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?
edit: Thanks for a range of informative replies!