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Tesla is basically taking on a loan in form of a convertible notes. probably much smarter to distribute their lender among multiple entities than one giant ban

Tesla is basically taking on a loan in form of a convertible notes. probably much smarter to distribute their lender among multiple entities than one giant bank that would have leverage on them. Also, it looks like Tesla would use a portion of the money to inflate their share prices via a small buyback. The after market trading so far make this strategy look successful. So at the end of a day: Tesla is raising capital without diluting their shareholders and reducing their share values and giving up much control. Also the maturity date of 5 years is rather interesting. I wonder if it correlates with their internal projections and their ability to pay that money back by then.

jeffwass 10y ago
You've contradicted yourself in the two quotes below. "Tesla is basically taking on a loan in form of a convertible notes." "So at the end of a day: Tesla is raising capital without diluting their shareholders and reducing their share values" Convertible debt is in fact dilutive. It's even specifically accounted for when calculating Diluted Earnings per Share : http://www.investopedia.com/terms/d/dilutedeps.asp http://www.investopedia.com/terms/d/dilutedeps.asp
- salimmadjd 10y ago
  But you're not flooding the market with $750M new common stock of TSLA in the market. If TSLA price crashes it could impact consumer confidence in buying the T3 which Tesla is banking on. If TSLA drops and T3 are delayed, many consumers might panic and not oder their car creating a vicious circle.
  - jonknee 10y ago
    ... They are also issuing new shares: > Concurrently with this offering of notes, we are offering 968,993 shares of our common stock (or up to 1,114,341 shares of our common stock if the underwriters of that offering exercise their option to purchase additional shares in full), in an underwritten offering pursuant to a separate prospectus supplement. The closing of this offering of notes is not contingent upon the closing of the concurrent offering of common stock, and the closing of the concurrent offering of common stock is not contingent upon the closing of this offering.
- arzt 10y ago
  Sort of, but not really...the FASB has said you can treat the underlying shares as non-dilutive if the stock price isn't above the conversion price (this is called "net share settlement"). So basically, while outstanding, the debt acts like debt for accounting purposes until the stock price is above the conversion price. When it goes above the conversion price, the you treat those incremental shares as dilutive. Additionally TSLA is putting what's called a bond hedge (or call spread) on top of this, which limits dilution over and above an even higher stock price. Pretty sweet deal if your stock price doesn't go up and you only have to pay minimal interest. Here's an example that lays out a similar structure and accounting treatment: https://www.sec.gov/Archives/edgar/data/1084961/000119312513055339/d486089dex992.htm https://www.sec.gov/Archives/edgar/data/1084961/000119312513...
  - nemanja-mit 10y ago
    looks like you've done time on a coverts desk ;)
    - arzt 10y ago
      In another life... :)
  - dilemma 10y ago
    >Pretty sweet deal if your stock price doesn't go up and you only have to pay minimal interest. So Tesla is shorting TSLA?
    - arzt 10y ago
      Lol, effectively. A convert is basically a forward stock sale, so if you're TSLA you're basically saying "I get a pretty good cost of capital if my stock stays where it is, but if it goes up a lot, my company is probably in better shape than it was before I raised capital, so I'm more or less happy either way."
brianpgordon 10y ago
> So at the end of a day: Tesla is raising capital without diluting their shareholders They're also offering at least $250 million in common stock as part of this round. And the notes are convertible so if it becomes profitable to convert them those will result in dilution as well.
idiot_stick 10y ago
>probably much smarter to distribute their lender among multiple entities than one giant bank that would have leverage on them. A less charitable reading is that no single lender wanted to write the debt. A billion isn't substantial...
- sokoloff 10y ago
  Exactly! If you owe a bank $10MM and you default on the loan, you have a problem. If you owe a bank $10BB and you default on the loan, the bank has a problem.
  - phkahler 10y ago
    And if you owe bond holders a billion dollars and your company has a billion dollars in assets when it goes under, the bond holders get your company and the stock holders get nothing. Or perhaps the assets are sold to another party to pay off the bond holders and it's that other party that gets the company for the price of paying off the bond holders.
- bwilliams18 10y ago
  I've heard just such rumblings from large banks who specialize in auto loans.
nemanja-mit 10y ago
> probably much smarter to distribute their lender among multiple entities than one giant bank that would have leverage on them The banks you see on the front page of the prospectus are not lenders in this transaction, they are underwriters. They are executing transaction and distributing the converts to the institutional investors (long-only and hedge funds). At any rate, underwriters and investors will have exactly zero leverage over Tesla following transaction (debt holders have no voting power). > would use a portion of the money to inflate their share prices via a small buyback Not at all. They are concurrently offering common shares, so buyback would make zero sense (i.e. buying and selling shares at the same time). They plan to use proceeds for general corporate purposes (Model 3!) and to buy a call spread they will overlay on top of the convert to synthetically increase the effective conversion premium above the premium that convert will price at. This is done to reduce potential dilution down the road. > Tesla is raising capital without diluting their shareholders... Correct - this convert will likely fly off the shelves and the conversion premium will be high (perhaps up 30-40% from tomorrow's close). On top of that, they will enter into the call spread that will bring the conversion premium to up 50% or 75% (depending on the structure they pick) from tomorrow's close. > Also the maturity date of 5 years is rather interesting This is standard duration for convertible debt. Generally they are structured with 5 year or 7 year duration, but 5 years sell better (pricing is also tighter). Overall, smart deal for Tesla and net positive for shareholders.
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jeffwass 10y ago

You've contradicted yourself in the two quotes below. "Tesla is basically taking on a loan in form of a convertible notes." "So at the end of a day: Tesla is raising capital without diluting their shareholders and reducing their share values" Convertible debt is in fact dilutive. It's even specifically accounted for when calculating Diluted Earnings per Share : http://www.investopedia.com/terms/d/dilutedeps.asp http://www.investopedia.com/terms/d/dilutedeps.asp

salimmadjd 10y ago
But you're not flooding the market with $750M new common stock of TSLA in the market. If TSLA price crashes it could impact consumer confidence in buying the T3 which Tesla is banking on. If TSLA drops and T3 are delayed, many consumers might panic and not oder their car creating a vicious circle.
- jonknee 10y ago
  ... They are also issuing new shares: > Concurrently with this offering of notes, we are offering 968,993 shares of our common stock (or up to 1,114,341 shares of our common stock if the underwriters of that offering exercise their option to purchase additional shares in full), in an underwritten offering pursuant to a separate prospectus supplement. The closing of this offering of notes is not contingent upon the closing of the concurrent offering of common stock, and the closing of the concurrent offering of common stock is not contingent upon the closing of this offering.
arzt 10y ago
Sort of, but not really...the FASB has said you can treat the underlying shares as non-dilutive if the stock price isn't above the conversion price (this is called "net share settlement"). So basically, while outstanding, the debt acts like debt for accounting purposes until the stock price is above the conversion price. When it goes above the conversion price, the you treat those incremental shares as dilutive. Additionally TSLA is putting what's called a bond hedge (or call spread) on top of this, which limits dilution over and above an even higher stock price. Pretty sweet deal if your stock price doesn't go up and you only have to pay minimal interest. Here's an example that lays out a similar structure and accounting treatment: https://www.sec.gov/Archives/edgar/data/1084961/000119312513055339/d486089dex992.htm https://www.sec.gov/Archives/edgar/data/1084961/000119312513...
- nemanja-mit 10y ago
  looks like you've done time on a coverts desk ;)
  - arzt 10y ago
    In another life... :)
- dilemma 10y ago
  >Pretty sweet deal if your stock price doesn't go up and you only have to pay minimal interest. So Tesla is shorting TSLA?
  - arzt 10y ago
    Lol, effectively. A convert is basically a forward stock sale, so if you're TSLA you're basically saying "I get a pretty good cost of capital if my stock stays where it is, but if it goes up a lot, my company is probably in better shape than it was before I raised capital, so I'm more or less happy either way."

brianpgordon 10y ago

> So at the end of a day: Tesla is raising capital without diluting their shareholders They're also offering at least $250 million in common stock as part of this round. And the notes are convertible so if it becomes profitable to convert them those will result in dilution as well.

idiot_stick 10y ago

>probably much smarter to distribute their lender among multiple entities than one giant bank that would have leverage on them. A less charitable reading is that no single lender wanted to write the debt. A billion isn't substantial...

sokoloff 10y ago
Exactly! If you owe a bank $10MM and you default on the loan, you have a problem. If you owe a bank $10BB and you default on the loan, the bank has a problem.
- phkahler 10y ago
  And if you owe bond holders a billion dollars and your company has a billion dollars in assets when it goes under, the bond holders get your company and the stock holders get nothing. Or perhaps the assets are sold to another party to pay off the bond holders and it's that other party that gets the company for the price of paying off the bond holders.
bwilliams18 10y ago
I've heard just such rumblings from large banks who specialize in auto loans.

nemanja-mit 10y ago

> probably much smarter to distribute their lender among multiple entities than one giant bank that would have leverage on them The banks you see on the front page of the prospectus are not lenders in this transaction, they are underwriters. They are executing transaction and distributing the converts to the institutional investors (long-only and hedge funds). At any rate, underwriters and investors will have exactly zero leverage over Tesla following transaction (debt holders have no voting power). > would use a portion of the money to inflate their share prices via a small buyback Not at all. They are concurrently offering common shares, so buyback would make zero sense (i.e. buying and selling shares at the same time). They plan to use proceeds for general corporate purposes (Model 3!) and to buy a call spread they will overlay on top of the convert to synthetically increase the effective conversion premium above the premium that convert will price at. This is done to reduce potential dilution down the road. > Tesla is raising capital without diluting their shareholders... Correct - this convert will likely fly off the shelves and the conversion premium will be high (perhaps up 30-40% from tomorrow's close). On top of that, they will enter into the call spread that will bring the conversion premium to up 50% or 75% (depending on the structure they pick) from tomorrow's close. > Also the maturity date of 5 years is rather interesting This is standard duration for convertible debt. Generally they are structured with 5 year or 7 year duration, but 5 years sell better (pricing is also tighter). Overall, smart deal for Tesla and net positive for shareholders.

deleted 10y ago

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