Carmageddon Sinks Tesla’s Bonds

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Wolf Richter,

Tesla is steeped in chaos – and chaos is absolutely the opposite what a complex manufacturing, distribution, and retail operation needs.

When bonds dive, it’s a bad sign. And Tesla’s bonds dove today to new all-time lows, and the yield spiked to new highs. In August 2017, Tesla sold $1.8 billion in senior unsecured notes due in August 2025, with a coupon rate of 5.3%. The most recent transaction at the moment that I see recorded by FINRA/Morningstar this afternoon was at 82.375 cents on the dollar. This is what these bonds have done in their lifetime:

Tesla’s shares are volatile and jump up and down. So they’ve been jumping down, down, down, leaving out the ups in between, as some long-term investors finally threw in the towel. They’re down 47% from their 52-week high last December, a big move in five months, when other stocks have rallied in a historic manner. However, at $205 at the moment, they’re still ridiculously overvalued, according to Tesla’s bonds.

The bonds tell a story of a company that is facing a considerable risk it might default on its debts. If this scenario comes about, it would trigger a restructuring of the company, possibly in bankruptcy court, where creditors would get most or all of the equity, and current shareholders would be mostly or totally wiped out. The bond market is now saying that this risk – the risk that existing shareholders might get wiped out in a restructuring – though still distant, is getting closer.

The yield on these notes due in August 2025 has shot up to 9.06% this afternoon, the highest ever (when the price of a bond falls, the yield rises):

Standard and Poor’s rates these notes a B-. Moody’s recently downgraded them to Caa1, one notch below S&P’s rating. Both ratings are deep junk (here is my cheat sheet on the corporate bond rating scales by S&P, Moody’s, and Fitch and what they mean in painfully plain English). Moody’s Caa1 means “substantial risk” of a default.

The average yield for B-rated junk bonds in the US was 6.67% as of Friday evening. So Tesla’s B-/Caa1 rated bonds trading at a yield of 9.06% means that the market has already downgraded these bonds a lot further than the ratings agencies.

To shed some light on the obscure bond market, FINRA now publishes the data on the actual bond transactions. Here is today’s batch of transactions for Tesla’s notes due in August 2025, as of the moment I’m writing this:

In early May, Tesla closed an offering of stock and convertible notes that netted $2.4 billion, giving it sorely needed cash to keep its cash-burn machine fueled for a while longer, after having reported a huge loss and a massive cash burn in the first quarter, that would have been a lot worse if Tesla had not booked record pollution credits that it ingeniously disclosed five days after the earnings announcement.

Immediately after the stock and debt offering, shares rose because the new money would delay Tesla’s liquidity crisis by some time, depending on how fast it will burn this cash. But then reality sank in. Shares have since dropped 18% from $250 two days after the offering was announced to about $205 now. So OK, some true believers got taken to the cleaners.

But the $1.84 billion of senior unsecured convertible notes issued at the time were supposedly acquired by institutional investors – the smart money. They were issued at 100 cents on the dollar at the beginning of May and jumped 4% to close at 104.37 on May 7. Then they started the downtrend. Today, they’ve traded in a range of 88.5 to 92, and are currently at 90. In other words, the smart money handed its cash to Tesla and two weeks later already lost 10%.

Turns out, according to CEO Elon Musk’s own admission in an email to his employees, Tesla will burn through that $2.4 billion in net proceeds in just 10 months. If Tesla’s stock is still worth anything at that time, the company will have to sell more shares or it will have to sell more debt to an increasingly nervous bond market. If it cannot do that, and thus if it cannot get more cash to fuel its cash-burn machine, it will have to default on its debts – see above scenario.

Tesla has been steeped in chaos – and chaos is absolutely the opposite of what a complex manufacturing, distribution, and retail operation needs. Musk himself has sowed that chaos. And he relentlessly continues to sow it.

One of his recent antics was that he told employees in this email last week that the company would embark on a cost-cutting drive that would entail that “all expenses of any kind anywhere in the world, including parts, salary, travel expenses, rent, literally every payment that leaves our bank account must (be) reviewed” by the CFO, and that Musk himself would sign off on every 10th page of expenses.

The CFO and Musk will be busy reviewing and signing off on janitorial department purchases of cleaning materials and toilet paper. The hope is that this amount of work will keep Musk off Twitter, but those hopes too will be dashed.

The company has already undergone waves of layoffs. Now the CFO and Musk are themselves looking at cleaning supplies to reduce the cash burn.

So let me give you, Dear Elon, a little piece of personal advice: I only ran a small company, a Ford dealership and subsidiaries with 250 employees. And I kept my eyes closely on expenses. But let me tell you, Dear Elon, that in even such a small and local operation, there are many thousands of expense items every month!

But Tesla is a large, global, complex manufacturing, distribution, and retail operation, and you, Dear Elon, will have no idea what most of these expense items are and what they’re for unless you ask the responsible manager. This, Dear Elon, takes a HUGE amount of time. Trying to do this for a company the size of Tesla shows that you are:

  • Either clueless about running a complex manufacturing, distribution, and retail operation,
  • Or so desperate that you can’t think straight any longer,
  • Or willing to say anything no matter how silly just to boost the shares,
  • Or all of the above.

I give you, Dear Elon, enormous credit for having put electric cars on the map and making them cool. No one in the world has ever been able to do this. You created an entire industry. And that was an awesome accomplishment. But this very talent of creating market hype and investor bedazzlement has a dark side, and that is now coming to the foreground.


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