May 16 (IFR) - Shrieks of pain could be heard across Wall
Street last night as short-sellers were hit by the market's
reaction to Tesla Motors' circa US$830m equity raise.
Shares of the electric car manufacturer spiked 7.6% to
US$91.28 in afterhours trading as investors factored in the rush
of liquidity and the operational traction the company gains with
The combo-financing, consisting of convertible debt and
equity, including a fresh investment from CEO Elon Musk, is
remarkable on multiple fronts.
The pain felt by short-sellers will have been widespread. At
last count, there were 27.5m Tesla shares sold short,
37.5% of the company's free float.
For starters, Tesla is betting that investors will jump in
at a near all-time high share price. Since its first quarter
earnings report on May 8, Tesla shares have gained more than
50%, closing Wednesday's session at US$84.84 before jumping
again after hours. The company reported a profit of US$11m for
the quarter, the first profit in its 10-year history.
Few would argue that the current US$10.2bn valuation is
rooted in near-term fundamentals. But the near term was never
part of the Tesla investment premise.
Tellingly, the largest component of the financing is a
US$450m five-year convertible bond. Sure, investors are giving
up the first 30%-35% of the upside, and being paid just 2%-2.5%
as compensation, but that would prove small consideration to
Worst case, CB investors get their money back -
principal-protected equity - or so the argument goes.
Goldman Sachs, Morgan Stanley and JP Morgan are marketing
the CB at a credit spread of Libor plus 350bp, visionary for a
company that only recently turned its first quarterly profit.
Again, the assumption is based on the future, not present,
Another serious consideration is that proceeds will fund the
takeout of a US$452.4m loan from the US Department of Energy,
removing the shackles of government subsidies. However
attractive the terms of that loan - 1% debt through 2017 - the
operational constraints imposed are real.
The deal is part of Tesla's move to roll out an entire
standalone capital structure in short order. That capital
structure will include not only bank loans, but asset-based
financing against cars sold, providing operational flexibility
and financial leverage.
That CEO and co-founder Musk will invest US$100m of
additional equity is not surprising. Musk, who proclaimed Tesla
a "technological velociraptor", while selling the IPO in 2010,
has invested at every step and would not risk diluting his 23.5%
Musk has pledged to purchase US$45m on the sale of 2.7m
shares (US$230m) being sold to the public, and another US$55m as
part of a private placement in the near future - bankers say he
would have put the entire US$100m upfront if the Department of
Justice allowed it.
Tesla is using a portion of the proceeds to enter into a
derivatives transaction to offset economic dilution from
conversion of the CB. The call-spread overlay will offset
dilution to a 100% premium, or a share price of nearly US$170.