+1 can't see any reason why dec 1 matters

December 1st is the last day that Tesla can lower the strike price with an offer of more shares. They are allowed to lower it all the way down to $252, otherwise it’s fixed at 360

So it's all nonsense then? They can just dilute a little more and set the strike at say, $330 and guarantee conversion? I haven't really bought all the stuff because it seems there's an easy enough workaround to all of this. But if they can just lower the strike by diluting up to another 30% then the notion that they need to come with $900 million is ******ed.

It obviously matters a great deal down at $260 but it doesn't matter up here if it's at $360 or $340. If I was a billion short I'd be pitching exactly this to Panasonic last quarter and getting them to rebate me/underprice things (remember Panasonic had their first huge drop to profit last quarter) under the table so I can push out a fabulous fake quarter. That way I can keep things alive and pay the debt by dilution and buy enough time to try and speed up production or clear whatever it is that's stopping me from raising.

Do you have a source for this? I can't think of any economic reason to have that sort of clause barring some sort of corporate event.

Edit: looks like maybe you are saying the strike price gets adjusted for a rights offering or such? If so that adjustment should still be neutral ev.

There's a whole thread on the bond covenants here: https://twitter.com/ElonBachman/stat...58046093238275

Basically, the board can adjust the conversion ratio of shares all the way to a strike of 252 and change, but the change has to be proposed for 20 business days, it isn't an overnight thing.

Even so, Tesla still cannot compel bondholders to convert. Bondholders have the option to convert into shares or not starting December 1st.

It's probably a clause put in there in case of dire financial situations or something.

It's not so simple, although yeah if the shares fall below 252 then it literally is game over. The more prudent move for the bondholders if Tesla changes the strike price would be to simply short more shares and hold the bonds until close to march 1st to decide whether to convert and cover or not. Tesla cannot compel the conversion; bondholders can convert or demand cash at their choice.

Also, the market may take it as an admission that they can't pay the bonds, which would cause questions about their ability to remain as a going concern. It's basically an option of last resort.

Interesting, it seems odd but I'd have to think thats just some boilerplate contingency thing, and not sure it would pass the exchange's regulations or the markets sniff test if they tried doing that to avoid insolvency.

It would require them to admit both that they are at risk of insolvency and that they are unable to raise capital through any other means. It's a cool conversation topic but don't think it can ever be used.

See here's what I don't understand, and why I think this is all bull**** bear beatup. This passage from your link basically lays it out for me:
Tesla (privately to bond holders): We'd rather not pay $900 million to you. Convert at the current strike and we'll agree to pay you the difference + 5% on top.
Bondholders: Done.

$70 million or so spent, bonds paid off.

It would literally be an admission that they can't pay the bonds.

They've literally sold a 360 strike Call option. Voluntarily reducing the strike to 250 makes no sense on any financial level unless they need the money so bad they have no other option. Issuing new equity or junk bonds makes infinitely more sense if it's a possibility at all.

I don’t think Tesla can offer anything like that given the price of the March 360 call options

This is not quite right. On dec 1, they have to elect how to settle conversions (stock, cash, or a combination) - this election is fixed/can’t be changed. The strike can be lowered at any time with 15 days notice as long as the lower strike is a available for a min 20BD period. It’s in the boards discretion to do so, I’m not aware of any exchange rule that would prevent it. Obviously if the idea is to induce conversion, the period must expire before maturity (otherwise the option is just more valuable and will be held until maturity as before).

The idea of reducing the strike is that it is essentially a backdoor equity raise for $900M at an offered price of the reduced strike. Ignoring timing mechanics, if the stock is at 330 a week before maturity and Tesla can either a) pay full amount in cash or b) restrike at 300 (just to throw out a number), it doesn’t seem unreasonable to just choose (b) and raise 900m @ 300 on the spot instead of going thru the whole equity raise process, which could be lengthy + expensive bc apparently they don’t have a registration statement effective right now. Obviously the timing requirements on the restrike + signaling value, etc., make it a much messier issue. I’m not sure trying a HY bond offering is preferable to the restrike, but just simply doing a refi of the converts definitely is, so would be a signal that at least the convert market is not open to them imo

I guess the average tesla long/bull is too dumb to care or even notice if they restrike the converts and effectively issue equity at a steep discount to market so in that sense it's prob the best option. Elon can just pretend it never happened to save his ego just like he can pretend the Q3 earnings call wasn't intentionally misleading.

Yeah, pretty much. I think a large equity offering would have to be pretty deep in the hole anyways though, so it might be preferable to do a restrike at a 10% discount to market than a broad offering at a 30% (made up #) discount (which obv also has bad signaling value itself).

Pretty sure that's what people assumed would happen all along.

Highly leveraged firms have been doing stuff like this since MCI and Milken figured out there is a huge market for subprime debt/equity hybrids that look like backdoor equity.

Some of that isn't even total scam (on investors). A lot of it is, in effect, the IRS subsidizing the yield on convertible bonds. There are some more obscure issues with regards to tax status of certain investment vehicle entities that make some of them all but prohibited from buying straight equity.

I'm not really sure that they can lower the strike without causing panic. If you're a creditor and the company is signaling that $920m would cripple them, all the more reason to take the cash instead of distressed shares.

agree, I can see some small discount in lowering the strike over just issuing equity for legal/operational hassle, but if they signal they can't raise a measly 900M in the capital markets the bond holders might be happy taking cash and holding short deltas.

If the converts actually become a big deal there's a good chance the price pins to the strike regardless.

I think the reqs re timing are an important wrinkle here wrt how it could/would be used. Tesla has to provide 15 days notice to holders with the new strike and how long the new strike is available, which must be min 20 BDs. If you really want to induce conversion, you would offer the lower strike for a limited period of time, expiring well before maturity, after which it reverts to the 360 strike. So, if you are a holder who’s fully delta hedged, you don’t get to take advantage of the lower strike if you want to use your holdup value to demand cash at maturity. The long time period reqs also mean the last day you can choose to restrike is really in mid January (to be effective in month of feb), so practically Tesla can’t really lower it a small amount to try to save on costs while getting a raise thru bc they’d have to bear price risk for a month and a half and otherwise owe cash

Strongly disagree. Could of course be part of some convert holders thesis, but on the whole this would be big news


How is the IRS subsidizing the bond yield? Not following here

First short admits to blowing up. Entertaining read.

https://twitter.com/FedsDead/status/1067824771457576961



The only way a long term should cold have blown up the last two months if there were silly enough to add lower thinking the price proved the thesis was coming true. Same silliness as bulls, who'll have the same thing happen to them x 1000, plenty of these cucks have mortgaged their house to get in Tesla and Musk has sent some bankrupt already no doubt with his fraudulent $420 tweet.

There's no thesis worth becoming a true believer for. As a short of Tesla you've done very very well with a bit of caution/profit taking/getting out of the way of freight train when it comes.

Sick setup though

Tesla convertibles have been trading above par pretty much all month even early in the month when TSLA stock was in the 330s and 320s.

At least the traders of TSLA convertible bonds were expecting more shares and/or some trickery to: 1. de facto lower strike price or 2. just more broadly, some kind of payoff to make sure the bonds don't get converted and get rolled over smoothly. Which by extension means pretty much every arbitrage desk in the country knew.

Uhmmm no. The option to convert at 360ish was worth more than enough even in the 320s for the bonds to trade above par. No nonsense strike lowering required.

Head of SEC's SF regional office resigns with one day notice:

https://www.sec.gov/news/press-release/2018-267

Doubtless over the cuckery the SEC commissioner has exhibited in allowing the farce that is Tesla to continue unabated.

At this point the SEC is just enabling fraud.

This is way off...

TSLA convertible has been at 120 or higher for pretty much the whole month. That’s 200+dollar premium for call on less than 3 shares. The March 360 strike call never got close to that.

I was imprecise with my use of language. I should have said TSLA convertibles have been trading so far above par it’s clear the market was expecting some payoff to the convertible holders.