Cheap debt with enough financial engineering to minimize EPS dilution.
TSLA is an ideal stock for convert debt because it's highly volatile (compared to some other companies) which makes the pricing more attractive and opens it up for a certain class of buyers.
These also allow for deductions at Tesla's applicable plain vanilla debt rate, which would be much higher than the cash interest rate on the notes (by using a call spread on top of the embedded option). So there's a tax arbitrage as well.
Source: I used to structure and sell these for a living
"In connection with the offering of the notes, Tesla intends to enter into convertible note hedge transactions and warrant transactions, which are generally expected to prevent dilution up to approximately 100% over the common stock price at the time of pricing of the notes due 2019 and 120% over the common stock price at the time of pricing of the notes due 2021. Tesla intends to use a portion of the proceeds from the offering to pay the net cost of the convertible note hedge transactions. In connection with establishing their initial hedge of the convertible note hedge and warrant transactions, the hedge counterparties or their affiliates expect to enter into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the notes, including with certain investors in the notes."
A blue chip company will usually issue bonds because investors perceive them as low default risk and will buy debt at attractive rates. A company like Tesla would be seen as higher risk and would face higher rates on debt. A convertible note offers a potential equity element that can cause investors to accept less interest in return for potentially sharing upside though equity. The benefit to Tesla is that it won't necessarily dilute existing shareholders unless the conversion is exercised.
> From the issuer's perspective, the key benefit of raising money by selling convertible bonds is a reduced cash interest payment. The advantage for companies of issuing convertible bonds is that, if the bonds are converted to stocks, companies' debt vanishes. However, in exchange for the benefit of reduced interest payments, the value of shareholder's equity is reduced due to the stock dilution expected when bondholders convert their bonds into new shares.
targets different group of investors (who like the fixed income component) and is quicker to issue and less costly in terms of coupon rate and transaction costs.
Tesla's high stock price 'begs' a convertible offering which lets the Company offer equity by the 'back door' without impacting the stock negatively.
A suspicious mind could also suspect that it is an attempt to limit availability of additional shares on the open market, preventing existing short sellers from covering their positions en masse. Musk said something to this effect during the previous capital raise.
Tesla has a ~30% short interest, which contributes to the ridiculous volatility of the stock.
> Tesla has a ~30% short interest, which contributes to the ridiculous volatility of the stock.
As a TSLA investor who owns several thousand shares, is there any way I can take advantage of this? I'm always looking for a way to generate more cash to acquire more TSLA.
They're at TD Ameritrade in an institutional account managed by an automated Y Combinator investment firm. How do you determine which brokerage firms lend shares out for shorts?
not to derail your interesting question (which I also want to know the answer to), but I'm super curious about that account: managed by an automated y combinator investment firm? can you elaborate on what that means?
I put cash into our (mine and my wife's) retirement accounts every month, they auto-rebalance it to optimize returns and tax savings.
They have the ability to lock securities in your accounts so their algorithm doesn't touch them, but I asked them to move my TSLA stock to distinct IRA/ROTH IRA accounts just to be safe.
The limit effect is temporary isn't it? Though Tesla could fulfill the note by repayment in cash, I would suspect that by 2019/21, even if they execute perfectly on their plans, the company is still going to prefer to keep cash in hand and repay in stock. Wouldn't that increase short interest in a time window in front of the 2019/21 due dates?
Wow, they expect to be selling half a million vehicles/year in six years. That would make make a Tesla a major automaker, roughly in the same league as household-name auto brands -- you know, the ones that advertise in the Super Bowl.
Wow, they expect to be selling half a million
vehicles/year in six years.
No no no, they expect to sell batteries to power half a million vehicles per year.. They intend to supply other auto companies with battery packs.
That would make make a Tesla a major automaker,
roughly in the same league as household-name auto brands.
It would still be a magnitude smaller than all 'major' manufacturers. Toyota sells ~10M/year, GM ~9.5M/year, VW ~9.2M/year, Ford ~5.5M/year, Chrysler ~2.4M/year, BMW ~2M/year..
There's no shame in being a wildly profitable smaller manufacturer though.
That said, half a million vehicles would make them 1/4th the size of BMW and 1/5th the size of Chrysler. For me, that's "roughly in the same league as household-name auto brands."
(For reference, right now, they are around 1/100th the size of BMW and Chrysler.)
Good find, but that contradicts many of their earlier numbers.
More importantly, Tesla bought the old NUMMI plant from the GM/Toyota consortium to use as their manufacturing facility. The peak production under NUMMI was only 400k cars/year, so they'd have to get an additional 25% utilization out of a facility that was running 3 shifts/day in many areas. I'm fairly skeptical they can do that, especially by 2020.
Going from 60 cars/day (current production rate) to 1,500/day is no small feat.
[citation needed] on the 400k, but at least on wikipedia the average number is 6000/week. At 3 shifts/day * 5 days gives the really too nice and round 400 / shift (or almost 1 a minute off all lines give a 7 hour production). And this is with Toyota's lean changes so making significant improvements would be hard. For example if you watch UltimateFactory you can determining the takt time in your head of other auto manufacturing facilities, some including GM are able do do 450+ in their plants (btw for those of you in the EU and you ever get the chance see Porche's factory, it is fantastic). But the fact is that the cars being made are not the same and so you might be able to get that efficiency gains simply from the smaller number of value added steps required. Really it all depends upon the amount of waste (non-value add) that is in the system and how easy it is to make improvements. Given the opportunity I would love to checkout Tesla's facilities and would probably geek out more on it than the car. 25% might be doable, but without more real information I guess this is like saying sports team X could win Y without looking at the current stats.
One of the more interesting things about factories is that a facility that has a robots doesn't guarantee high throughput. If the robot can work 10 times faster than the rest of the line does that mean it is mostly idle or does it work on multiple lines or do you have a wip queue somewhere and then you have more work moving stuff from the robot to inventory etc and lastly the great thing about humans over robots is that we are much more flexible and can try new things sooner to see if they work better. I wouldn't be surprised if there are stories of factories that got robots and their metrics went down.
Peak production at the 370 acre facility on the outskirts of
Silicon Valley topped 400,000 cars and trucks in 2005.
I've been on tours of several plants, include GM's Delta Township plant which at the time was the most automated in the world as well as the factory we're discussing (NUMMI both Pre and Post Tesla ownership).
The thing that makes me skeptical with Tesla is the amount of custom work they need to do. Some of the GM / Toyota plants have higher throughput, but that's because they're largely just assembly buildings. Tesla is custom forming many parts on site, far more than a typical assembly building. It would be hard to scale many of those areas without huge investment.
Very interesting, even with a big investment to try to scale their tooling that doesn't happen overnight. At the very least it could be a difficult/fun challenge for someone to take on.
If they maxed out the "Tesla Factory" (formerly NUMMI), they'd still need ~100k vehicles/year from somewhere else. GM just announced they're spending ~$1.5B on a 150k vehicle/year plant in China. Assuming the new Tesla factory would be more expensive, since labor cost in the US demands more automation, they'd be looking at ~$2B to build a new facility. Plus the costs from the upgrades at the Tesla Factory.
I have a hard time seeing Tesla deploying $5B in CapEx in the next 5 years when they only have $700M in PPE now and $800M cash in the bank.
When they retool for the Gen III 'Model E', I'd expect about $1B in capital investment to satisfy a production level of ~150k cars/year.
The Gigafactory PDF does make it sound like it'll be 500,000 vehicles per year, though. Perhaps it's left vague because "500,000 batteries" just doesn't sound like a lot of batteries to most people.
Well they could just use the number of actual cells there are in a battery pack which I think is 7k. So that is 3.5 billion battery cells per year. I think 500k cars is much better to understand though.
Yeah, saying "3.5 billion battery cells per year [for cars]" could make it sound like they delusional expect every other person in the world to be buying a new electric car every year by 2020.
Very interesting, I did not know selling the batteries was part of the plan. Are the trying to remain independent though or would they be a very large acquisition target long term then? I suppose they could license out large format battery tech to a number of other industries as well?
Selling batteries might be a bit of a misnomer since they'll probably be working with their existing partners (Toyota[1] and Mercedes[2] primarily) who would both presumably invest in the battery facility too.
The 500k cars worth of batteries would probably be some combination of Teslas, Toyotas, and Mercs. Since the latter two companies have already invested in Tesla, and have working partnerships, they would probably get the batteries for the same price as the Tesla internal transfer pricing. (Mostly speculation on my part) It then wouldn't be a profit center for Tesla as much as it would leverage the scale of a bigger facility to lower tech costs for all three companies.
I don't think that's just Tesla vehicles, they'll probably supply them for others too? Anyway, Tesla's goal from the beginning has been to eventually take the market leader position by being the first-mover in the electric car disruption.
If Texas is the right place for it, then so be it. But, it would be a great way to stick it to them by not choosing them because of their stance on traditional dealers vs. Tesla.
That would be sweet but I can't see that dealership law standing indefinitely either way. I don't think Texas should get the plant unless they are truly the best place for it.
I'm curious whether retail presence matters that much - their current clientele seems to be motivated enough that even if they sold exclusively via Web site, with subsequent delivery in person, they would still have a waiting line.
Those pesky laws generally prohibit direct sales, not service of the vehicles, so Tesla would still be able to open a full-blown service location, and direct any potential new buyers online.
>their current clientele seems to be motivated enough
Their current clientele is a small population of wealthy trend-setters and early adopters. It's unlikely Tesla will ever sell 500,000 units per year over the internet, without a retail location.
People blame lobbying for everything, but this is really how companies influence politicians. "We have 10,000 employees in your state. It would be a shame if anything happened to them."
Yeah, the lack of awareness in these comments is pretty entertaining.
"Tesla will teach those dealerships who have too much influence over the legislature a real lesson by holding that same legislature hostage to achieve their own selfish corporate goals."
Selfish? At least as long as Elon Musk is the CEO of the company, the main goal of Tesla is to transition transport to away from non-renewable resources. He was also explicitly asked that question by an actual shareholder in a shareholder conference, and the answer was something on that line.
Selfish? At least as long as Elon Musk is the CEO of the
company, the main goal of Tesla is to transition transport
to away from non-renewable resources. He was also
explicitly asked that question by an actual shareholder
in a shareholder conference, and the answer was something
on that line.
I'm a huge Tesla fan, I applaud what they're doing in a major way. That doesn't change the fact that they are a for-profit publicly traded company who has an independent board of directors. Their goal is to make money. They'll make more money if they can extract tax breaks from states for building their factory in the region. They'll make more money if the franchising dealership laws are overturned.
It may be a beneficial outcome for humanity, but the pursuits are still 'selfish' in the sense that it's not some public interest group influencing the legislature, it's a company that will directly profit from its influence.
Money is merely the resource you need to reach the goal. Note that this a Company we are talking about not some greedy individuals. A foolish company would have greed dictated in their private mission statement. Elon stated clearly what that is. Of course the company wants as much money as possible, that guarantees the best chance of success and the achievement of their goal.
You can believe Elon or not, but I think he is not lying about his plans. Simple listen to his reasons for forming SpaceX and Tesla, and how much of his personal wealth did he spent to achieve it.( everything at one point )
Not yet, but eventually it will be. The battery pack cases could be SLS assembled (laser sintered) to exacting specifications. Pack disassembly could be automated. Not quite sure on raw material->cell construction though. I'll have to research that process and see if FANUC robotics has anything that would fit the bill for that sort of work
It's fairly unlikely that it'll ever be robots all the way down. If it's not instrumented it can't be measured by automated systems and you can't instrument everything. Management is unlikely to be replaced by robots in the short and mid term.
It's not the fact they invest in manufacturing, it's the size of the investment compared to company size/assets.
Factory is supposed to pay for itself before its product becomes deprecated.
Looking at how expensive this gigafactory is - how many years will it take before profits from selling li-ion batteries cover the equipment & construction costs?
Some projections say peak output is expected by 2019-2021.
Doesn't this imply that today's technology will still be competitive and in demand 6-7 years from now?
I'm assuming gigafactory uses chemicals and tech that powers current generation of Tesla cars. Because if they had something significantly better they would not care about 2019, but would instead die to get it to market ASAP. Not caring about unit price or volumes. Just to prove that it works and to capture the high end market.
And my second assumption is they don't plan to lose money on this project.
> Some projections say peak output is expected by 2019-2021. Doesn't this imply that today's technology will still be competitive and in demand 6-7 years from now?
Tesla never said they will be building today's batteries in the plant and I would be surprised if your assumption is correct. They likely have projections on their R&D and can also project how long it takes to build massive capacity on what they are building.
All major manufacturers of all complex products are faced with the same challenges. Management must match R&D to production or they will have huge misses. Manufacturing true technologically advance products is tough.
There are many examples of companies that simultaneously invest in R&D while making far out production capacity investments: Intel, all Pharmaceutical companies etc. etc.
If you can think of some companies that invest heavily in R&D, then stop investing in R&D and start investing in manufacturing, I would be interested in learning about them and why.
I don't know how Intel operates. Did they start building a 90nm factory before they finalised the process of making a 90nm chip? Can they upgrade a 90nm plant to start producing 45nm, and will it cost less than half of the original spend?
As for pharmaceuticals - I'd expect their plants to a) be capable of producing multiple different compounds and b) equipment to be modular. Research & clinical trials are expensive, reconfiguring equipment to make newly discovered drug is cheap. Once proven to work, drug can be replicated fairly quickly and cheaply, that's why they push so hard against any patent law reform.
A half-million batteries a year means they need raw materials to support that production. Are there suppliers that can do that? After all, these are car-sized batteries, not phone-sized ones.
Fuck, I read all that and still no news of a Tesla Convertible. Bring back the Roaster! Any executive that opts to discontinue a 2-seater needs to be shot.
I wouldn't be surprised if the reason for a current lack of a convertible is a strategic move away from the following things:
1) making the cars even more expensive (by making)
2) things that have to high potential for fatality
3) things that require lots of engineering, testing and certification for a limited appeal/run (and thus limited profit)
It will be awhile on that convertible, I bet.
The Model X has gullwing(-like) doors.. That's pretty cool, right?
These are some pictures of the Model X, I have found. There are no "holes", only arm-rests. The black detail on the second picture must be the window control.
I hope this isn't referring to the endless debates around whether the reports of Tesla fires is, or is not, on the wrong side of a Poisson distribution of such events... ;)
'junk bonds' are bonds with a high interest rate because of poor credit quality.
convertible bonds basically have an equity option attached, so the interest rate paid by the issue is lower than what it would be otherwise (because the buyer is getting an option).
Often it is low grade companies that issue convertible bonds (to keep the interest expense they pay down), but it doesn't have to be. Investment grade companies can issue converts as well.
edit: Thanks for a range of informative replies!