Tesla's Stock Surge Is a Chance to Clean Up Its Balance Sheet

  • Debt conversion prices in closer reach after shares surge
  • Converting bonds would allow Musk to ‘reload,’ professor says

QuickTake: Elon Musk Living on the Edge

Tesla Inc.’s rally is giving the electric-car maker an opportunity to wipe out some of its substantial debt.

About $3.4 billion of Tesla’s debt can be converted into common stock if the company’s shares reach about $360, with a portion eligible even at today’s prices, according to data compiled by Bloomberg. While Tesla’s surge to a record close of $322.83 earlier this week has put these levels in closer reach, some of the securities have provisions making conversion more difficult until the bonds are within a year of maturity.

The stock gains have reflected investors’ optimism in Chief Executive Elon Musk and his plan to deliver Tesla’s first affordable electric car, the Model 3 sedan. To get to this point, Musk has relied on a virtuous cycle -- a climbing share price has bought him more time to bring Model 3 to market by enabling Tesla to raise more capital and provide the financial means for his expansive vision.

Converting the bonds “would get the debt off their balance sheets and allow them to ‘reload’ with more debt to finance their ambitious expansion plans,” said James Angel, a professor of finance at Georgetown University.

The potential conversion of most securities issued by Tesla and SolarCity Corp. -- the solar installer acquired by the carmaker late last year -- isn’t right around the corner.

While some of the debt matures as early as next year, some doesn’t mature until as late as March 2022. None of the bonds are callable, and holders likely would want to see the shares rise past the conversion price to make up for any forgone interest.

Musk’s Fundraising

Musk, 45, has regularly turned to Wall Street for cash to support a product pipeline that, after the Model 3 rollout, includes a solar roof product and an electric semi truck and pickup model. Tesla also has said it may build four additional “gigafactories” for battery production.

The company had about $6.8 billion in total debt on its balance sheet as of the end of 2016. Palo Alto, California-based Tesla took on more liabilities late last year when it acquired SolarCity in a deal valued at about $2 billion.

Prior to the SolarCity acquisition, Tesla carried about $2.7 billion of debt as of Sept. 30. The company reports first-quarter earnings results Wednesday after the close.

QuickTake Elon Musk

While converting debt into common stock would boost the number of shares outstanding and could dilute the value of current investors’ holdings, Tesla has kept on climbing through a series of equity offerings, including as recently as March.

“The reduction in leverage would be a good sign, especially given the concerns over the effect of SolarCity on Tesla’s financing needs,” Angel said.

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