Tesla bonds: Investors paying more than ever for credit default swaps

Engineer
and tech entrepreneur Elon Musk of The Boring Company listens as
Chicago Mayor Rahm Emanuel talks about constructing a high speed
transit tunnel at Block 37 during a news conference on June 14,
2018 in Chicago, Illinois.
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Images/Joshua Lott

The cost of insuring Tesla
bonds against default via credit default swaps hit an all-time
high on Tuesday.

The cost of insuring $100 of Tesla debt hit $6.58 around 10:30 am
Tuesday, according to data from Bloomberg, amid fresh fears over
Tesla’s cash position. The car company has $10.68 billion of
outstanding debt.

“The CDS is saying that there are a lot of people betting this
company is going out of business,” Thomas Graff, head of fixed
income at Brown Advisory, told
Reuters. 

Concerns about Tesla’s cash situation became top of mind once
again on Monday when it was reported that the company had
requested retroactive refunds from a handful of suppliers to
improve its financial situation. A spokesperson later told
Business Insider that the requests went out to “fewer than 10
suppliers” and were part of routine negotiations in the
procurement process.

“Any changes with these suppliers would improve our future cash
flows, but not impact our ability to achieve profitability in
Q3,” the representative said.

Despite CEO Elon Musk’s public promises that the company will
achieve profitability by the third quarter, many analysts on Wall Street say the company will likely
need to raise cash, either through stock or debt
offerings. Tesla’s cash burn, which was reduced to $1.1 billion
on its most recent earnings report in May, will be top of mind
when the company reports second quarter earnings on August 1.

A company spokesperson declined to comment on the CDS spike on
Tuesday. 

Tesla hit its goal of producing 5,000 Model 3 sedans, the car
widely seen as its path to profitability, on July 1. Musk marked
the occasion by saying the milestone finally made Tesla “a real
company.”

Meanwhile, doubt runs rampant on Wall Street, with Tesla
remaining one of the most shorted stocks in the United States.
Short interest — or bets that the company’s stock price will
decline — sit at over $11.5 billion, according to data from
financial analysts from S3 partners.

Shares of Tesla declined 3% in trading Tuesday and were down 8%
since the beginning of 2018. 

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