A banner stands in front of cranes at the site of the Tesla Inc. manufacturing facility in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)

Tesla Has Just 4 Weeks to Rally 21% or Pay $920 Million on Bonds

(Bloomberg) -- The clock is now ticking for Elon Musk to avoid a $920 million bill for Tesla Inc.

That’s the amount of debt coming due March 1 from convertible bonds issued back in 2014. Tesla can dodge the payout by exchanging the note for a mix of cash and stock -- but only if the shares jump about 21 percent from their current level, based on a 20-day averaging period that starts today.

The debt payment, the largest in the company’s history, would take a big bite out of Tesla’s cash just as Musk enters another challenging year. But while a rally to the $359.87 price needed for a swap may be a long shot, it’s not an impossibility for a stock prone to heavy swings. And with the automaker scheduled to report fourth-quarter earnings Wednesday, a catalyst could be just around the corner.

“There’s always a glimmer of hope,” said Chris Hartman, a senior portfolio manager who specializes in convertible arbitrage at Aegon Asset Management. “With the volatility that can happen inside this stock, the market is clearly saying it’s possible for that stock to be at, near, or above $360.”

Tesla Has Just 4 Weeks to Rally 21% or Pay $920 Million on Bonds

Indeed, Tesla shares were trading as high as $376 in December, propelled by blowout third-quarter earnings and a Bloomberg report that China was moving toward cutting its trade-war tariffs on imported U.S.-made cars. The Palo Alto, California-based company had eased concerns about upcoming debt maturities by posting $881 million in positive free cash flow for the three months ended Sept. 30, adding credence to CEO Musk’s assertion that he won’t need to raise money to pay off the bonds.

Some analysts still doubt that’s plausible. Tesla could end the year with around $2.6 billion in cash, including an additional $2 billion in outside capital UBS Group AG analyst Colin Langan expects to be raised in 2019. The capital will be used to support the Model 3 ramp, construction of a factory in China, and planned production of the Model Y and Semi in 2020, according to a report Monday. He has a sell rating on the stock, and lowered its price target to $220 from $230.

New Woes

The start of 2019 brought a spate of bad news that’s sent Tesla shares down more than 20 percent from their December high, to about $296 at Monday’s close. Musk announced plans to lay off 7 percent of Tesla’s work force, warning “the road ahead is very difficult” for making its Model 3 sedan more affordable for the masses. The company has cut prices and production on some of its vehicles. And trade tensions with China have yet to improve.

Now, Musk needs to assure investors that Tesla can ramp up production to enable a Model 3 priced at $35,000 that would still be profitable. The cheapest configuration available so far has cost $44,000, according to a Jan. 18 blog post.

With the debt maturities looming, analysts will be using Wednesday’s report to look at Tesla’s cash. It’s expected to generate $411.5 million for the fourth quarter, according to a Bloomberg survey.

As of Sept. 30, Tesla had around $3 billion of cash and equivalents, which would be more than sufficient to cover the $920 million in principal, plus $1.15 million in interest, on the convertible notes. Musk has already said that he plans to pay off the debt rather than refinance it.

Judging by the company’s fourth-quarter delivery figures, the company’s cash as of the end of 2018 could be in the $3.5 billion to $4 billion range, said Hitin Anand, an analyst at debt-research firm CreditSights Inc. in New York.

“They have the cash, but would rather have people convert,” Anand said by phone. “Will this put them in distress? No. But it won’t be ideal.”

Cash Calculation

Regardless, the company will be making some sort of payout. If Tesla’s stock rises and investors elect to convert, the automaker plans to settle the maturity with a 50-50 mix of cash and stock, Bloomberg reported last month. Holders have to make their decision two business days prior to maturity, or Feb. 27.

The cash component of that settlement is calculated over a 20-consecutive day trading period leading up to Feb. 26. Each trading day is assigned a value based on a volume weighted average price, or VWAP. To determine the cash amount, the average of the 20 VWAPs is multiplied by a predetermined conversion ratio of 2.7788, according to bond documents. Tesla would have to pay half of that amount in cash (up to $500 per $1,000 bond), while the other half would be settled through stock.

Tesla Has Just 4 Weeks to Rally 21% or Pay $920 Million on Bonds

Bond investors seem to be less optimistic that this option will become a reality, as the price of the convertible note has fallen along with the shares. However, it’s still trading around par, so all hope is not lost.

©2019 Bloomberg L.P.