Schadenfreude is a German word and it has a special place on Wall Street!
Tesla: Classic short squeeze by just announcing rocket boosters and a “full self-driving” package for Tesla cars that comes without the typical delays and without any deadly accidents. Why don’t they install some flamethrowers for the fun of it? Also peculiar, the timing. Released just two days before they announce a 9% cut in the workforce. Talking about managing the news!

The layoffs might be due to Solar City’s past dead weight and don’t apply to the production of Tesla Model 3 cars, but no company on a growth trajectory and self-acclaimed disruptor does that sort of thing. Excuses to finally think of profitability after 15 years of loss-making are just heaps of BS. 

Tesla’s Low Batteries

Tesla has a growing liquidity issue – plain and simple! It is struggling for cash flows at a critical moment in time and they will need to call for help again soon. Laying off 4,000 people can be interpreted as the first signs of schmoozing up to Wall Street because the $80 million a quarter in savings is just a drop in the ocean.

Huge debt is due in the 3rd quarter (convertible bonds), they are burning $1 billion over a couple of quarters and laying off 4,000 people never comes cheap! Not to mention what it does to the morale of the remaining workforce. Now add this: Interest rates are rising and last time I checked producing cars for the common man is an extremely cyclical enterprise.

Higher Interest Rates Bad for Tesla

Another example of what rising interest rates can do to perfectly calculated capital structures is Tesla! It’s a given that Tesla will need more money by the end of 2018, and it’s foolish of  Musk to deny it as central bankers usually do before denying they ever denied anything. His own cash generating options are shocking, considering that they are still burning through loads of their cash like a pyromaniac in a paper factory.

You just can’t sweep something like that under the carpet by producing 500 more cars in the final week of March 2018. Musk has been very creative in finding new sources of finance, but will it be enough? Tapping his loyal followers in social media in a crowdfunding type fashion will not be enough. He needs to access large institutional investors and they have been less enthused about Tesla’s recent developments, including corporate governance issues, and key executives leaving Tesla.

Right now, Tesla still has a couple of financing options and some liquid reserves, but as the year progresses and interest rates rise, each of these options will become more painful in its own way. The most recent funding round was straight debt issuance at very favorable rates. But these ideal conditions are over, as banks have been closely following Tesla’s production challenges, noting their repeated delays, and the departure of key executives.

All future finance will come at much higher rates, especially because they can’t seem to get their cash burn under control. But if they have to pay more for debt, obviously their earnings and cash flow situation gets even worse. Higher rates make it that much more difficult to operate profitably, and places a further burden on real cash flows.

Tesla’s Outlook for 2018

As an analyst at a leading brokerage house noted, “depending on where their stock price will trade within the next quarters, Tesla may miss the strike price of some of the convertible debt,” which means they balance sheet will be fully loaded with debt that was anticipated to be converted into equity. This means more interest payments and lower earnings. With falling share prices, other finance options will disappear as investors are unlikely to accept more convertible bond issuance.

This leaves the option of doing another secondary offering of common stock to institutional investors. Traditionally issuing stock is considered the most expensive form of finance, as it dilutes existing shareholders and caps profit upsides. The constant negative press about Tesla’s production problems and Musk’s PR blunders will ensure that Tesla will get less than favorable terms when the times comes. Besides, according to experts, raising $1-2 billion of cash won’t nearly be enough, to finance all of Musk’s grand projects.

Right now, Tesla finds itself at the beginning stages of a debt vicious cycle that can only worsen over time as market rates rise. For now, Tesla’s skill of pulling white rabbits out of their electric hats has been impressive. But investors and creditors are beginning to suspect it’s just sleight of hand and not real magic after all. Let’s see how Musk will talk to the gentlemen in pinstripe suits with horn-rimmed glasses in his next earnings call – he won’t be prioritizing YouTubers again.


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