Musk must put money to mouth

In the sweepstakes about how soon Elon Musk would resume his incendiary tweeting, “less than a week” was the winning bet. Tesla’s recent dust-up with US regulators has not changed the habits of its CEO. He goaded the US Securities and Exchange Commission just five days after settling over an earlier tweet.

Fears about a potential cash crunch at the carmaker with a market capitalisation of $48bn have not gone away either. The company insists that there is nothing to fear and that the second half of 2018 will be better. Costs have been cut and spending delayed in the hopes of turning a profit. By the end of the third quarter Tesla aims to have cash on the balance sheet above $2.2bn.

It needs working capital for existing operations but also wants to fund new projects, including a new factory in China, and must return $1bn to bondholders in the next year. If short-sellers win their case against the company it will have to pay them, too.

Short-term repayments seem manageable. Musk’s illfated purchase of SolarCity, a solar panel installer founded by two of his cousins, means it must repay a $230m convertible bond in November. However, next year could be different. In March a $920m Tesla convertible bond is due, unless the shares reach $360. That looks tough, if Musk stays active on social media — Tesla fell to $275 after his trolling tweet this week.

If Tesla needs to tap markets to refinance its debt it can. The spread of Tesla’s 2025 bond over US Treasuries has widened by half since issuance, to 460 basis points. However, the junk bond market will be receptive if the company pays up. Issuing cheaper convertible bonds is possible if new governance inspires confidence.

The snag is Musk. He insists Tesla does not need to raise money and doing so would be capitulation. The company’s new executives will need to convince him otherwise. /© The Financial Times Ltd 2018