FreightWaves has covered Tesla’s product launches, technological innovations, and commercial stumbles fairly heavily for two reasons: the first is that Tesla’s identity as an electrified and autonomous disruptor is right in our wheelhouse. We admire Elon Musk’s vision and what he’s been able to accomplish—15 years ago when Tesla was founded, mass market electric cars were far-fetched science fiction, and today every major automaker is transitioning to EVs.
But the second reason we’ve been paying so much attention is that Tesla is a wildly overvalued company. Tesla’s market capitalization is larger than Ford Motor Company’s ($48.16B vs. $43.96B) despite selling fewer than 1/60th the number of vehicles Ford did in 2017. For reasons that baffle us, Tesla is valued like a software startup despite being a 15 year old automobile manufacturer. Therefore, we think that Tesla stock is an overhyped, unsustainable bubble, and we’ve been waiting, along with some well-known bears, for the other shoe to drop.
FreightWaves was skeptical about Musk’s claims about the Semi, and we’ve covered their ‘production hell’, engineering difficulties, battery supply chain, and executive turnover not because we’re fossil fuel enthusiasts bent on melting polar bear habitat or luddites who think nothing can change, but because we believe that Tesla is a poorly run company that is unfortunately more likely than not to go bankrupt.
It’s early in the week, but there’s already been a lot of bad news for Tesla. Crashes keep piling up. What’s most startling about these crashes isn’t that they’re caused by drivers who may or may not be operating Tesla’s Autopilot correctly, it’s the batteries’ propensity to burst into flame after the crash. In January we reported on the engineers who blew a whistle on Tesla’s sloppy battery assembly practices; it seems their concerns are being born out, and people are burning to death in accidents that should not have been fatal. The National Transportation Safety Board is investigating two recent Tesla battery fires (one in California that killed the driver and one in Florida that killed two teenagers), and Swiss police are investigating a fatal battery fire that occurred after a Tesla crashed last week.
Meanwhile, there’s been a steady stream of Tesla executives leaving for other companies. Top finance, sales, and engineering officers have left Tesla in the past few months. The latest officers to join the exodus were Doug Field, Tesla’s SVP of Engineering—who is reportedly ‘taking a break from the company’—and Matthew Schwall, Tesla’s former director of field performance engineering, who is joining Waymo. The departure of Doug Field, as Forbes pointed out, is a particularly challenging loss because he was the only remaining member of Tesla’s executive team with automotive engineering experience (six years at Ford as an engineer 25 years ago).
The most remarkable revelation in Forbes’ recent coverage of Tesla, though, hasn’t really been in the headlines—it’s the result of a deep dive into Tesla’s last 10-Q filing, from the first quarter of 2018. Near the end of that document, buried in the Ninth Amendment to the Credit Agreement, which itself is Exhibit 10.3, Tesla says that it’s collateralized its Fremont car factory.
Musk has said over and over again that Tesla won’t have to return to the capital markets to sell stock or debt this year, but can rely on its ‘standard credit lines’. Tesla’s standard credit line is a revolving facility with a maximum borrowing base of $1.829B; at the end of the first quarter Tesla only had $543M left. By offering up its main asset as further collateral, Tesla will be able to borrow more cash. But this is really the last, most valuable asset that Tesla can borrow against: Tesla collateralizing the Fremont factory is the equivalent of pushing all its chips to the center of the table.
The Ninth Amendment to the Credit Agreement does not specify how much Tesla thinks the ‘Fremont Real Property’ is worth, but one suspects that the 370 acres the factory is built on must be worth much more than the car plant itself. Before Tesla was at the Fremont plant, it belonged to NUMMI, a joint venture between General Motors and Toyota; Tesla was able to acquire the unused facility for just $42M in 2010. Before NUMMI shuttered the plant, it was the last major automotive manufacturing plant on the West Coast. It turns out that most companies don’t think it’s a good idea to build a car factory in the Bay Area, one of the most expensive labor markets in the entire world. The decline of industrial activity in the Bay Area has to, at some point, affect the fair market value of Tesla’s real property and thus how much money it can borrow against those assets, but at this point we don’t have the hard numbers.
To put Tesla’s mortgaging of its factory in context, reflect on how the company has raised money in the past. It started with selling equity in the form of stock, which is great because while you’re diluting your ownership of the company, you don’t have to make payments. Then, last summer, Tesla issued junk bonds, which have coupons they have to pay, but are still unsecured, meaning there’s no collateral. If Tesla decides not to pay back its bondholders, it can still hold on to its assets. Then Tesla issued asset-backed securities in February, where they essentially securitized their incoming lease payments and sold them off. With the move to collateralize the Fremont factory, Tesla is firmly into secured debt territory. We can infer that Tesla is piling on debt with more and more strings attached because creditors want more collateral backing up the risk they’re taking.
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