Elon Musk’s Borrowing Of Hundreds Of Millions Called Into Question

5 months ago by Steven Loveday 51

Elon Musk with Tesla’s lineup of vehicles at the Model 3 reveal event.

As we all now know, Tesla raised $1.2 billion this week, in order to move into Model 3 production with added security. When the effort was announced, it was told that CEO Elon Musk himself would be buying another $25 million worth of  Tesla stock.

Musk is the automaker’s largest stockholder, with a 21 percent stake, worth about $8.6 billion. This setup can surely be a way to motivate a CEO to see that his/her company performs well. However, much of Musk’s fortune is tied up in the stock, and he makes a meager salary as the company’s chief officer.

Tesla Model 3 Unclothed

Information was revealed, as part of Tesla’s deal, that showed that Musk personally increased his debt by another $100 million this week. To date, he has borrowed $624 million – more than half of which is still owed to Morgan Stanley, and a couple hundred million to other lenders. He also borrowed a substantial amount from Goldman Sachs in the past, but doesn’t owe the lender any money currently. In order for Musk to continue purchasing Tesla stock, all while maintaining the expensive lifestyle that comes with the territory, borrowing is a necessity.

The only rub in the situation is that if stock prices suddenly drop, lenders could push Musk to either sell or provide alternate collateral. This could potentially negatively impact Tesla stock prices. Jeffrey Osborne, analyst for Cowen and Co., shared:

Musk’s borrowing “has been the case for a while and I don’t think impacts investor sentiment for now.” But is  “certainly something for people to continue to monitor.”

The practice of lenders funding startup CEOs is nothing new. New companies can’t generally pay large salaries, and keeping top brass in their positions is critical to success, in most cases.

To date, Musk has never reduced his net share position in Tesla.

Source: Autonews, edit/update via Mark S

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51 responses to "Elon Musk’s Borrowing Of Hundreds Of Millions Called Into Question"

  1. Some Guy says:

    So where exactly is a problem here?

    The guy has stock worth 8.6 billion, and debt 0.624 billion. Tesla stock would have to drop >90% in order to be worth less than the debt. At least to me, such a thing is doubtful, if not impossible (it’s not like EVs are suddenly declared illegal goods, especially ones that create American jobs). Last I checked he owned a significant amount of another billion dollar company as well (Space X). Elon Musk will be the richest guy on earth in a few years before he takes the flight to Mars.

    Aside from that, check the ratio of net-worth to debt for the average American middle class home owner, I bet its much worse than the one described above.

    1. AlanSqB says:

      Exactly. This is simply a very common case of deferring his compensation. Borrowed money is extremely cheap right now and keeping his salary off the Tesla books is a good thing. This will work out well for Elon and the other shareholders.

    2. TwoVolts says:

      Some Guy,
      It is certainly not impossible for Tesla stock to drop >90% – and in a relatively short period of time. Tesla is at a critical juncture, and is quite vulnerable to a stock price spiral downward. Tesla needs a lot of things to go right in the next three years. They ultimately need to prove they can be profitable in the next five years. It is not a given – and many things can go wrong to facilitate a downward stock price spiral.

      1. Also mote, when Elon last bought stock, it was at about the bottom of a dip, at about $180-$185.00 per share, some $70-80 below what it is today, meaning he has growing profit on that buy in as well!

        This is also another confidence indicator, since he knows much more than he has shared on Model 3 Production Readyness!

        Those worrying must think they know more than Elon.

      2. mx says:

        No. There’s no way in hell it’ll drop 90%.
        Not after Tesla battery deal with Australia.

        These large deals are now set to roll out at a rapid pace, justifying the stock price, and the Gigafactory, in short order.

        Remember, Tesla has a better Book than Amazon, and a brighter future.

        1. unlucky says:

          What battery deal with Australia? That was just tweets. We’ll know when there is a battery deal with Australia.

        2. terminaltrip421 says:

          this just made me think of a future where every brick and mortar is an Amazon store.

        3. daniel.inform says:

          mx,

          Respectfully, people said that same type of thing in 2006, 2007, the 1920’s, and every other time before the crash happened.

          See, for example:

          If I was Musk I would sell at least 15% of my liquid holdings as quickly as reasonably possible.

          1. Mike says:

            Daniel.inform: the past is not a guide to the future. (Source: SEC )

            1. TwoVolts says:

              “History doesn’t repeat itself, but it does rhyme.”

          2. Nathanael says:

            There has been only one 90% general market crash since accurate records started being kept: 1929.

            Only one.

            Even that wouldn’t have margin-called Musk.

      3. Thomas says:

        Enron was also the darling of all Investors……

    3. unlucky says:

      The stock wouldn’t necessarily have to drop that far to cause issues.

      The concern here is that since the borrowing is secured by Tesla stock he could be forced to sell Tesla stock. This could happen if ANY of his his loans are called. And those loans could be called long before a 90% price drop.

      Look at the most recent loan, if he really borrowed $100M against $25M of stock then the stock value which would trigger a call is surely a lot higher than 10% of the current value.

      You’re right, probably nothing will come of this. But the concern is that if things were to turn significantly negative then they would probably move pretty quickly because of these loans.

      He’s leveraged and leverage means risk. Porsche (the company) was leveraged and then was wounded and forced to sell by a stock drop. It could happen to Musk.

      But yes, it probably won’t. It’s good to know, but no one has to go overboard.

      1. Loans get called, when it is a stock leveraged margin loan, from a broker, like some of these are, and even then, the call is based on a margin equity.

    4. Someone out there says:

      If Tesla declares bankrupcy his stock is going to be worth exactly 0.

    5. Guest 7 says:

      Also, Elon owns about 50% of SpaceX, which worth about $10B right now. He can easily sell a few shares SpaceX and payoff the 0.6B debt. Or borrow a little bit against SpaceX shares, and payoff the current 0.6B borrowing. Now he has another big business in the making – Tunnels. Even in the worst case, he has a few rich friends that he can just go and get a personal loan.

      This topic has been discussed extensively in the past. Elon said he is very careful to keep the loan to net ratio below 5%. There is no risk here. I can tell shorts really run out of ideas.

  2. Rebel44 says:

    IMO, since Elons loans are worth less than 10% of his Tesla shares value, its not a problem.

    1. Guest 7 says:

      Elon’s net worth is about $20B and increasing at a fast pace. Those who has no clue about SpaceX and Tunnels will only focus on Tesla. They also have no clue about Founders Fund.

      It’s fine if they only focus on Tesla. But they also don’t understand Tesla at all. With all these clueless bears on the short side, I can tell it will not end well for the shorts. My only suggestion to shorts is “short more, guys.” What can go wrong? You will make a lot of money when Tesla bankrupt. Also you can happily claim you have been right all this time.

  3. DJ says:

    Who cares if he sells some stock here and there and also borrows a reasonable% of his net worth.

    How many of the people here have a higher debt to equity ratio, I am betting a lot!

    1. Sublime says:

      Investors care. The CEO selling shares needs to be disclosed to the public (I think in some cases before it’s even done). If you own stock in a company (any company) and the visionary, founder, CEO begins to liquidate… most people think it’s time to find the exit.

      1. Guest 7 says:

        Years ago Amazon CEO said he planned to sell large number of AMZN shares. Many smart people said that’s a sign AMZN topping. Turned out they were all wrong. After his selling AMZN went up a lot.

        Same for Google CEO, he planned to sell lots of shares, then he did, then Google stock continued to go up big time.

        When Steve Jobs died, smart guys said APPL is done. Recommended “short”. Turns out AAPL continued to go up big time.

        All of these tell me, it’s case by case, has to value the company, nothing else matter much.

  4. ffbj says:

    Since rates will rise even more, might as well get some while you can.

  5. Pushmi-Pullyu says:

    I admit to being more than a bit puzzled as to why this article is appearing at InsideEVs. Why is Musk’s heavy investment in his own company, coupled with his own decision to pay himself only “a meager salary” as CEO of Tesla, being portrayed as though it’s somehow bad?

    If a lot more CEOs of large companies were paid only “a meager salary” while being given lots of stock options, that would give them a real incentive to lead the company to long-term financial soundness. What a refreshing change Musk is, as compared to the general trend in the U.S. of paying CEOs obscenely bloated salaries and giving them “golden parachutes”, rewarding them even while they concentrate on short-term profits at the expense of long-term financial soundness!

    Let us please remember that Musk has put himself very far out on a limb, “betting” his entire fortune to keep Tesla from going under at least once if not more often. I dunno about anyone else, but I think Elon Musk has shown he’s far more committed to Tesla Inc.’s success than are most CEOs. So again, where’s the problem?

    There isn’t any problem; this is just an attempt to put negative spin on something that is very positive!

    Here’s a relevant quote regarding the obscene levels of CEO salaries in the USA:

    Over the last several decades, inflation-adjusted CEO compensation increased from $1.5 million in 1978 to $16.3 million in 2014, or 997 percent… Due to this unequal growth, average top CEOs now make over 300 times what typical workers earn. (Source 1)

    When compared to CEO compensation in other countries, different writers figure differently, but an article in the Washington Post, whose claim seems to be about average, pegs the wage gap in America at more than five times what it is in the USA. (source 2)

    Source 1:
    “CEO Pay Has Grown 90 Times Faster than Typical Worker Pay Since 1978”

    http://www.epi.org/publication/ceo-pay-has-grown-90-times-faster-than-typical-worker-pay-since-1978/

    Source 2:
    “The pay gap between CEOs and workers is much worse than you realize”

    https://www.washingtonpost.com/news/wonk/wp/2014/09/25/the-pay-gap-between-ceos-and-workers-is-much-worse-than-you-realize/?utm_term=.485581aaf3cf

    1. Pushmi-Pullyu says:

      Edit: …the wage gap in America at more than five times what it is in Japan.

    2. Ambulator says:

      “…pegs the wage gap in America at more than five times what it is in the USA.”

      What does America refer to here?

      1. Ambulator says:

        Thanks.

    3. Spider-Dan says:

      There are an entirely different set of problems involved with a CEO leveraging his company’s stock for income; we saw this repeatedly from 1998-2008. CEOs that lean on the value of their stock to backstop large personal loans face the risk of tanking said company if their creditors call in the loans.

      A CEO selling off stock in a company he owns is a Bad Look at any time, and saying, “The company is fine, I just needed some quick cash to shore up my personal finances” – for a company that is essentially still a startup – can send people scurrying for the exits.

      1. Susie Ruth Powell says:

        “running for exits” – Let them out. A man with vision should be allowed to risk it all. Let us not kick him down some stairs, just run away and pick up our own dreams and visions.

        1. TwoVolts says:

          Nobody is kicking any one down any stairs here. Someone is merely sharing an opinion in a forum regarding actions affecting a publicly traded company.

    4. Guest 7 says:

      “We bears don’t care about pay gaps. We don’t care if a CEO is paid $50 million a year, or $1 a year at his own request. That’s not our business.

      The only thing we care and hate is Elon himself. We hate anything he does. We just want him fail so we can make money from short side. That’s all.” – from the heart of a longterm short.

  6. Four Electrics says:

    The debt to asset ratio is not the problem here. The issue is that Musk buys Tesla stock as part of new offerings, but using money borrowed against Tesla stock.

    So he’s not really buying any stock at all, and it’s a borderline lie for him to promote these kind of shenanigans as if he’s ponying up his own money. Does he really believe people are this stupid? Or that he is that clever?

    1. Michael Will says:

      Still sounds like try to put a negative spin on a positive thing. What he likely thinks is that he is all in on the future and is going to make it happen. And as P pointed out his wealth is Tesla and spacex and some other boring company at the least.

      He for sure committee a lot more than any other any other CEO.

      I wish him the best.

    2. Anyone van borrow against stock they own! You just need to sign off on the risk for a leveraged account, which is what this comes down to!

      It’s the same as my Option Trading Account , where you are positioning yourself for a possible future debt or large cost to come due at the strike date!

  7. Mister G says:

    Musk is putting his ARSE on the line for Tesla because it is about cleaning up our transportation system. Some people will never understand.

    1. Bonaire says:

      Carlos Ghosn has sold more EVs than Musk. Hmm. Any tip of the hat that way? Or is this about being a stockholder?

      1. Anti-Lord Kelvin says:

        On the other hand, Ghosn sold much more dirty diesel cars and apparently with some cheating device too, so I think the balance is in favour of Elon Musk, unless he starts to sell diesel generators for fixing grids from isolated Pacific Island to a country with the size of a continent…Oh wait, it’s exactly the contrary which is happening! My God, how sorry I feel for all these “stable boys” of the XXI century trying to stop the inevitable fall of their dark and dirty oil and coal obsolete world with these type or articles, blogs or “campaign donations” for some stupid and greedy lawmakers…

      2. Mister G says:

        Ghosn borrowed $2 billion from US government and all we got was the Leaf in 2010. And 7 years later the Leaf hasn’t changed much. On the other hand, Musk borrowed half a billion dollars and we got the roadster, model S, model x, power wall, gigafactory. And this year the model 3. In conclusion, Ghosn is no Musk.

  8. Bonaire says:

    For a Billionaire, he sure borrows a lot of money.

    1. Interesting side point,
      I remember hearing from ‘The Real Donald Trump’, a few years back, about borrowed money:

      If you default on a few $100,000 – you have a problem; but if you default on a ‘Few Hundred Million $, it’s the Banks Problem! (Maybe it was ‘A Few Hundred Billion’, can’t remember for sure now!)

      1. Nemo says:

        Old saying, doesn’t originate with Trump.

        1. Bonaire says:

          Underwriters just got $130M in fees and he borrowed $100M. Seems fair. As long as they keep feeding the banks fees for convertible hedges (which makes no sense ever since the first convertible notes were allowed past the $161.88 conversion point even after paying large hedges. They should save their hedge fees and simply invest that money into company resources.

  9. EV Jo says:

    I wonder if the people who are shorting Tesla planted this. They are going to get squeezed once Model 3 production starts later this year (IMO).

    1. Get Real says:

      Absolutely a career Tesla shorter planted this, his name is Mark
      Spiegel and he used to pollute this site very frequently with his serial FUD regarding all things Tesla.

      that is until Jay became tired of his constant FUD and told him not to bother posting here unless he had something truthful to say so he went away.

      However, InsideEVs does have several mini-me serial Tesla Fudsters so any article like this will bring in these desperate d-bag vultures who have been spectacularly unsuccesful in attempting to sway the market.

  10. I see no problem here. What was the question again?

    Please mention “analyst” in the title so that I can skip reading right away. 😉

    1. Aaron says:

      +1

      This article was written without an understanding of how this level of financing works.

  11. TwoVolts says:

    The expression that was mockingly applied to General Motors a generation ago was: ‘We Lose Money on Every Car We Sell But Make It Up In Volume’. It’s reasonable to point to the 400k reservations for the Model 3 and conclude that Tesla will be different. But they will be selling the Model 3 at less than half the current unit price of the S or X. They will also be reaching peak sales of the M3 at a time when the IRS tax credit will be phased out for Tesla. The tax credit is not a major consideration for S or X purchasers, but it is relatively more significant for M3 purchasers that choose to follow through on their reservations.

    Even if you make optimistic assumptions on margin per vehicle and total actual purchases, the numbers still don’t come close to making Tesla profitable. And if they have problems with the M3 launch that lead to higher costs, the old ‘make it up in volume’ expression will be applied to Tesla this time. In such a scenario,Tesla stock will suffer, and they will not be able to raise much cash from additional stock offerings without significant share price dilution. Their only option left will be to borrow more money.

    1. George Taylor says:

      TwoVolts has not done that good a job of trying to understand old Elon Musk’s method of thinking. It is profoundly scientific, rather than simple economic. Of course Musk understands the simple economics involved. And he also understands the costs and problems associated with current car design and manufacture.

      Has TwoVolts checked out the difference between the bonnet – or hood – of a Nissan Leaf and compared it to the hood of a Model S – or 3? The hood of the Leaf is jammed full of stuff. That takes a lot of time and manpower to put together. The hood of a Model S is completely empty! All the components and complexity of the Nissan Leaf’s hood – has been fitted inside a liquid cooled can the size of two footballs near the rear motor, by the rear axle. Which coincidentally helps allow the incredible performance of Tesla cars compared to any other car on the planet, electric or petrol.

      Has TwoVolts checked out the difference between the dashboard of the Leaf and the Model 3? The Model 3 has no dashboard. It is missing 30 switches and all the associated wiring.

      The Model 3 has been designed to be 100% manufactured by robots. Musk has said that the design of the machinery and layout in the manufacturing plant is 10x more difficult than designing the car. He has said that they are working on version 1 of the factory – and that there will be a version 2 of the factory, and then a version 3.

      So the cost of building high volumes of the Model 3 will get cheaper and cheaper – and will be in a completely different league from car manufacture anywhere else on the planet. Of course others will have to copy him, but he will have a 5 to 10 year head start.

      1. TwoVolts says:

        George,
        “Has TwoVolts checked out the difference between the bonnet – or hood – of a Nissan Leaf and compared it to the hood of a Model S – or 3? The hood of the Leaf is jammed full of stuff.”

        Are you suggesting that it is easier (from an engineering standpoint) and significantly less expensive to create a ‘frunk’ and redeploy the “stuff” that is inside the Leaf’s hood (or bonnet, if you prefer) into liquid-cooled modules? I doubt it.

        As for use of robots, I assume you are aware that even the most labor-intense vehicle assembly lines still rely heavily on robots. Robots don’t require wages – but they are still not cheap. Every Model 3 – as I understand it – will include all of the hardware for autonomous driving. Does that sound like an inexpensive vehicle to build?

        I simply do not buy your argument that Tesla’s manufacturing process is so much more efficient and their car design so superior (from a cost standpoint) to all others – that they have a significant cost advantage over their competitors.

        I think we can both agree that Tesla is a technology leader and has proven they can build a really great car with a very high price tag. I am impressed with what Tesla has done, and have my own reservation for the Model 3. Very few doubt whether Tesla makes great cars. But that is not the question. The question is: Can they survive financially? To do so, they need to deliver financial results (i.e., profits). They have yet to do so.

        1. 3rd start up says:

          why does the drive shaft go through the knuckle casting ?????

          1. TwoVolts says:

            Is this a riddle? To get to the other side?

            I’ll play along: Why does the drive shaft go through the knuckle casting?

  12. John Gibbons says:

    Such high debt backed by company stock certainly can be a concern. McClendon has $1.1bln in such loans at Chesapeake before taking his own life. In that case there were also conflicts on interest. Musk bought his most recent recent one by merging TSLA with Solar City. There is no positive cash flow for the resi solar business as far as the eye can see, much further out than for Tesla itslef. This is a very difficult short, but it may prove worth it. If you never cover your short there is no tax on the gain.

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