If I collectively owned a enterprise with one other individual and the opposite individual mortgaged their share of that enterprise to purchase an unrelated enterprise that introduced me no profit, I might not be pleased to this. That is precisely what Elon Musk is proposing, utilizing his Tesla (NASDAQ: TSLA) shares as collateral for a mortgage to purchase Twitter (TWTR).
Musk has provided $54.20/share for Twitter, which might put the takeover’s worth at $43 billion, together with the 9.2% share he already owns.
A dedication to fund the transaction was posted final week on EDGAR’s web site. Elon Musk will present fairness financing and a gaggle of banks led by Morgan Stanley will present debt financing as follows:
- $6 billion in unsecured loans and $7 billion in secured loans (secured by shares of the entity that may personal Twitter) – to be repaid from Twitter’s future money flows.
- $12.5 billion margin mortgage secured by Elon Musk’s unencumbered Tesla shares
- Fairness financing of $21 billion might be offered by Elon Musk
Musk is utilizing a few of his Tesla inventory as collateral for the margin mortgage, however we do not know the place the $21 billion in money got here from. It’s attainable that Tesla shares may even be used as collateral for the fairness part of the deal.
A attainable supply of Musk’s funds
Musk himself has usually claimed to be “cash poor”, and it’s typically accepted within the media that he doesn’t have entry to very large quantities of cash.
He takes no wage from Tesla besides minimal wage, and previously he has solely bought sufficient Tesla inventory to pay taxes on exercising choices. His second most vital asset is his possession of SpaceX, however I feel he is unlikely to promote any of it to fund the acquisition of Twitter.
The engagement letter makes no point out of a companion for Musk’s money injection, though that can’t be dominated out.
In order that leaves Tesla shares as a attainable supply of money. Both he intends to promote Tesla inventory or he has raised funds utilizing his Tesla inventory as collateral. It’s attainable that he’ll use a mortgage settlement that’s already in place to offer the $21 billion.
In the latest proxy assertion (August 2021), Tesla acknowledged that Musk’s shareholding “Consists of 88,331,125 shares pledged to safe sure private money owed”. If he follows Tesla’s coverage of limiting borrowing to 25% of inventory worth, that might indicate that he can borrow (or has borrowed) about $22 billion utilizing Tesla shares already pledged as collateral. .
That is hypothesis on my half, I clearly do not have entry to the main points of his personal funds, however the numbers match, and I current it as a attainable situation.
Whole shares pledged
The phrases of the proposed margin mortgage restrict the preliminary mortgage quantity to twenty% of the worth of the collateral. Which means that for a $12.5 billion mortgage, Musk should pledge $62.5 billion of Tesla inventory, or about 62.5 million shares at a worth of $1,000 per share.
This could carry his whole pledged shares to 150.8 million out of a complete of 170 million he at the moment owns. This leaves him with little or no leeway to lift funds sooner or later with out promoting Tesla shares.
He additionally has round 80 million vested inventory choices, however they’re restricted and can’t be used as collateral. The phrases of his 2018 bonus plan place a 5-year maintain interval on the shares (besides that he can promote sufficient shares to pay the strike worth and related taxes).
Margin Mortgage Phrases
The phrases of the margin mortgage are vital in understanding the chance to Tesla shareholders.
The mortgage is for 3 years and bears curiosity at “SOFR 3 months + 3%” (ie 4.78% at the moment), and an entry price of 0.5%.
Minimal funds are 5% per yr ($625 million).
Preliminary LTV is 20%
The mortgage could be referred to as on margin if the LTV reaches 35%, wherein case Musk would have two days to seek out money to scale back the LTV to the reset stage of 25%. The pledging of further shares to extend the safety shouldn’t be permitted.
Assuming a beginning worth of $1,000 per share, the margin name is obtainable at a share worth of $571, wherein case Musk would want to seek out $2.6 billion to scale back the mortgage excellent and convey the loan-to-value ratio again to the reset stage. This might power the sale of a few of Musk’s Tesla shares, placing downward stress on the inventory worth and additional decreasing the worth of the collateral.
Full compensation of the mortgage can be necessary if the VWAP of the shares falls under 40% of the share worth on the funding date. Musk must give you $12.5 billion to keep away from default if Tesla’s inventory worth falls under $400.
There’s additionally the matter of Tesla’s personal coverage which limits loans to 25% of the worth of the pledged shares and requires a money injection to appropriate any shortfall. This could set off a name for added money at a share worth of $800.
Margin lending additionally consists of an ordinary listing of occasions that might set off a full refund:
The final two are attention-grabbing:
“A judgment or order to pay cash in opposition to the borrower– It’s useless to remind most readers that the decision within the Photo voltaic Metropolis fraud lawsuit is predicted at any time, and a trial within the “secured funding” lawsuit is predicted to start in late Might. both of those may end in a judgment for cost of cash in opposition to Elon Musk.
“Any authorities investigation in opposition to the borrower that might moderately be anticipated to have a cloth adversarial impact– Musk appears to ask such inquiry with each motion or Tweet.
Any of those occasions, adopted by the success of the circumstances, would terminate the margin mortgage settlement and the complete $12.5 billion would grow to be instantly due and payable.
The chance for Tesla shareholders
Having a lot of the inventory pledged presents a danger to Tesla shareholders for which there is no such thing as a corresponding reward. Tesla earns nothing from Musk’s Twitter possession, besides for one more pointless distraction for its CEO
Over an eight-week interval within the fourth quarter of final yr, Musk bought about 11 million Tesla shares to pay taxes from his choice train. The sale had a adverse impression on the inventory worth, which remains to be round 25% under the degrees at which the shares have been buying and selling earlier than this sale.
A pressured sale triggered by the margin mortgage would virtually definitely put downward stress on Tesla’s inventory worth. It’s a danger to Tesla’s share worth of a inventory that gives no profit to Tesla shareholders.
With Tesla buying and selling at round $1,000, the margin name worth of $571 could seem far off. Even the $800 price ticket that might set off a money injection to satisfy Tesla’s personal insurance policies may appear out of attain. However anybody who remembers the dot.com bubble burst will let you know in any other case. High quality corporations like Cisco and Microsoft weren’t proof against this bubble. Tesla shares are additionally overvalued and won’t be proof against the bursting of the present bubble.
The very last thing Tesla shareholders want is a CEO hanging a grindstone round their necks through the use of a big portion of his holdings to purchase an unrelated firm simply to fulfill his personal ego.
There isn’t any compelling cause to purchase Tesla shares at present valuations, however buyers also needs to watch out of “shopping for the dip.” If the inventory worth have been to fall to the extent the place Elon Musk is pressured to promote, the worth may spin uncontrolled.