Pain Worsens for Tesla Bondholders, Nursing $300 Million Loss

(Bloomberg) -- At least Tesla Inc.’s shareholders still have that $40 billion-plus market cap. The investors who lent the electric-car maker $1.8 billion a year ago? They’re now almost $300 million in the hole.

Tesla’s bonds dropped to 83.5 percent of face value on Friday amid headlines that two senior executives were leaving, hours after founder Elon Musk smoked marijuana during an interview with a comedian. The debt, issued last August with a 5.3 percent coupon, are now yielding about 8.5 percent, according to data from the Trace bond-price system.

The bond market had never lent money so cheaply to a junk-rated company like Tesla, which has been burning through cash as it ramps up manufacturing. Musk personally pitched debt investors on his ambitious plans for the Model 3, ultimately getting orders for about double the amount of debt the company initially sought.

That allowed the company to boost the size of the offering. The 5.3 percent coupon was a record low at the time for bonds with similar maturities and ratings.

But as concerns emerged over the company’s ability to deliver on its production goals -- and ultimately generate the cash flow that would be needed to pay off the bonds -- the price of the debt sunk in secondary markets and never recovered. At today’s market price, anyone who bought the debt at par would have a paper loss of roughly $297 million. That doesn’t account for the $95 million of interest Tesla’s paid in the past year.

“We knew what we were getting into, the bonds were mispriced -- we said it day one and all along,” said Hitin Anand, an analyst at debt-research firm CreditSights Inc. in New York. “It was a stroke of luck that they priced at that level and they’re getting repriced to where they belong.”

The decline put Tesla in unique territory for the bond market. No other U.S. company with publicly traded dollar-denominated debt and equity has yields above 8 percent while maintaining a stock-market value above $40 billion, data compiled by Bloomberg show.

“It underscores the one-man risk that we’ve had out there for awhile,” said Bloomberg Intelligence analyst Joel Levington. “It’s yet another example of a Tesla management shakeup, which really takes away from the focus which should be on improving operating performance.”

Funding Options

With the elevated yields on the unsecured debt and declines in Tesla’s stock, the company’s options for raising additional capital are becoming more expensive. It may drive the company to issue secured debt -- typically a cheaper form of financing -- should it need to raise more cash, Levington said in a report Thursday. That would put more creditors ahead of existing bondholders, he said.

Musk sipped whiskey and smoked marijuana during a 2 1/2-hour podcast with California comedian Joe Rogan, which was shown live on the internet. Then Friday morning, Tesla said in a regulatory filing that its chief accounting officer, Dave Morton, had given notice he was resigning -- less than a month into the job. Gabrielle Toledano, the head of human resources who’s been on a leave of absence, later told Bloomberg News that she won’t rejoin the company.

Morton said he had no issues with Tesla’s accounting.

Tesla’s stock fell as much as 10 percent Friday, resuming a seven-day losing streak that had temporarily been snapped Thursday. That took the company’s market value down to just above $45 billion, erasing almost $3 billion in value from the start of trading Friday. Even after the decline, the market cap is still double what it was five years ago.

--With assistance from Claire Boston.

To contact the reporter on this story: Molly Smith in New York at msmith604@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Shannon D. Harrington, Dan Wilchins

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