Bet TSLA
Active Member
No, it doesn't mean that at all, nor is it any sort of approximation. You put money in these things and you have no idea what they are? Maybe there's some reading you should be doing?
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Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable
- Thread starter AudubonB
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RobStark
Well-Known Member
Tesla can choose to repay the converts in cash (at the value of the equivalent shares) and it has hedged the call option on each bond (by buying call options itself) so it can fund these payments and avoid any new share issuance and dilution. Tesla partly funded buying these call options by selling warrants at higher strikes, so it is only above these warrant strike prices (in the $561 to $655 range) where we will have to see dilution. The call options Tesla owns (and the value of the call option feature on the converts) is currently $2,322m. The value of the Warrants Tesla sold is currently $1,126m.
On the 1.25% $1,380m Mar-2021 converts, conversion price is $360 (3.8m shares). The call option feature on these is currently worth $494m. Tesla owns calls of this value to hedge potential dilution, but it has also sold warrants with a $561 strike (currently worth $193m)
On the 2.38% $978m Mar-2022 converts, conversion price is $327.5 (3m shares). The call option on these is currently worth $518m. Tesla owns calls of this value to hedge potential dilution, but it has also sold warrants with a $655 strike (currently worth $188m)
On the 2.0% $1,840m May-2024 converts, conversion price is $310 (6m shares). The call option on these is currently worth $1,311m. Tesla owns calls of this value to hedge potential dilution, but it has also sold warrants with a $607.5 strike (currently worth $745m)
Converts are generally held by debt funds who delta hedge their bonds. To fully delta hedge all the converts would require shorting 10.2 million Tesla shares currently. If we assume 80% are delta hedged and 20% are held by hedge funds/retail investors who want both the bond and call option exposure, then convert delta hedging accounts for 8.1m of my estimated current Tesla short interest of 25m.
Fact Checking
Well-Known Member
Indeed. Right now I see no force that could turn these ocean liners:
- If you have significant wealth invested in Toyota shares you "see the EV light", you don't start trying to pressure Toyota execs to embrace EVs. You sell your shares and buy TSLA instead.
- If you are a capable employee of one of the big OEMs and you "see the EV light" you don't have to fight the existing inertia and anti-EV corporate culture: you can apply at Tesla or another EV-friendly OEM like VW instead.
@avoigt has a better insight into German OEMs, but I think they already have trouble retaining good software developers - the result of outsourcing most of the automotive software to suppliers and allowing it to fracture into a heterogeneous mess.
Tesla's approach is superior: they vertically integrated software not just into their cars but into their factories as well ("Factory OS"), a largely unified software platform that not only allows much faster R&D and a better user experience, but is also fun to work with and attracts top software talent. Software is treated as a core competency by the Tesla CEO himself.
Tesla's cars might be 5 years ahead of the competition - but their factories are 10 years ahead ...
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Fact Checking
Well-Known Member
Very interesting, reminds me of Intel's Tick-Tock model of CPU design:
Tesla's Model 3 introduction broke this model and probably caused more delays than a more careful approach would have resulted in to begin with.
I'm pretty sure they learned this lesson, and I don't think Tesla risked the GF3 ramp-up with big changes like the Model Y wire harness - only a cleaned up, streamlined, safe "copy" of the best bits of Fremont.
Fact Checking
Well-Known Member
Btw. can bond holders convert early, or do these bonds exist until maturity in essence?
Runarbt
Active Member
My guess is they will wait until their sales crashes completely.
Problem then is, Tesla might hav0 10+ GFs and be capable of satisfying demand of any high-margin model - and they will have a full sortiment: smal and large SUV, sedan, hatchback, Truck, performance and even Semis.
Maybe Toyota can fight it out in small city car segemnt, or enter bus manufacturing?
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Fact Checking
Well-Known Member
Btw., another consequence of the current higher level of share prices: Tesla's debt schedule would be lighter by ~4 billion dollars (they can pay in shares instead of cash) - a very large chunk of Tesla's long term debt would be eliminated in essence, right?
The longer Moody's is waiting with an upgrade of Tesla's debt, the more ridiculous their stance becomes.
They can convert any time in the final 3 months, but would be giving up time value to do so.
And bonus question: if the bond holders convert early, what happens to the mentioned short position: I guess the bond holders will have to cover that in a short period of time.
Fact Checking
Well-Known Member
Btw., were do debt funds make money in this scheme? The convertible notes are only paying 1-2%, which is lower than money market rates.
Do they simply use the cash proceeds from the short sale and reinvest them, thus basically gaining Tesla's rate plus money market rates?
If it's the latter then indeed they'd lose 3 months worth of "double interest rate" time value, right?
Yes if they choose to pay in new shares they will both eliminate the debt and increase their cash balance.
For example, for the Mar 2021 bonds, if the stock price is at $450 in March 2021, convert holders will choose to convert their $1,380m bond into 3.8 million shares worth $1,725m. Tesla's call option hedge will be worth $345m and the warrant it sold would be worth 0.
Tesla can either choose to pay the bondholders $1,725m in cash or it can issue them 3.8m new shares. If it issues them 3.8m new shares, it will eliminate $1,380m debt off its balance sheet and also close its call options to raise $345m new cash on balance sheet. Alternatively it can choose to pay cash, here it will sell the calls and eliminate the debt and give the bondholders $1,725m, but cash balance would be depleted by $1,380m. Here it is quite likely they issue normal bonds to fund the $1,380m.
Alternatively, if the stock price is $600 in March 2021, the convert holders 3.8m shares will be worth $2,300m and Tesla's call option hedge worth $920m. The $561m strike warrants will also be in the money and Tesla will be required to issue 3.8m shares to the warrant holders at a share issue price of $561.
So here if Tesla chooses to repay the convert in cash. It will sell the calls, pay the convert holders $2,300m and deplete cash balance by $1,380m. It will then issue 3.8m new shares to warrant holders and receive $2,132m cash in return. So overall it will have eliminated $1,380m debt and increased cash balance by $752m while diluting stock by 3.8m new shares.
It can also choose double dilution and repay both the convert holders and warrant holders in new shares. In this case it will see 7.6m dilution, eliminate $1,380m debt and raise $920m + $2,132m = $3,052m cash.
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The money they raise from selling Tesla shares short can be used to buy the bonds and then they can pledge the converts as collateral for holding the short position. So they are making 1-2% interest but committing no capital. However they do take credit risk exposure to Tesla.
That would total 560k
My projections
S+X @ 70k (~16.5-17K/quarter)
M3 @ 280K (~70k/quarter)
MY @ 120K (few scattered deliveries in Q2 and ramping up in 2H)
Fremont: 470K
China: M3 100-120K
Total just below 600K: 570-590K
Okay, since we're all doing this game:
S+X @ 75k (significant uncertainty, depends on what they introduce this year. Plaid will be pricey (~$125k before options), but it's supposed to get a new pack, and if so, I wouldn't be surprised in the least for the downmarket models to get a new pack as well. Sky's the limit then.)
M3 @ 350K (I expect cannibalization to largely be compensated for by expansion and overall global EV market growth)
MY @ 120K (agree with kcveins - few scattered deliveries in late Q2 and ramping up in 2H)
Fremont: 545K
China: M3 110K (should be readily eaten up by domestic markets, but if not, there's a number of export markets which have significantly better trade deals with China than with the US).
Total: 655K production. Deliveries somewhat lower due to inventory runup due to expansion (we're also abnormally low inventory relative to scale at this point).
Hope we get some projections on the call.
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I couldn’t agree more. To me, this is why certainty is such a red flag.
Fact Checking
Well-Known Member
Can Tesla excercise the call options to get shares at the strike price? If yes then another possibility would be for them to exercise instead of selling the call options - then hand those shares to the bond holders and raise the $1,380m cash required to excercise via regular corporate debt - or pay it from free cash.
Yes they should be able to do this. From Tesla's perspective it is essentially the same as choosing to pay the convert holders in cash. Just different processes in the finance department behind the scenes and a different announcement to convert holders.
Fact Checking
Well-Known Member
That's worse than I thought it was.
Let me extend my statement:
- Tesla's cars are 5 years ahead,
- Tesla's factories are 10 years ahead,
- Tesla's software is 15 years ahead.
Well funded, huge financial institutions like Deutsche Bank have failed with 10 year projects to get rid of heterogeneous software platforms. (A large part of Deutsche Bank's downfall was the lack of control over their software platforms, which forced them into a destructive spiral of compensating lack of internal efficiencies and lack of scale with riskier financial bets.)
The quirky physicist-economist software nerd with a mild Twitter addiction understands this very well. He is one of Tesla's most valuable assets going forward, as Tesla's business plan starts branching out for real ...
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Tesla certainly doesn’t write all of their software themselfves. I remember that when they updated the Model S radar software to see beyond the the first car in front, they had to cooperate with Bosch to have Bosch change the radar firmware.
Over time Tesla has produced more an more components in-house, so they probably do write much more software themselves compared to other car manufacturers.
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