There's No Accounting for Tesla Bondholders' Tolerance
Comment of the Day

March 09 2018

Commentary by Eoin Treacy

There's No Accounting for Tesla Bondholders' Tolerance

This article by Liam Denning for Bloomberg may be of interest to subscribers. Here is a section:

There's more to be found off the balance sheet, too. According to Tesla's annual filing, which dropped a couple of weeks ago, it's potentially on the hook for an estimated $8.5 billion of contracted purchases over the next three years alone. Most of this relates to batteries coming from Panasonic Corp. and emphasizes the importance of Model 3 production catching up with the vast ambitions set ahead of it.

That fixed-income investors are fine with this is, of course, a function of their primary defense; namely, Tesla's gravity-defying stock price. The potential for an eighth equity sale to refill company coffers serves to salve any wounds inflicted by slipping Model 3 targets or senior managers sipping away. In early trading on Friday morning, the shares were down less than 1 percent.

What might cause the market's confidence to crack? It's impossible to say, though the Model 3's woes represent the most acute threat. We are now just over three weeks away from the March 31 deadline to get weekly production up to 2,500; a target that's been reset several times already. Bloomberg's own tracker estimates the current rate at less than 700.

Eoin Treacy's view

Tesla is a B- rated credit so it sits squarely in the riskiest portion of the junk bond universe. The fact that it’s attempts to build a large-scale manufacturing venture from zero have been met with equanimity by the investing public is a testament to the boldness of their design, Elon Musk’s ability to inspire just about everyone he meets and the abundance of credit on offer since 2008.

The share has been ranging above $300 since April of last year. Volatility is something investors in Tesla are familiar but there is a preponderance of downward dynamics within the range over the last year. $300 represents the upper side of the underlying range but the below options pricing page highlights that a considerable number of 3-month put options move into the money if the price falls below that level.

Tesla is a barometer for global risk tolerance in the high yield sector. High yield spreads have been inert for more than a year but if investors lose confidence in Tesla’s ability to continue to raise capital it is likely to have a knock-on effect for the whole high yield sector.

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