Thursday, August 9, 2018

"Tesla Going Private Would Demolish Doubters in Default Swaps" (TSLA)

First up, the headline story from Bloomberg:
Elon Musk fired a bazooka in his war against Tesla Inc.’s equity market short-sellers when he announced he’s considering taking the company private. His plan would also most likely wipe out investors who bet the money-losing automaker would eventually default on its bonds.

The cost to insure against Tesla failing to make good on its debt fell to an all-time low, with five-year credit-default swaps implying just a 35 percent chance of a missed payment in the next half-decade, down from 43 percent earlier this month. Even that seems far too high if you believe Musk will follow through on his privatization plans (and that’s a big if). That’s because such a move would most likely trigger the bonds’ change of control covenant, which would pay holders 101 cents on the dollar and take out the unsecured debt.

In other words, Tesla can’t default on debt that’s already paid off, just as investors can’t short shares of a company that goes private. Musk’s plan would crush the “large numbers of people who have the incentive to attack the company,” as he put it in a blog post.

It’s a stunning turn of events. JPMorgan Chase & Co. had reportedly led an effort to make a market in the derivatives, and Goldman Sachs Group Inc. supposedly quoted Tesla CDS prices, too. It could have been one of the few credits to have experienced a decent amount of CDS trading since the crisis.
Instead, the bonds rallied, with 5.3 percent coupon notes due in 2025 trading at 92.4 cents on the dollar. That does reflect some skepticism that the deal will truly come together. Bloomberg Intelligence credit analyst Joel Levington’s reaction was that “funding such a deal that could manage a large debt load as Tesla struggles to generate cash will be a challenge.”...MORE
And from FT Alphaville:

Change of control: How would Tesla's creditors fare in a LoLBO?
Yes, we're tired of thinking about Tesla, too.

But the company's bonds responded rather noticeably to the LoLBO, which, as Matt Levine covered nicely yesterday, makes very little sense as an actual LBO.

First the high-yield bond maturing in 2025, which spiked before falling back to a price slightly above its pre-tweet levels:
Tesla's convertible bonds have held up better. The $230m of legacy SolarCity converts maturing in November are trading near par -- 99.5 cents on the dollar on Wednesday, via TRACE -- even though their conversion price is $560.

The $920m of converts maturing in March 2019 have been trading above par, as the stock has traded above their conversion price of $359.87:

Of course, by the time those converts mature in six months, investors should have a better view into the likely success (or lack thereof) of any go-private transaction. If the deal does not occur, it is unclear whether Tesla's shares will hang on to their recent gains. Even if they do, higher share prices will probably not provide the company with much “ relief”.

That's because the company's converts and high-yield bonds have covenants that require the company to buy them back in this type of situation.

Some of these covenants are clearer than others. For example, the company has to buy back the 2019 converts if it goes through a “Fundamental Change”. Here is how they describe such a change in the prospectus, with our emphasis:...MUCH MORE