Tesla Bonds Are in Free Fall – Bloomberg

We just covered basics of bond valuation in FIN101 today. When prices fall the fixed payments (coupon and par value) remained unchanged. Thus, a lower price translates into a higher return on investment – if the company does not default on its payments. We also know that higher return and higher risk are non-separate.

So, why are Tesla’s bonds more risky? A few quotes from the article:

1. “The company, which has never shown an annual profit in the 15 years since it was founded, will need to raise over $2 billion to cover not only its cash burn this year, but also about $1.2 billion of debt that comes due by 2019″ where “debt that comes due” is the return of face or par value.

2. Tesla is “burning through money so fast that, without additional financing, it would run out of cash before year-end. To put that into perspective, that amounts to more than $6,500 every minute of every day

3. “While shareholders just approved a massive $2.6 billion pay package for Musk, three executives have headed for the exits this quarter, including two from the company’s finance team.” Well, at least you can say the company is still “founder-led.” But, does the founder know how to run a profitable business?

Add to this some basic questions about the promise of all-electric cars:

1. Is the carbon footprint of a Tesla really lower than that of a hybrid or a four cylinder Camry when you take into consideration manufacturing cleanliness such as the mining of lithium and the percentage of coal/fossil fuels in the power grid that charges the car?

2. Speaking of the power grid, even if it were 100% clean, could the current infrastructure support charging an exponentially higher number of electric cars?

Lots of concern here regarding Tesla. Well, at least TSLA is not in my S&P 500 index fund so perhaps I should not worry.

Checkout the Bloomberg article:


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