SolarCity (SCTY)

[Cosmacelf]

arbitrage opportunity
current bonds 12% yield
new bonds 6.5% yield
Bonds Detail

even a struggling company tries really hard to buy back bonds when their own bonds have 25% yield. SCTY did not!
why not?

What's the arbitrage opportunity? How does a trader use this fact to make an arb trade?

Oh, and Solarcity isn't and has never paid 25% yield. The bonds you are talking about were issued with low yield, like 1.5%. That is what Solarcity is paying on them. However, people have been selling these bonds at below par value, making their current yield higher, but that has nothing to do with Solarcity directly.

 

[adiggs]

What's the arbitrage opportunity? How does a trader use this fact to make an arb trade?

Oh, and Solarcity isn't and has never paid 25% yield. The bonds you are talking about were issued with low yield, like 1.5%. That is what Solarcity is paying on them. However, people have been selling these bonds at below par value, making their current yield higher, but that has nothing to do with Solarcity directly.

I think that the idea here, is that you can buy the bonds that are yielding 12% based on what you pay for them, and retire way more than you lend out, when you borrow at 6%.

(Making up an example).. if the bond originally pays 4%, a $1000 bond is paying 4$/year. If it's now paying 12%, then that's because it's selling for $333.

If you can issue new $1000 bonds paying 6%, then you can issue a $1000 bond paying $6/year, and use that $1000 to buy back 3 of the bonds selling for $333, thereby retiring $12/year in payments. For the company, they trade in $12/year in payments for $6/year in payments, while also reducing their outstanding debt from $3000 to $1000.

That's the arbitrage opportunity.


For something to yield 25% today that pays 1.5% on face value, I think it would have to be selling today for 1/20 of it's face value. If Solar City can issue new bonds at 6.5%, that looks like about a 4 for 1 trade in.


Anyway - that's how I understand it.

 

[Cosmacelf]

No, it isn't that simple. You are forgetting that bonds have a maturity date. The Solarcity bonds that are currently yielding about 12% are selling for about $80 (out of $100 par value) since they still have three years left on them. IIRC, the coupon on them is around 1.75%.

Anyhoo, you were talking about an arb play that Solarcity could undertake, and I thought you were talking about an arb play investors could do.

I very much doubt Solarcity wants to retire debt they are paying 1.75% on regardless of any possible arb play. They want/need more debt, not less.

 

[renim]

yes it was about SCTY's arbitrage

an example was a iron miner called Fortescue, Fortescue buys back bonds in a strong September quarter late 2015/early 2016 they were buying back their bonds at a good discount. Why, because they had confidence in their outlook that the wider bond market did not share. particularly in regards to getting their costs down.

Anyway, it was a smart move, it really set them up

 

[Cosmacelf]

Ok, but I still don't see an arb play. Fortescue had a debt target they wanted to get down to. They had the cash to buy back debt, and buying it back at 80% of principle made a lot of sense rather than paying 100% principle in three years. If SCTY generated excess cash flow and didn't need more debt, it would make sense for them to do the same thing.

Unless things change, however, both SCTY and TSLA need more cash in the near term, not less.

Thanks for pointing me to that Fortescue article though. Gosh, seems that if a company is buying back its debt like that, and their bonds continue to trade at $80, seems like a screaming deal to me as an investor to buy those bonds.

 

[hirox]

$100 million new Solarbond.

Elon Musk buys $65 million worth
Lyndon Rive buys $17.5 million worth
Peter Rive buys $17.5 million worth

Amendment No. 1 to Prospectus Supplement No. 23 Filed Pursuant to Rule 424(b)(5)

Comments?

 

[Cosmacelf]

Elon doesn't have $65M in cash lying around, and I suspect the same of the Rive brothers. Whenever Elon buys large chunks of stock/bonds, he borrows the money from Goldman Sachs using his shares in Tesla as collateral. If he keeps doing this (and he isn't near the danger point ... yet), he risks creating a leveraged house of cards that will implode if Tesla stock tanks. He is playing with fire when doing things like this, and the market WILL take note if he ever gets close to the danger line.

 

[dakh]

Elon doesn't have $65M in cash lying around, and I suspect the same of the Rive brothers. Whenever Elon buys large chunks of stock/bonds, he borrows the money from Goldman Sachs using his shares in Tesla as collateral. If he keeps doing this (and he isn't near the danger point ... yet), he risks creating a leveraged house of cards that will implode if Tesla stock tanks. He is playing with fire when doing things like this, and the market WILL take note if he ever gets close to the danger line.

That's a pretty bold statement. How do you know how much of SpaceX income does he get to pocket?

 

[Cosmacelf]

I can guarantee you Elon has not taken out anything close to $65M from SpaceX. I suspect, but don't know, that he is doing the same thing with SpaceX as he has done with Tesla. Ie. Not sell any of his stock and instead borrow against its value. But hey, believe what you want.

 

[Turing]

Elon is worth something like 12 billion in current market assets. If he collateralizes 5-10% of that he is hardly at a major risk of being margin called. Even if Tesla lost half its market value, as long as the company stabilized his lenders shouldn't care much. And then of course Spacex is doing well so he could always back up loans with spacex equity as well.

 

[schonelucht]

I think it is more telling that he has to do this. Capital markets for SolarCity are completely shut.

 

[neroden]

$100 million new Solarbond.

Elon Musk buys $65 million worth
Lyndon Rive buys $17.5 million worth
Peter Rive buys $17.5 million worth

Amendment No. 1 to Prospectus Supplement No. 23 Filed Pursuant to Rule 424(b)(5)

Comments?

That's $100 million of the short-term financing needs accounted for. Unfortunately I'm not sure how large the total short-term financing needs are so that makes it hard to put into context.

I have said before that SCTY has substantial short-term refinancing issues. The switch from PPAs and leases to direct sales and loans should substantially reduce the *ongoing new financing* needs, but the old PPAs and leases were mostly not financed for their full duration and are therefore facing refinancing. (The ones which are financed for their full duration, or "fully monetized" in the SCTY report parlance, are not much of an issue from a financing POV, but that's nowhere near all of them.) I'm not sure whether this new Solarbond is refinancing old stuff (I hope so) or financing more new PPAs and leases (I hope not).

 

[neroden]

So, the offering of $25,000 powerpacks appears to be not correct. Looks to be $44,500 now.

Volume pricing up to 10 powerpacks, still $44,500. Same for 20.

What does this nearly doubling of the "advertised price" back in April of 2015 do for demand?

I honestly think this is deliberate "go-away" pricing. Tesla doesn't have the ability to produce in volume at this time, so they set a high price to chase away all but the most desperate customers (and to grab extra money from those customers). Remember the "Signature tax" for those who were desparate to get their Tesla cars earlier?

I expect a lower price to be offered once Tesla is actually producing a reasonable number of batteries at the Gigafactory.

 

[bonaire]

I honestly think this is deliberate "go-away" pricing. Tesla doesn't have the ability to produce in volume at this time, so they set a high price to chase away all but the most desperate customers (and to grab extra money from those customers). Remember the "Signature tax" for those who were desparate to get their Tesla cars earlier?

I expect a lower price to be offered once Tesla is actually producing a reasonable number of batteries at the Gigafactory.

When they say they were "sold out for 2016" did it mean they would only produce a few dozen and that's it and pretty much mis-guided on their revenue income for Tesla Energy for 2016? It's not a good thing when officers of a company misguide sales using non-transparent phrases like "sold out for..." without a unit scale and then guesswork for revenue ramp.

 

[bonaire]

Elon is worth something like 12 billion in current market assets. If he collateralizes 5-10% of that he is hardly at a major risk of being margin called. Even if Tesla lost half its market value, as long as the company stabilized his lenders shouldn't care much. And then of course Spacex is doing well so he could always back up loans with spacex equity as well.

Why can't he or any officer hedge their shares with bought Put options or they just sign them as collateral to GS and then they arrange intelligent put-spreads against them? And all the while, can be selling well OTM Calls against them for lunch money?

Be careful of judging SpaceX as "doing well" unless you know their private financing numbers. Also, NASA is moving up the Mars mission to 2021-2022. There could be drama and other things that cause programs to be changed, etc. SpaceX is no "cash cow" other than for satellite launches and cargo to ISS.

They got a billion in general cash in 2015 this way (but what are the terms?):
Financing Round

In all likelihood, the plan will be to IPO SpaceX before the Mars mission(s) occur - perhaps 2018-2019. If financial markets are healthy, they could generate 5 Billion+ because of "coolness". But what is the true value of such things as Mars missions to the general population? Mars cannot be terra-formed but it can be something interesting to do - like the moon missions. We'll learn "something" - but how much more than what we already know? And yes, I know about using Mars as a waypoint for further missions if they can establish a method to manufacture rocket fuels on Mars from water (electrolysis - O and H2). Then using other solids like Cobalt-Uranium type fuels, alter the future of space travel. But jeez - who's going where and why? I'd rather see activity in the area of electrically bending of gravity than new forms of thrust.

http://gizmodo.com/5992441/how-nasas-nuclear-rockets-will-take-us-way-beyond-mars

 

[Cosmacelf]

Tesla Energy's prize is the potential to buy 100kWh in a rack for $25k, however lately if you go here:
Build your Powerpack Energy Storage Solution | Tesla
And for my Solar Powered Delicatessen I want to keep my meat cold during a Zombie Apocalypse.
The pricing of a 100kw - 200 kWh Powerpack sytem, with 2 powerpacks lists out at:

2 Powerpacks $89,000

• 1 Bi-Directional 250 kW Inverter $52,500 (quite high pricing here - what brand?)
• Cabling & Site Support Hardware $3,600
• TOTAL IS $145,100

So, the offering of $25,000 powerpacks appears to be not correct. Looks to be $44,500 now.

Volume pricing up to 10 powerpacks, still $44,500. Same for 20.

What does this nearly doubling of the "advertised price" back in April of 2015 do for demand? Are we hoping that state and federal incentives is the calling card to make people say "oh, we have ITC 30% and SGIP or NYSERDA to pay for it!"

All you need to know about Tesla's big battery announcement

All indications are that Tesla Energy is a big dud. Lots of excuses, but bottom line, very few sales.

On the Powerpack front, here's an interesting article about some emergency battery storage projects being implemented right now in California. If you click through to the RFPs, you find that not one of them is using Tesla batteries.

California Utilities Are Fast-Tracking Battery Projects to Manage Aliso Canyon Shortfall

 

[doggusfluffy]

All indications are that Tesla Energy is a big dud. Lots of excuses, but bottom line, very few sales.

On the Powerpack front, here's an interesting article about some emergency battery storage projects being implemented right now in California. If you click through to the RFPs, you find that not one of them is using Tesla batteries.

California Utilities Are Fast-Tracking Battery Projects to Manage Aliso Canyon Shortfall

I can't argue with that point at all. For all of the TE will be bigger, as well as faster and easier to scale than cars...more fallout from a shockingly lackluster 2016 from both companies.

SolarCity to lay off 108 workers in San Mateo, San Francisco

The company will cut 80 employees from its San Mateo headquarters and another 28 from its San Francisco facility. The layoffs are expected to begin Oct. 19, according to a filing with the state. The cuts are expected to be permanent.

Elon Musk, SolarCity execs to buy most of SolarCity bond offering

In an emailed statement Tuesday night, Lyndon Rive said they invested in SolarCity’s bonds “because it’s a very efficient way for the company to raise capital without paying expensive banking fees.” Rive said there has been “a lot of interest” in the company’s solar bonds, and that as the program expands, “Ultimately Elon, Pete, and I expect to be minority investors.”

 

[bonaire]

All indications are that Tesla Energy is a big dud. Lots of excuses, but bottom line, very few sales.

On the Powerpack front, here's an interesting article about some emergency battery storage projects being implemented right now in California. If you click through to the RFPs, you find that not one of them is using Tesla batteries.

California Utilities Are Fast-Tracking Battery Projects to Manage Aliso Canyon Shortfall

There are a lot of homeowners who have 4000sq ft homes in California - many million dollars in value. They'd surely want to have a powerpack (not bunch of walls) setup as their standby power. And at $25,000 per unit (well, you need that $55,000 inverter, though as well and labor and other goodies) - why not? Even at $44,500 - not too bad. Except that $55,000 inverter. (I know it is 52,500 but I am throwing sales tax on it for various states). You can energy Arbitrage up to 100 kWh for one box and if the grid goes down, you can have a substantial standby power. Not sure if it will run the pool pumps and pool heater - so get a 2nd one for that.

So, why is it that a Powerwall can go into a home but not a Powerpack and a reasonable 20KW max-power inverter? Could run a house for a few days on that and with solar, for years. You'd think hollywood types would be lining up for "home standby systems with good size to run our 3000-6000 sq ft hillside homes".

 

[doggusfluffy]

This article stands out for me due to the names that are missing from the discussion.

http://www.nytimes.com/2016/08/24/b...lity-sources.html?ref=energy-environment&_r=0

Like other big companies before it, including Walmart and Google, Apple recently received a federal designation for its energy subsidiary that allows it to become a wholesale seller of electricity from coast to coast. In effect, Apple is creating its own green utility company, although the main customer is itself.

 

[electracity]

When they say they were "sold out for 2016" did it mean they would only produce a few dozen and that's it and pretty much mis-guided on their revenue income for Tesla Energy for 2016? It's not a good thing when officers of a company misguide sales using non-transparent phrases like "sold out for..." without a unit scale and then guesswork for revenue ramp.

Well, they apparently sold 50 powerpacks in the U.S. in 2015.

But the two big issues is software/inverters not being finished, and Tesla probably deciding not to invest in the "old way" of producing powerpacks.

But Musk's ability to announce guidance, not meet guidance, and never mention explain is extraordinary and unique to Tesla. Major skills displayed here. What happened to cash flow neutral in 2016 for Tesla energy? What probably happened is that they have now actually developed real post merger budgets. So we are now probably expected to forget the assertion that Solarcity would not have a negative effect on Tesla cashflow.

Selling solar ands storage with electric cars is probably a good idea. But more risk and the doubling of Tesla employees is in no way contributing towards a more financially stable Tesla over the next three years.