Tesla’s driverless cars could be in for a rocky road ahead, according to Samuel Pierson, director of securities finance at IHS Markit.
Pierson explained that the company is heavily shorted across its capital structure.
With the share price moving negative for 2018 to date, Tesla shares may be nearing a crossroads, he suggested, after trading up nearly 15 percent on the year in late February.
While equity short sellers continue to hang around, shorts in the company’s most liquid TSLA bond have made a tidy profit so far in 2018. They have not covered to lock in the profit, suggesting that they think the credit will continue to deteriorate, he continued.
The 5.3 percent coupon issue maturing in 2025 saw short demand trend up last autumn, he noted, pushing over $280 million in early November, according to IHS Markit evaluated data.
Coming in to the end of last year, some short covering coincided with the bonds trading back up to 96 cents on the dollar. This week, IHS Markit showed the mid-close price hit 92.5, the lowest level following issuance of the bond in August last year.
Short sellers have not covered, and there is still a par value of $251 million short in the 5.3 percent 2025 issue, equating to 13.2 percent of the total issue size, he observed. That represents the vast majority of $261 million total short demand across the four TSLA bonds with short balances.
The limiting factor for short sellers has been the available supply of bonds, with the utilisation of lendable supply currently at 99 percent─having not been less than 90 percent since October. Borrowing costs have thus trended up and are currently at the highest level recorded for new borrowings.
Pierson said: “For equity short sellers, there isn't currently much limitation on size, with active utilisation of supply from lenders at 70 percent, though that's well above the lowest level observed in 2017, just below 50 percent.”
“The cost of borrowing the shares is elevated beyond general collateral rates, but remains a far cry from the rates observed in late 2016.”
The proxy record date (on 7 February) caused rates to blow out to double digits for new borrowings, he added. “Some shareholders pulled back shares they had lent out so that they could vote them - and those who lent their shares were able to charge a premium to forgo their voting rights.”
He said the current short borrow is 29.8 million shares, up from 27.8 million on 15 March. The next exchange short interest publish on 26 March was collected for settlement on 15 March, so it may print lower than the last observation, but given the increase in borrows since then, he predicted the subsequent number released on 10 April will reflect the recent increase in short demand. The current equity short balance is $9.4 billion, making Tesla the most shorted US equity in dollar terms.
Pierson explained: “With the short demand for Tesla increasing through the recent sell-off - and the short demand for bonds fully utilising the available supply—it appears short sellers are looking for more downside before they begin to cover.”
Given the limited supply from lenders, the short balances are only $250 million for that issue. So far this year the bonds have decreased in value, so trading below 100 cents on the dollar, making it a profitable trade, but shorts haven’t started to cover yet. On the equity side, TSLA remains the most shorted US equity in dollar terms, with over $9 billion currently short.
He concluded: “Is this the same road we've been down before? Or are we perhaps just further along the road we've been on the whole time?” he concluded by asking before answering his own question. “Only time will tell...”
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