Tesla convertibles occupy secondary as B and C tranches contract; SolarCity in focus

By Abigail W. Adams

Portland, Me., Sept. 28 – Tesla Inc.’s convertible bonds were the focus of trading activity on Friday with CEO Elon Musk again the talk of the town after the Securities and Exchange Commission accused him of fraud.

All three tranches dropped on an outright basis. Tesla’s 1.25% convertible notes due 2021 and 2.375% convertible notes due 2022 were contracting dollar-neutral while Tesla’s 0.25% convertible notes due 2019 were unchanged, according to a market source.

SolarCity Corp.’s soon-to-mature convertible bonds were also losing ground.

Sources described the situation surrounding Tesla’s bonds as “dicey,” “dangerous,” and rife with uncertainty as the SEC seeks to oust Musk from his position.

Tesla’s tranches

Tesla was the focus of the secondary space on Friday as the electric car manufacturer’s stock plummeted after the SEC filed a federal lawsuit accusing Musk of fraud.

All three tranches dropped on an outright basis with the B and C tranches contracted about 2 points dollar-neutral, sources said.

Tesla’s 0.25% convertible notes due 2019 were down about 4 points outright to trade below par. They were seen at 99.25 bid, 99.75 offered versus a stock price of $270 early in the session.

They traded down to 99 with stock continuing to plummet in the late afternoon.

While down several points outright, the 0.25% notes were holding on a dollar-neutral basis, a market source said.

The short duration of the notes was pointed to as the reason why the notes were unchanged as the other tranches contracted.

The 0.25% convertible notes mature on March 1, 2019, after SolarCity’s 2.75% convertible notes which will mature Nov. 1, 2018 but before SolarCity’s 1.625% convertible notes, which mature Nov. 1, 2019.

They currently have $920 million outstanding, according to Trace data.

Tesla’s 1.25% convertible notes due 2021 dropped about 9 points outright. They were seen at 96.25 bid, 97 offered versus a stock price of $270 early in the session.

They were seen trading at 95 in the late afternoon.

The 1.25% notes were contracted about 2 points on a dollar-neutral basis, a market source said.

The 2.375% convertible notes dropped about 10 points outright.

They were seen at 102.5 bid, 103 offered versus a stock price of $270 early in the session. The notes traded just south of 103 in the afternoon.

They were also contracted about 2 points dollar-neutral.

Tesla stock closed Friday at $264.77, a decrease of 13.9%.

SolarCity in focus

While Tesla’s three tranches of convertible notes dominated activity in the secondary space, the SolarCity convertible notes were also trading down on Friday.

The soon-to-mature SolarCity bonds are “the interesting ones,” with analysts pointing to the bonds as the catalyst that could push the company into bankruptcy, sources said.

SolarCity’s 2.75% convertible notes mature on Nov. 1, 2018. However, the issue size is small with only $230 million outstanding.

The bonds traded down to 98.5 on Friday with the yield to maturity now over 20%. While a large yield, there is also an enormous downside, a market source said.

SolarCity’s 1.625% convertible notes due Nov. 1, 2019 were seen at 89.5 bid, 90.25 offered early in the session. They continued to trade down and were seen at 87.75 shortly before the market close.

The yield on the notes is now over 14%. There are $566 million of the bonds outstanding.

A dangerous situation

The latest development in the Tesla saga has further darkened the cloud surrounding the company with investors concerned about Tesla in a post-Musk world, sources said.

“There’s a lot of uncertainty,” with the situation becoming dangerous, a market source said.

The SEC filed a lawsuit against Musk on Friday over his early August tweet about taking the company private, which sent Tesla’s stock and convertible bonds on a roller-coaster ride.

The suit alleges Musk misled investors with false public statements and is seeking to bar Musk from serving as an executive or director of a publicly traded company.

Musk pulled out of a no-guilt settlement with the SEC prior to the lawsuit, CNBC reported.

“There’s a fine line between genius and crazy,” a market source said.

The situation is dicey and investors are concerned about the ability of the company to handle its quickly maturing debt with a new leader at the helm, another source said.

“It could all go up in smoke,” the source said.

Musk has repeatedly stated an additional capital raise would not be necessary to cover the maturing bonds. Analysts have remained skeptical.

Mentioned in this article:

Tesla Inc. Nasdaq: TSLA

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