Tesla’s upcoming debt payments could be a big challenge: Experts

Tesla CEO Elon Musk.Patrick Fallon / Reuters

• Tesla‘s finances have been an area of concern for the automaker throughout its 15-year history, and those concerns may be reaching an inflection point.
• In the next five months, two convertible bonds worth a combined $1.15 billion will come due.
• If Tesla becomes profitable and cash flow positive, the bonds shouldn’t be a major issue.
• But if Tesla’s financial condition hasn’t improved and doesn’t in the near future, the bonds could pose another challenge to a company that is already dealing with delivery issues and erratic behavior from CEO Elon Musk.

Tesla’s finances have been an area of concern for the automaker throughout its 15-year history, and those concerns may be reaching an inflection point.

The automaker and its CEO, Elon Musk, have said it would be consistently profitable starting in the third quarter of this year (Tesla is expected to release its third-quarter earnings report in November), part of the reason why so much scrutiny has been placed on Tesla’s ability to hit self-imposed production goals that Musk has said are vital to becoming profitable.

Tesla’s financial performance will have long-term consequences for the automaker’s ability to keep investors and observers optimistic, but in the near term, Tesla has more tangible reasons to maintain a healthy balance sheet: Two convertible bonds, which can be transferred into Tesla stock if shares hit a pre-determined price, that will come due in the next five months and are worth a combined $1.15 billion. (At the end of June, Tesla had a total of $2.2 billion in cash on hand.)

The first is worth $230 million, has a $560.64 conversion price, and matures in November. The second is worth $920 million, has a $359.87 conversion price, and matures in March. 

Michael Ramsey, an automotive analyst at Gartner, told Business Insider that Tesla’s third-quarter results will provide an indication of how troublesome those bonds will be. If Tesla ended the third quarter with a positive cash balance, the November bond shouldn’t be a major concern, Ramsey said, but if Tesla’s financial condition hasn’t improved and doesn’t in the near future, the March bond will become an issue. 

“They very likely are going to have to borrow more money,” Ramsey said, probably in the form of another convertible bond, as issuing conventional bonds would require high-interest rates — since Tesla’s bonds are rated in junk territory — and asset-backed loans would be risky since Tesla’s creditors would be able to seize the assets used as collateral if the automaker was unable to pay the loans back.

Tesla did not immediately respond to a request for comment on this story.

Of course, if Tesla’s stock can hit the conversion prices for one or both of the convertible bonds, it won’t face as much immediate financial pressure. Tesla shares were trading at a little over $250 as of Thursday afternoon but have historically been volatile. In the past six months, they’ve traded above $375 and below $250.

While it’s unlikely Tesla shares will reach the conversion price for the November bond, there’s a chance they could for the March bond, Morningstar auto equity analyst David Whiston said. If Tesla can continue to hit its production targets and become profitable and cash flow positive, positive sentiment could lift its stock price, though investigations from the Securities and Exchange Commission (one of which was settled last week) and Department of Justice could suppress the stock’s upside, Whiston said.

Tesla and Musk have expressed confidence about the automaker’s financial future, but for Whiston, the results will speak for themselves.

“They’re going to have to prove it to me,” he said.

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