Troubling times at Tesla
21 August 2018
After suffering an extremely volatile year, Tesla’s troubles are not over yet. Maddie Saghir explains more
Image: Shutterstock
Tesla, the electric vehicle and renewable energy corporation, has experienced extreme volatility this year, particularly from May through to 7 August. The company’s first week in May saw shares end the week flat despite earnings volatility. In July, Tesla saw the cost of insuring Tesla debt against default rise, and in August, Tesla’s equity short position was above $13 billion for the first time.
IHS Markit evaluated data found that the 5.3 percent coupon issue maturing in 2025 saw short demand trend up last autumn. As 2017 came to a close, some short covering coincided with the bonds tracking back up to 96 cents on the dollar. Then, in March this year, IHS Markit found the mid-close price hit 92.5, which was the lowest level following issuance of the bond in August of last year.
Tesla has lost a lot of gains; last year it topped out in September at $385 but in late January and early February, stocks closed at $353, $354, and $357, respectively. In June, shares dipped below $300.
In addition, Tesla saw shares end flat for the first week in May. Samuel Pierson, director of IHS Markit, said that the much-discussed Tesla earnings report and conference call certainly added to the volatility, though the net impact was fairly muted, with shares ending the week with little change from the start.
Commenting on the flat shares, Pierson said: “Short sellers have continued to increase bets against the firm, which currently total more than $12.6 billion.”
He explained: “The short balance in dollar terms has increased 45 percent since the year-to-date low price, observed 2 April, resulting from both share price appreciation (16 percent) and an increase in shares shorted (24 percent). The borrow cost has continued to trend up, with substantial spikes around proxy record dates.”
“Earnings season can be a minefield for short sellers, with the known catalysts providing immediate feedback to a short thesis. Witness Frontier shares have appreciated more than 40 percent since their earnings report on 1 May.”
In terms of numbers, Pierson stated there were 27 million shares short (for Witness Frontier), representing a 6 million share decline from the 2018 high on 3 April.
He added: “It’s worth noting that some portion of the short demand is used to hedge long positions elsewhere in the capital structure, including the convertible preferred shares. Following the report, short sellers added 6.3 million shares to the position, putting the total short back over 33 million shares.”
For the following month in June, equity shorts reduced their position size by eight million shares in the first three weeks of June, while the share price increased by more than 20 percent.
Meanwhile, in July, Pierson announced that the cost of insuring Tesla debt against default was on the rise.
IHS Markit found that there had been increased interest in trading credit default swap (CDS) on Tesla since late June, at which point the five-year CDS was offered around 18 points upfront.
The upfront points on the offer widened during the second week of July, and peaked above 23 points on 12 July following reports that former employee Martin Tripp, had filed a whistleblower complaint with the US Securities and Exchange Commission.
Credit shorts were active in the 5.3 percent 2025 bond from the initial issuance in August last year, borrowing 8 percent of the total issue size within the first week following the offering, or $140 million at par.
The short position in the 2025 bonds, implied by borrowing demand, had increased to $264 million at present, or 14 percent of the issue size.
Pierson said: “While that suggests there’s another 86 percent of the issue to go, that isn’t really the case, as owners of the bonds have only put 14 percent of the issue into lending programmes where they can be readily borrowed by short sellers or market makers.”
He added: “The utilisation of that lendable supply has not been lower than 95 percent in 2018, despite the size of the pool increasing by $40 million.”
Earlier in August this year, Tesla’s equity short position was above $13 billion for the first time, which compares to the previous peak being $12.8 billion in June. This comes after Saudi Arabia’s sovereign wealth fund took a $2 billion stake in Tesla shares.
The short interest equated to 20.7 percent of outstanding shares, down from the year-to-date (YTD) peak of 23 percent observed in June. Commenting on this, Pierson stated: “The short interest in Tesla hasn’t changed a ton over the last week since they reported earnings.”
Pierson added: “We’ve seen a 700,000 reduction in shares short, leaving the total at just over 35 million shares, well above the 31.5 million shares observed the last time the share price was in the $370s in mid-June.”
He also outlined that the short value was higher than any Standard and Poor 500 stock. Only Under Armour has a higher percentage of outstanding shares short with 24 percent.
Pierson stated: “There’s a lot of debt, around $9 billion, which short sellers are betting against via outright shorts in the underlying bonds and credit default swap contracts. The firm doesn’t need to go bankrupt in order for these trades to be profitable.”
While Musk is no stranger to backlash on Twitter, his recent tweets on the privatisation of Tesla resulted in a lawsuit calling the firm’s operations into question.
In the Tweet, Musk claimed that he would make Tesla private and that the funding for doing so had been “secured”. Shareholders responded by saying that this was an attempt to manipulate Tesla’s stock price and ruin plans for short-sellers.
Following this, shareholders filed a class action lawsuit, claiming Musk’s tweet was false and misleading information. As a result of the tweet, Tesla’s stock rose to $387.46, $45.47 over the previous day’s closing price (as 10 August).
Investors remain “sceptical” regarding Musk’s suggestion about making the firm private. Pierson concluded that part of this reason is that at yield in the 6 to 7 percent range could be a challenge for a firm, which continues to report losses to fund interest payments on an addition of many billions in debt.
According to Pierson, there has been no reduction in short positions in the bonds, currently over $300 million short the bonds (at par), compared with $12 billion-plus in the equity.
IHS Markit evaluated data found that the 5.3 percent coupon issue maturing in 2025 saw short demand trend up last autumn. As 2017 came to a close, some short covering coincided with the bonds tracking back up to 96 cents on the dollar. Then, in March this year, IHS Markit found the mid-close price hit 92.5, which was the lowest level following issuance of the bond in August of last year.
Tesla has lost a lot of gains; last year it topped out in September at $385 but in late January and early February, stocks closed at $353, $354, and $357, respectively. In June, shares dipped below $300.
In addition, Tesla saw shares end flat for the first week in May. Samuel Pierson, director of IHS Markit, said that the much-discussed Tesla earnings report and conference call certainly added to the volatility, though the net impact was fairly muted, with shares ending the week with little change from the start.
Commenting on the flat shares, Pierson said: “Short sellers have continued to increase bets against the firm, which currently total more than $12.6 billion.”
He explained: “The short balance in dollar terms has increased 45 percent since the year-to-date low price, observed 2 April, resulting from both share price appreciation (16 percent) and an increase in shares shorted (24 percent). The borrow cost has continued to trend up, with substantial spikes around proxy record dates.”
“Earnings season can be a minefield for short sellers, with the known catalysts providing immediate feedback to a short thesis. Witness Frontier shares have appreciated more than 40 percent since their earnings report on 1 May.”
In terms of numbers, Pierson stated there were 27 million shares short (for Witness Frontier), representing a 6 million share decline from the 2018 high on 3 April.
He added: “It’s worth noting that some portion of the short demand is used to hedge long positions elsewhere in the capital structure, including the convertible preferred shares. Following the report, short sellers added 6.3 million shares to the position, putting the total short back over 33 million shares.”
For the following month in June, equity shorts reduced their position size by eight million shares in the first three weeks of June, while the share price increased by more than 20 percent.
Meanwhile, in July, Pierson announced that the cost of insuring Tesla debt against default was on the rise.
IHS Markit found that there had been increased interest in trading credit default swap (CDS) on Tesla since late June, at which point the five-year CDS was offered around 18 points upfront.
The upfront points on the offer widened during the second week of July, and peaked above 23 points on 12 July following reports that former employee Martin Tripp, had filed a whistleblower complaint with the US Securities and Exchange Commission.
Credit shorts were active in the 5.3 percent 2025 bond from the initial issuance in August last year, borrowing 8 percent of the total issue size within the first week following the offering, or $140 million at par.
The short position in the 2025 bonds, implied by borrowing demand, had increased to $264 million at present, or 14 percent of the issue size.
Pierson said: “While that suggests there’s another 86 percent of the issue to go, that isn’t really the case, as owners of the bonds have only put 14 percent of the issue into lending programmes where they can be readily borrowed by short sellers or market makers.”
He added: “The utilisation of that lendable supply has not been lower than 95 percent in 2018, despite the size of the pool increasing by $40 million.”
Earlier in August this year, Tesla’s equity short position was above $13 billion for the first time, which compares to the previous peak being $12.8 billion in June. This comes after Saudi Arabia’s sovereign wealth fund took a $2 billion stake in Tesla shares.
The short interest equated to 20.7 percent of outstanding shares, down from the year-to-date (YTD) peak of 23 percent observed in June. Commenting on this, Pierson stated: “The short interest in Tesla hasn’t changed a ton over the last week since they reported earnings.”
Pierson added: “We’ve seen a 700,000 reduction in shares short, leaving the total at just over 35 million shares, well above the 31.5 million shares observed the last time the share price was in the $370s in mid-June.”
He also outlined that the short value was higher than any Standard and Poor 500 stock. Only Under Armour has a higher percentage of outstanding shares short with 24 percent.
Pierson stated: “There’s a lot of debt, around $9 billion, which short sellers are betting against via outright shorts in the underlying bonds and credit default swap contracts. The firm doesn’t need to go bankrupt in order for these trades to be profitable.”
While Musk is no stranger to backlash on Twitter, his recent tweets on the privatisation of Tesla resulted in a lawsuit calling the firm’s operations into question.
In the Tweet, Musk claimed that he would make Tesla private and that the funding for doing so had been “secured”. Shareholders responded by saying that this was an attempt to manipulate Tesla’s stock price and ruin plans for short-sellers.
Following this, shareholders filed a class action lawsuit, claiming Musk’s tweet was false and misleading information. As a result of the tweet, Tesla’s stock rose to $387.46, $45.47 over the previous day’s closing price (as 10 August).
Investors remain “sceptical” regarding Musk’s suggestion about making the firm private. Pierson concluded that part of this reason is that at yield in the 6 to 7 percent range could be a challenge for a firm, which continues to report losses to fund interest payments on an addition of many billions in debt.
According to Pierson, there has been no reduction in short positions in the bonds, currently over $300 million short the bonds (at par), compared with $12 billion-plus in the equity.
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