends”
The Beatles
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