Tesla’s debt is bigger than Ben Hur
Tesla has produced impressive cars and its success appears to be flourishing, but its bank account may tell another story.
TESLA HAS ACHIEVED extraordinary goals in a very short time to be a successful automotive manufacturer. Indeed, if the demand late last year for the Palo Alto, California-based company’s Model 3 is anything to go by, it would seem the 373,000 reservations and over 100 million dollars in cash raised from customers is a sure ticket to success as an automotive powerhouse. However Tesla has already pushed delivery of the Model 3 beyond the original estimate of 2017 to 2018, and it seems it’s now a race against its giant debt to build the vehicles and turn a profit.
Tesla’s estimated capital expenditure for the first six months of 2017 will be between $2 and $2.5 billion dollars. Not a terrible cost considering Tesla claims it has $6.23 billion of cash, however according to Seeking Alpha debt analyst expert Montana Skeptic, Tesla may have already burned as much as $4.84 billion in capital leases, liabilities and long-term debt by June this year.
This would leave Tesla with $1.39 billion cash, making Tesla short its required estimated expenditure by up to $1.11 billion. Tesla does have access to a line of credit, worth up $1.8 billion, however, it has already borrowed $1.36 billion of this leaving just $440 million to play with.
This leaves Tesla with a $1 billion hole to fill and Montana suggested back in February that Tesla is already coming dangerously close to triggering its fixed-charge coverage ratio test for its credit line – a test it cannot possibly pass. Thus the only option for Tesla would be to raise even more equity, regardless that it had already done so for the Model 3.
And now indeed it seems that logic might be coming to fruition, as Tesla has filed with the SEC (Security and Exchange Commision) on March 15 to sell nearly 1 million shares worth at least $250 million and at least $750 million of convertible notes (options) due in 2022. This would raise a total of $1 billion, almost exactly the amount of debt it is suggested Tesla needs to overcome.
In Tesla’s filing the company said the money raised would be used to, “strengthen our balance sheet and further reduce any risks associated with the rapid scaling of our business due to the launch of Model 3, as well as for general corporate purposes,”.
Elon Musk, Tesla CEO, has already said the propsed plans would push the companies finances, “close to the edge”.
Musk, who has never sold any personally owned Tesla shares, has said he will purchase $25 million of the new shares. Curiously, Musk has increased his own personal borrowing capacity by $100 million to $624 million total and Musk’s largest lender, Morgan Stanley, is also Tesla’s eight largest shareholder.
So it would seem the challenge for Tesla now, if it raises the funds needed, is to transition from small car producer to mass volume manufacturer. And quickly. The company produced only 100,000 vehicles last year compared to the planned 500,000 cars next year and 1 million in 2020.
At Tesla’s current rate it will be back into a debt hole and may require yet another fund raising but just how long can it, and more importantly investors, sustain the cycle?