Tesla's U-turn puts it back at square one on cash

Tesla, which has had just one quarter of positive free cash flow since the fourth quarter of 2013, has $1.3 billion in debt coming due in the next 12 months. Meanwhile it has just $1.3 billion of cash on hand after backing out $942 million of customer deposits on cars.

With analysts forecasting a slowed, but continued, cash burn in the second half of 2018, Tesla may need to borrow up to $2 billion by the end of the year to stay afloat.

In response to a request for comment, a Tesla representative referred to Musk's statement on the company's second-quarter earnings call when he said the company planned to pay its convertible debt with internally generated cash flow.

DEBT RAISING

The most likely option, according to analysts, is a convertible debt issue. Musk has historically favored convertible bonds to raise capital, and Tesla and its SolarCity unit each have three issues of convertible senior notes, worth a total of $4.2 billion.

Convertibles give owners the right to trade their debt for equity after shares rise over a certain price. They allow holders to benefit from a rising share price, while also offering bond-like protection if it falls.

The one challenge of using more convertible debt, however, is "that it drives more short sellers to your stock. And Musk does not want that," said Jeffrey Osborne, senior research analyst, Cowen Inc.

Frequently, convertible bond owners will hedge their positions by selling the underlying stock short. Moreover, the dilution caused by conversion could also pressure a stock, drawing the interest of short sellers.

Of the $1.3 billion Tesla has coming due in the next 12 months, $230 million is from a SolarCity convertible due on Nov. 1, and another $920 million from a Tesla convertible due on March 1, 2019. Tesla's shares, at $319.27, are a long way from the $560.64 needed to convert the SolarCity debt but have traded above the $359.87 March 2019 debt conversion price.

Musk could also choose to offer convertible bond investors the opportunity to exchange their debt for equity below either or both strike prices, although that could require some assurances on the company's fundamentals.

STRAIGHT DEBT

Tesla could issue straight debt akin to the 5.3 percent coupon junk bond coming due in 2025. That bond however, is trading well below par at 87.13 cents on the dollar, and so it would be unlikely that Tesla could get the sort of favorable terms they secured in their last offering.

Krishna Memani, chief investment officer of OppenheimerFunds, which is among Tesla's top 10 bondholders, said that the level of scrutiny Musk would have to go through "would be meaningfully higher in any new issuance."

EQUITY

Equity markets have historically been friendly to Tesla, however Musk said, on the company's second-quarter earnings call, that he would not tap them for cash. "We'll not be raising any equity at any point. I have no expectation of doing so; do not plan to do so."

The Securities and Exchange Commission has opened an investigation into Musk for potentially misleading investors when he tweeted that he had "funding secured" for a $420 a share take-private deal, according to media reports.

LEASE/ASSET-BACKED SECURITY DEAL

Tesla could securitize automotive leases backed by drivers' monthly payments as it did earlier this year when it sold $546 million of bonds backed by leases on Model S and Model X cars.

There are two problems with issuing new asset-backed securities.

The first is that old vehicles may not sell for as much as expected given the increasing competition Tesla is facing in the electric vehicle space. Second, leases as a percentage of vehicles sold have fallen dramatically as it is not possible to lease a Model 3 sedan. While roughly 20 percent to 30 percent of Model S and Model Xs were leased, the Model 3 must be paid for in cash.