- Wall Street's convinced that Tesla will need to raise more cash, and it has some theories about how and when that may happen.
- Morgan Stanley said that in addition to a capital raise in 2018, Elon Musk might also need an outside partner for more financing.
And while Elon Musk remains adamant that the electric-car maker can become sustainably cash-flow positive in 2018, sell-side analysts are now busy theorizing possibilities for when and how Tesla might raise cash.
"Valuing Tesla shares is a volatile, unpredictable dynamic," Adam Jonas, an analyst at Morgan Stanley, said in a note to clients Tuesday. "But we believe it is ultimately dictated by a few key vectors: demand, cash consumption, access to outside capital, management actions/governance, and strategic price discovery."
Jonas sees the next stages of Tesla's evolution coming in five parts. He predicts Tesla will raise $2.5 billion in equity in the fourth quarter, even if it doesn't need the money, because it will be easier to do than when it's a dire necessity. Then, when Model 3 volume eventually hits a plateau, it's a perfect time for a strategic partner to step in.
"Step 5: Tesla potentially crystallizes strategic value with a partner that can fund the ongoing capital requirements of the auto business or can monetize the value of Tesla’s edge compute/machine learning ecosystem," Jonas said. This could be similar to the potential investment from Saudi Arabia's Public Investment Fund that originally sparked Musk's go-private bid, but eventually fell through.
In another scenario laid out by Alexander Diaz-Matos, an analyst at the credit research firm Covenant Review, Tesla could pledge its intellectual property — things like its logo and brand assets — to take on more debt. The company already has $11.5 billion of current outstanding debt.
It's similar to a move Ford pulled in 2006, ahead of the automotive industry's meltdown, and "investors have questioned whether Tesla might follow suit with a similar plan, to pledge valuable brand names and trademarks to secure debt and ensure access to liquidity in a time of potent turmoil," Diaz-Matos said.
In order to get around something known as a liens covenant, there would need to be a non-US subsidiary at play.
"The liens covenant by its terms applies only to domestic restrict subsidiaries," said Covenant Review. "That is, non-US subsidiaries are not subject to the liens covenant, and therefore non-US subsidiaries, even if they are Restricted Subsidiaries, can pledge their assets to secure debt … because there is now restricted payments covenant, there is no meaningful restriction on [Tesla] transferring value from domestic to foreign subsidiaries."
In other words, Tesla would have to contribute its intellectual-property assets to a foreign-owned subsidiary that could then pledge that IP to secure more debt. That could "provide Tesla meaningful liquidity in a crunch," Covenant Review said.
Of course, any new debt will add to Tesla's current debt outstanding, which stands $11.5 billion. That includes $920 million in convertible bonds that could become due if the stock price doesn't hit $360 by March 1.
Tuesday's slump to $283, following news of a reported criminal investigation by US regulators that Tesla has denied, leaves the stock 27% below that threshold.
"We are increasingly of the view that the confluence of economic, competitive, regulatory, political, and technological forces may challenge Tesla’s status as a stand-alone entity," said Morgan Stanley's Jonas, who had a $291 price target for the stock. "Whether this results in a positive or negative outcome for existing shareholders vs. the current share price is much harder to determine at this time."
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