Tesla's U-turn puts it back at square one on cash

Elon Musk's take-private plans for Tesla Inc have evaporated, but the company's looming debt needs remain.

With a debt load of about $10.5 billion and the possibility of an impending cash shortfall, Wall Street expects the luxury electric carmaker may need to raise funds before long.

Tesla Chief Executive Musk said late on Friday he would heed shareholder concerns and no longer pursue a $72 billion take-private deal, abandoning an idea that stunned investors and may draw regulatory scrutiny.

None of that has done anything to help it with a looming issue: cash.

Tesla, which has had just one quarter of positive free cash flow since the fourth quarter of 2013, has $1.3 billion in debt coming due in the next 12 months. Meanwhile it has just $1.3 billion of cash on hand after backing out $942 million of customer deposits on cars.

With analysts forecasting a slowed, but continued, cash burn in the second half of 2018, Tesla may need to borrow up to $2 billion by the end of the year to stay afloat.

In response to a request for comment, a Tesla representative referred to Musk's statement on the company's second-quarter earnings call when he said the company planned to pay its convertible debt with internally generated cash flow.

The most likely option, according to analysts, is a convertible debt issue. Musk has historically favored convertible bonds to raise capital, and Tesla and its SolarCity unit each have three issues of convertible senior notes, worth a total of $4.2 billion.

Convertibles give owners the right to trade their debt for equity after shares rise over a certain price. They allow holders to benefit from a rising share price, while also offering bond-like protection if it falls.

The one challenge of using more convertible debt, however, is “that it drives more short sellers to your stock. And Musk does not want that,” said Jeffrey Osborne, senior research analyst, Cowen Inc.

Frequently, convertible bond owners will hedge their positions by selling the underlying stock short.