Tesla (NASDAQ:TSLA) must be burning cash a lot more quickly than the rate at which its operations were burning cash in the first 9 months of 2017. Through the first three quarters, TSLA had incinerated $570 million, or roughly $2 million per day. Its Model 3 sales are horrifically below Musk’s bold predictions.
Now Tesla is going take part of its “leased” vehicle portfolio and attempt to raise $546 million by letting Wall St. “engineer” the lease payments into an Asset-Backed Bond (ABS) deal. The problem with Tesla’s leases is that any of the leases issued before June 30, 2016 contain a “resale value guarantee” from Tesla. This is a “put option” issued to the lessee of a Tesla vehicle in which the value of the “put option” is worth significantly greater than the resale of the vehicle. And the resale value of a Tesla is declining rapidly on a daily basis, along with value of the entire used car inventory across the U.S.
The ABS bonds are structured from leases thrown into a pool of leases – the Trust – that will be used to fund the bond payments . One of the problems with this deal are the leases held by Tesla that contain a guaranteed re-sale value of the leased vehicle. To the extent that cars turned in under the guaranteed value payment are worth less than the value of the guarantee, the bond trust takes the hit.
However, I would bet my last nickel that the residual values in the plain-vanilla leases that will be tossed into the trust exceed the market value of the underlying vehicles. In this case the bond trust also takes a capital hit. I have a hunch that Elon Musk is trying to pull a fast one on yield-hog bond fund managers by transferring leases with overvalued residual values embedded in them into this ABS Trust.
With so much printed Central Bank currency sloshing around the financial system, I’m sure if the underwriters dress this pig with enough lipstick in the form of a high coupon, the deal will get done. I have to believe that this trust will have tobe over-collateralized by a significant amount, meaning that the implied value of the leases tossed into the ABS Trust exceeds the par value of the Trust by a considerable amount.
But it makes me wonder why Tesla is coming back to the capital markets with the equivalent of a “furniture sale” in order to raise high-cost capital given that the Company raised nearly $2 billion in August – just five months ago. How much cash has Tesla’s operations incinerated since the end of September? Judging from the collapse in Model 3 sales, it smells like Tesla and Elon Musk are beginning to get desperate to keep the lights on.