Musk’s Proposal Creates Liquidity, Uncertainty, For Tesla Bonds

Tesla is more than a manufacturer of electric vehicles. It is more than a stock which is currently down about eight tens of percent, trading at three hundred and seventy seven dollars. It is more than a company that was founded by Elon Muskoo holds nearly of the shares. Tesla is also a company that has eight point six billion

dollars worth of debt. And here to tell us about that debt and the very as bonds that the company has issued is Joe Levington, our senior credit analyst for Bloomberg Intelligence, and he joins me here in our eleven three oh studios. Joel, it is always a pleasure. I was gonna say, the best way for me to do this is just to say tell us everything we need to know about what is going on with Tesla bonds

because they run the gamut of maturities. There are some that are maturing this year, and there are a lot of interesting details in the bond covenants which actually were affected by yesterday's tweet. Yes um I would say three things. One, the immediate effect is that three point three billion dollars worth of their convertible debt went into the money yesterday off the news, with the stock rose above the three D fifty eight dollar threshold where where those bonds trade.

And that includes nine million dollars that comes due next March. So from the liquidity stamp point, the immediate impact is positive. Just explain that for people, So this nine hundred and twenty million dollars it's no longer debt, doesn't have to be right, it can be converted into equity. And that that's true for all all of it, mainly in twenty two issues as well as the slug next March, and

so that would be number one. Number two, to your point about the covenants in the bonds which are in the Bloomberg Barkleys in disease, they have a change of control provision and that provision says that a change of control must include a controlling investor owning fifty which initially I think people thought that that is what was going

to happen. When Mr must said that I am going to take Tesla private or I'm considering taking Tesla private, the pronoun I being important there, yes, and then he changed he changed his language slightly to there will be no controlling investors, so that would keep the unsecured bonds that they have outstanding, or theoretically that would keep it outstanding and a privatization. And so then it becomes well,

what does that mean for those bond holders? And for that I would go to point three to say, look, the issue here would be structural subordination. If they issue secured debt that will get the unsecured notes will get primed, meaning that the secured debt will be on top on the capital structure. Then these blump bonds in the Bloomberg

Barclays indocy and then the equity owners. And when you look at that relative to what rading agencies have done in the past with structural subordination, it could mean one to notch is worth of downgrade. So that would be step one. What does that mean in terms of value for the bonds. The value would be if I look at triple C bonds, which is where that might head, would mean about an eight percent yield for five in

the triple C zone. That is about a hundred and thirty basis points wider than where we are today, which is equal to about five or six points. That would be a worst case scenario, or how I would frame a worst case scenario. Now, it's true that nothing can happen because nobody has seen any of the financing or if any, if any debt will be issued at all. It could be all equity for all I know. UM. And of course there's always a case where he might

decide to call these bonds back anyway. UM. And the way that my math looks at it would indicate that there's about a fifteen percent chance that he would call the bonds in, about forty five percent that would go to triple C, and about forty uh that nothing will happen. That seems to be where the bond yields are today. Are the covenants that you've just described unusual? They're not unusual, but it is very unusual. Uh. You know, as we

come up on the anniversary of these bonds. Uh. For a issuer of such weak credit quality to issue unsecure debt and issue with um you know, almost investment grade type covenants, very very limited covenance. But is it usual to have a actual stock price for the convertible bonds?

What did you say, three fifty eight dollars a share, and have the CEO of the company do something that would indicate a price for the stock that is higher in order to actually trigger that potential convert and then remove that as debt from the balance sheet so that you can then go out and issue more bonds. Well, Elon Musk is definitely not usual. I have never seen that before in my twenty years of of doing credit research. But you know, twenty years ago there was no Twitter. No, no,

clearly I understand that. But I mean, twenty years ago, there were bonds, and there were bond covenants. This is true. But I've never seen anybody take such a monumental offering or potential action and just throw it out there on Twitter as if it's you know, like, uh, just a general thought in his mind. Based on your experience, what would be the normal pattern of trying to take a

company of this size private? Sure, Well, typically what I would expect is that the company would be issuing a press release uh and through an eight K filing with the SEC, and that would outline you know that they are investigating strategic alternatives. I think Mylan said something like that today as a very recent example, ticker m y L. And you take it from there. You explain here's the reasoning or here's the logic, and it will take this

amount of time. It usually doesn't come out in you know, a sixty one character tweet. Thanks very much, Joe Levington. We always learned a lot. Senior credit analyst for Bloomberg Intelligence talking about Tesla and Tesla bonds. The topic right now is Tesla and the shares of Tesla are down about three quarters of a per cent is coming after Chief executive Elon Musk tweeted yesterday that he was planning and looking forward to bringing the company private at a

price of a share. Here to help us understand this more and get his reaction is Gordon Johnson. He is managing director Alternative Energy, Metals and Mining as well as equipment analysts for Vertical Group and Gordon just to underscore, he has already a cell recommendation on Tesla with a price target of ninety three dollars. Shares of Tesla currently traded three hundred and seventies six dollars. Gordon, always a

pleasure to hear what you've got to say. What what was your reaction when you saw or learned about the tweet from elon Us? Well, I gotta tell you, Keim and thanks for having me on. I mean, initially it was sure excitement because it seemed to me like this was Thennell and the coffin. Um. I mean, you gotta think about this, right, let's just take a step back just a few days ago. Emon must promise that they're

gonna be profitable forever um starting in three UM. So why would he need to go private to end negative propaganda from the shorts? I mean, if they're gonna be profitable forever and he's saying he's gonna go private at I mean the short covering alone, we drive the stock to five dollars. I mean, you gotta think about all the dynamics regarding an LBL. First and foremost, average biout.

If you're a leverage biout investors, what you're looking for most is keep it or money generation for the cup from the company to pay the interest on your debt and ultimately the debt. And we know that's not what this company does. And we know that these um you know, they they rebuffed an investment offer from Saudi Eurabia. So if you're passing the hat uh for the largest lb OH syndicate in history, why would you say no to a big check? I mean, it just doesn't make sense.

And when you think about the fact this would be a seventy or eighty plus billion dollars deal, um uh, you know, and and then it's my newly choreograph. I mean, the local legal risk for any party involved would be significant. So you know you're talking about you know, uh multiple and uh lawyers that would need to be involved, multiple investments would need to be involved. And we've heard nothing from any of these Tesla financiers or lawyers regarding a

potential LBO. And just today we learned that you know, uh, the board members are saying they just started talking about this last week. Listen, here's the thing. The question is if the STC does their investigation, or if they investigate and they decide there's wrong doing here, well, Tesla investors care, you know, if Elon must broke offs here, well they care, probably not. But I think the bigger problem is if

there's no real offer out there. If Elon Musk can't over the next few weeks show that there's a real offer out there, I think he has serious problems with respect to his current investors and credibility. I think that's the real problem. And when you're thinking about you know, even if Elon Musk rolls the shares, and you know the share, you know the the employees roll there shares, you're still talking about sixty plus billion and capital that

needs to be raised. You have two current investigations alleging frauds with both with Solar City and with the amount of Model three is produced. You have a number of other potential issues um underpinning this company. With respect to a potential sec Wells noticed that maybe out there. I

know that people have said that's not the case. But if you listen to the question on the call, the analysts asked the question and not ask Tesla, do they have a Wells nonese that do you have something that procludes you from raising capital, which is not the definition of a Wells. Notice this just seems, I mean, quite frankly ludicrous and uh, you know that was our reaction yesterday. Okay, is there a way that you can see Elon Musk actually completing a deal like this? Would it be? Is there?

I mean, set aside for just a minute your skepticism on a technical basis. Is this a deal that is just too big to get done? Or is it possible? That's a great question, Pim, But I don't even think it's about the size of the deal. Again, think about this. A leverage buyout is based on a company generating cash. So if you're an LBO investors, you effectively take debt

in a company to take the company over. What the prospect being they're going to generate cash to pay you back for that debt or pay you back your interests and then pay you back for that debt. When has Tesla generated never? So why as an LBO investor would you be willing to go out on a limb and risk potentially uh, you know, a huge default and wasting your money. I mean, it just doesn't make any logical sense.

And I think that investors in the public, and you know, quite frankly, sec needs to see this actual money that he says he has secured. Those two words money secured that he said, I think need to be proven out over the next day's, last weeks, and we're highly skeptical that's going to be able to be the case. You know. It's like a very general question, is there enough money out there to do this? Yes? But doesn't make sense absolutely not. Well, let's let LBO investors scrutinized bills much

more than equity short sellers do. And I think that's what's gotten lost in a lot of this, you know, uh, you know story. I want to thank you very much for joining us. Gordon Johnson, Managing director Alternative Energy, Metals and Mining and Equipment Analysts for Vertical Group, talking about Elon Musk's Twitter proposal to take Tesla private at four hundred and twenty dollars a share. Stocks have gained this year.

The SMP five hundred is currently up nearly seven percent, NASDAC stopped SIR stocks are up nearly fourteen percent, and the Dow Jones Industrial average up just three and a half percent. Here to tell us what to do with money is Chuck Lieberman. He is the chief investment officer at Adviser's Capital Management. He is also a Bloomberg opinion columnist. He helps to manage more than one point three billion dollars of customer assets based in Ridgewood, New Jersey. Chuck Lieberman,

thank you very much for being with me. Maybe, and I promise I'm not gonna ask you about Tesla, so you can put that one to the side, right. I mean that you know there are other things in the world. Uh, tell us what you take away from all of the information regarding jobs and the health of the US economy and how that translates into a strategy for investing money. Sure, well,

I think everyone agrees that fest labor market is fairly tight. Uh. Some people think there's uh there are some people on the sidelines who could still be sucked into the job market. But the data, no matter how you look at it, in the case pretty clearly that labor is scarce. We have more job openings than unemployed. The unemployment rate is down at very low levels, historically cyclically low levels. Um. We're seeing uh, fifty year lows in unemployment claims. So

by every measure, labor is scarce. That's beginning to drive up labor costs. Uh. Some people make the argument that labor costs are not rising that quickly. But if you look at the last five six years, you can see the labor costs started to rise when the unemployment rate hit about five So with the unemployment rate now below four percent, there's every reason to expect more upward pressure on labor costs, and ultimately that will flow into inflation. So that gets to the things to avoid in the

things to play for. With a little bit higher inflation and solid economic growth, you want to be in the cyclicals or companies that will benefit from higher inflation or higher interest rates or accommodation, and you want to avoid the ones that are susceptible to those factors. So the susceptible areas are at the bond market, especially long term bonds, and especially high quality long term bonds that include utilities, real estate, investment, trust, consumer stables. Those are royal areas

that we see as relatively vulnerable. And the areas that benefit are financials which benefit from rising interest rates. UH, energy and pipelines in particular because they'll benefit from rising prices for crude oil and more volume passing through pipes um, so those are roll attractive areas. Let's talk a little bit about energy. What kinds of energy companies if you

can specifically, we're talking master limited partnerships. Are you talking about pure play energy companies, exploration and production, upstream, downstream? Where would you like to be, Well, it depends on the risk appetite and what the client needs. So if they need income, then midstream and downstream are great places

to be because they generate a lot of income. The industry is still transitioned from UH partnerships and incentive distribution rights to corporations, and so that's creating a little bit of turmoil and uncertainty in the market. Uh, just explain if you can. I hate to break in, but just explain what is going on, because this is an important point. It's it's a way in which master limited partnerships have typically operated in the energy sector. And as you say,

that's changing, yeah, well that's exactly right. So companies used to have these UH sort of operations, daughter companies, spinoffs, however you want to describe them, and those companies would be structured as partnerships with the ownership either in the hands of the public or the parent, and the parents with quickly UH reap some benefits every time the dividend paid to the limited partners increased, so they were motivated to increased dividends for UH, for the investors, but it

also meant that the company had relatively little cash flow to finance investments, so the company would be required, really forced to use the capital markets to raise capital and pay for capital investment. UH. That became untenable when oil prices fell and stock prices fell and the cost of capital went up very dramatically. And so these companies are now being converted into corporations and the entire partnership structures

is basically being thrown away or gotten rid of. UH. Some more of these companies who are going to operate like traditional companies, where they're going to retact and retain more cash flow, more profits in order to finance their investments. Okay, great description. Tell us now about financial stocks. Do you want to be in banks? Do you want to be in regional banks? What kind of banking stocks are? Financial entities are important? Well? I think the regionals and the

money centers are both attractive. UM. I happen to like some of the money centers because they are so cheap. We're talking what JP Morgan Chase Bank of America. Well, JP Morgan Chase is sort of the criminal a crime of the industry, and so it's the most expensive, but it's also the safest investment. UH. City is the cheapest of the group. Uh, it's the least expensive. It's the most international of all the money centers. UH is the cheapest for a reason. Well, I think it's cheapest because

it's not as simple a story. Bank of America has a very large retail business. UM, it's very attractive, very cheap. City is cheaper still partly because of its international exposure. I think there's a very rational case to be made for a mix of investing across all of those companies. Do you believe that higher interest rates will show themselves this year? Yes, I like that. That sucks SYNC. You

don't hear that often. Well, I'm trying to be straightforward that Uh yeah, I think we are going to see it. I think at the margin, we're already seeing higher inflation. The Fed is going to continue to slowly methodically ramp up policy rates, meaning another basis points in September and another in December. But we're we're running out of room for us to be surprised by a shocking inflation number.

I don't dismiss the possibility. But it's already August, so I think we are going to get a number that is kind of a shock to the market. I think the market is very complacent about inflation pressures, and so I think that that's going to be the big mover for the bond market. Give you about twenty seconds, Chuck Lieberman. You mentioned cychnical stocks. What about consumer discretionary Uh, some

of those are fairly well placed. Also, with so many households now employed, unemployment so far down, consumers do have more discretionary income that they can afford to spend, and they're doing it. So the discretionary retail space is extremely competitive, however, so you really have to look at company by company. I think the cruise lines, as an example, are well placed, they will do well. The retail space for clothing is just an absolute minefield, and so some companies are losing

out and others like Amazon or picking up share. Thanks very much, Chuck Lieberman. He is the chief investment officer at Advisers Capital Management, is also a Bloomberg Opinion columnists. Helps to manage more than one point three billion dollars the world of cryptocurrencies for example, bitcoin Bitcoin now trades about five and a half percent lower than it did yesterday at eighty dollars for bitcoin, Ripple is down about twelve percent, Atherium down four percent, light Coin down seven

and a quarter percent. Here to help us understand a little bit more about the world of cryptocurrencies and their exchanges is Joe Marino. He is a partner in the White Collar Defense and Investigations Group at Cadwalader in Washington, d C. But he joins us here in our eleven three oh studios. Joe, it is a pleasure. Thank you for coming in. Maybe just give people a little bit of your background so they understand where you're coming from in your level of expertise. Sure him, and thank you

so much for having me so. My background is as a federal prosecutor and I specialized is specifically in terrorist financing at Main Justice down in Washington, d C. And just to give a little background as to what we used to look at in terms of how individuals would funnel money to terrorist groups. In the old days, it was cash, right, It was cash carried over the border,

sometimes mailed in FedEx boxes. Then it was Hawalla's right, which are these informal ways with very little documentation of moving money between parties as a way to avoid taxes. The regulators, the I r S, the Treasury Department and so on, and the FBI, and this would be electronic. Well, Hawailli's typically we're kind of old school, you know, person to person, So maybe two persons in the US would exchange money for the purposes of exchanging the same amount overseas,

mostly off the books. Well, now we're in a digital age. So now what we're looking at is largely unregulated, unbanked transactions through digital currency, and that is very much on the radar of federal prosecutors and regulators because they see this as really the wild West, and it's a way for people to avoid taxes, to launder money from criminal enterprises potentially, and you know, even to violate campaign finance

and various different things. So it's very much on the radar of prosecutors and regulators when it comes to cryptocurrency. And again, there's so much promise to this technology, so it's a shame that it's gotten a bit of a blemish from some bad actors. But when it comes to regulators, I would characterize their view of cryptocurrency as ranging from

highly skeptical to openly hostile because of these reasons. So what do you believe the government's process is in determining how to regulate or manage this market, Because as you just describe, they're not agnostic at all. They're not agnostic. So if you are an individual, you can mind cryptocurrency, you can invest in cryptocurrency, you can buy and sell cryptocurrency, and the government will largely leave you alone except for the fact that you have to pay axes on it.

And the i r S does consider bitcoin and other types of cryptocurrency to be property, and they expect you to declare and pay capital gains tax on that. And a taxable event can come out a number of different ways. It's not just when you buy or sell or trade

the cryptocurrency. It's when you buy something. So if you bought bitcoin at one hundred, it's now at two hundred, and you buy something at two hundred dollars, the i r S sees that as a taxable event and expects you to pay short or long term capital gains on that differential. So, but in general, if you're not in

the business of exchanging cryptocurrency, you're largely off the government's radar. Now, if you want to get into the business of exchanging cryptocurrency, and either you're doing crypto for fiat currency like dollars or euro or crypto to crypto like bitcoin and ether, and you do this on a regular basis as a

business to take advantage of the spread. Well, now the Treasury Department has made very clear it considers you a money services business and what that means means is it's a term of art under a statute called the Bank Secrecy Act from the nineteen seventies. And what it means is you are now subject to registration. So if you don't register and you engage as a cryptocurrency exchange, you

are operating an unlicensed money service business. If you do register, which you should if you think you fall into this category. Now you have a whole range of record keeping and reporting and audit responsibilities to finn SEND, which is the Financial Crimes Enforcement Network which is a part of the Treasury Department. And this comes to a surprise to a lot of companies, whether they be startups or traditional brick and mortar banks and broker dealers who want to get

into the crypto space. Now you said that this is something that the companies have to do. What are the what are the responsibilities of the people who are actually running the companies? Well, so it often these often come to a surprise, a surprise to these people because now they have not just tax, not just Treasury, but also even sanctions obligations. So you have to make sure if you're running a business now, you're not running a foul

of the various laws that apply to traditional financial institutions. Again, traditional banks, they're accustomed to being regulated entities. They know for for decades how to respond to Treasury, how to respond to the compliance divisions. With expertise such as yourself, they can call it's an entire industry, right, Not so much in the crypto space with these startup companies that are you know, they're just they're just figuring out the technology,

they're getting into it. It's exciting, they're getting investors, they're getting customers. They are often shocked at the compliance and regulatory burden that's imposed on then. And this is not a sleepy industry. Like I started off saying, the government is very much attuned to it. So they're looking to make examples, they're looking to delve into the books and records of these companies and figure out what's going on and are they in compliance. What are mixers and tumblers? Okay,

so those are terms of art in the industry. They are specific technologies that provide for further anonymity, and they're red flags to be doubt for. Right. So part of the appeal of cryptocurrency is that it's largely anonymous. Right. The blockchain documents the transaction itself, but tying people's names to those transactions can be difficult because there's no universal directory. So what mixers and tunnelers do is they make it

even more anonymous. Possibly that is appealing to bitcoin users for whatever reason that they want to stay you know, off the radar, but to regulators that's a red flag. So if I'm advising a client that's trying to get into the crypto space, I say, okay, if we're looking for red flags such as transactions to be wary of, or customers to avoid any involvement of a mixer or a tumbler or any other technology that further anonymizes the transaction.

Is something from the company perspective you want to be wary of. Do you believe that online gaming is an area that is specifically targeted by regulators to watch out for these kinds of red flags. It's definitely something that is going to be on is on their radar. So again, if you are triaging, you want to get into the crypto business, right you want to think about what kind of counterparties, what kind of clients am I taking on? And an online gambling company comes to you, it's one

of those red flags. Doesn't necessarily mean they're doing something wrong. They could be in full compliance if they're off shore and they're running their business in compliance with the laws of whatever jurisdiction they're based in. But do you, as a US company, as a bank or money services business, want to be doing business with an online gambling company knowing that they might be under the radar of US regulators who might take a lot of interest in that

particular client. Thank you very much for being with us. Joe Marino, excellent partner White Collar Defense and Investigations Group for KED Walader based in Washington, d C. Giving us his take on the world of cryptocurrencies. Much appreciated. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Box, I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.

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