Tesla Bankruptcy? Fraudulent Conveyance?

An interesting Tweet popped up on my screen today regarding Tesla, bankruptcy, and possible fraudulent conveyance.

The Tweet looks cryptic so let's explain.

"SCTY" was the symbol for Solar City.

Zucchi is referring to Tesla's solar business as described in this November 2017 Motley Fool article: Tesla's SolarCity Buyout Looking Worse By the Day.

A year after paying $2.6 billion for SolarCity, Tesla appears to be shutting down the company's operations at a speed no one anticipated. If the trend continues, there may not be much of a solar business left.

Why did Tesla buy SolarCity for $2.6 billion if it was just going to shut down most of its valuable operations within a year?

Tesla didn't need SolarCity to start selling solar in Tesla showrooms or to develop the solar roof, which was actually a Tesla development. It seems to have been a bailout for Elon Musk and his cousins Lyndon Rive and Peter Rive, who would have lost hundreds of millions, if not billions, if SolarCity had failed.

Fraudulent Conveyance?

When Tesla bought SolarCity in late 2016, it was supposed to create a vertically integrated renewable energy company. People thought Elon Musk could marry EV sales with solar and combine SolarCity's installation arm with Tesla's Powerwall to create a path for customers to eventually go off-grid -- or at least charge their car with solar energy. When the solar roof was shown off last fall, the expectations got even higher.

But even before the deal closed, Tesla signed a deal that would bring Panasonic in as a partner and cut Silevo technology out. Now, it appears the solar panels Tesla has introduced are just rebranded Panasonic panels. And with Panasonic running the Buffalo plant -- dubbed "Gigafactory 2" -- Tesla doesn't have a new or differentiated product at all. It's just installing Panasonic panels.

How Musk & Family Cashed in on the SolarCity Deal

What's becoming increasingly clear about Tesla's buyout of SolarCity is that it was a huge benefit to Musk and his cousins Lyndon and Peter Rive. The three had $100 million of solar bonds issued by SolarCity, bonds that were recently bought back by Tesla. The three will have bonds transfered to Tesla under the same terms, unlike outside investors, but would you rather have a struggling SolarCity owe you $100 million, or market darling Tesla, who has easy access to equity markets?

The debt is on top of the 22.2 million SolarCity shares that Musk turned into Tesla shares and the 2.3 million shares the Rives converted. Had SolarCity gone bankrupt, as some major residential solar rivals have done, rather than being bought by Tesla, they would have lost hundreds of millions combined.

​Tesla Bonds in Freefall

Bloomberg reports Tesla Bonds Are in Free Fall.

In August, investors lined up for the chance to finance Tesla Inc.’s ambitious rollout of its Model 3 sedan. Wooed by Musk’s personal appeals, bond investors pretty much ignored the carmaker’s prolific cash burn and repeated failures to meet production targets and lent it $1.8 billion at record-low interest rates.

But now, after a spate of fresh setbacks in the past week, including a fatal Tesla crash and a credit-rating downgrade, bondholders are asking hard questions about whether Musk can deliver on his bold promise to bring electric cars to the masses before the company runs out of cash. On Wednesday, Tesla’s notes plunged to a low of 86 cents on the dollar, the clearest sign yet creditors aren’t totally sure the company will be money good.

​>The company, which has never shown an annual profit in the 15 years since it was founded, will need to raise over $2 billion to cover not only its cash burn this year, but also about $1.2 billion of debt that comes due by 2019, Moody’s Investors Service analyst Bruce Clark said in a report Tuesday.

Tesla is burning through money so fast that, without additional financing, it would run out of cash before year-end. To put that into perspective, that amounts to more than $6,500 every minute of every day, according to data compiled by Bloomberg.

With a junk rating of Caa1 from Moody’s on Tesla’s unsecured bonds -- seven levels below investment grade -- coming back to the market might prove to be too onerous in any case, says Bloomberg Intelligence’s Joel Levington.

Absolute Craziness

Despite all this, and despite the fact that three executives quit (two from the finance team), shareholders approve a $2.6 billion pay package for Musk.

Question of the Day

What is a Block Hole Worth?

What If Musk Heads to Mars?

Addendum

Fraudulent Conveyance is heading to court: Tesla shareholder lawsuit against SolarCity deal set to proceed.

A class action lawsuit by Tesla Inc shareholders against the electric car maker's chief executive, Elon Musk, and the company's board over the SolarCity deal was set to proceed after a Delaware judge refused to dismiss it.

Mike "Mish" Shedlock

Comments
No. 1-25
Mike Mish Shedlock
Mike Mish Shedlock

Editor

1) There could be fraud if details were withheld. 2) There is fraud by definition, according to the rules - whether or not the rules make any sense is subject to debate.Regardless, Libertarians rules DO NOT apply. Fractional reserve lending is the same way. It's fraud because it affects others. That I agree to let banks lend my 5-year CD for 25 years or checking account that is available on demand is irrelevant.

Long VIX
Long VIX

@stillCJ thank you for our both answers that did not have any real content or argument - they were very helpful and showed that you are very smart. Very unconfusing, indeed.

My main question was simple, if shareholders voted to merge then where is fraud? Tesla brings this as argument in response to plaintiff. Plaintiff brings as argument that Musk claimed "tesla is my company" and other nonsense stuff. I see libertarians crying on this particular Tesla affair the same way as liberals crying on Trump+Russia collusion that votes were somehow skewed. Voting happened and deal with it.

As for what libertarian would do if faced with such hypothetical "Stanford Marshmallow Test" - that was more thought provoking question that probably irked you a little bit, because under pure libertarian model it should be assumed impossible.

MorrisWR
MorrisWR

I have stated in the past that Tesla will go bankrupt just based on their inept manufacturing processes. They have no clue how to utilize robotics in a state of the art factory setting. This is no surprise and I am wondering why investors continue to be taken.

stillCJ
stillCJ

Editor

Thank you for that very long comment, VIX. You are a lot more confused than I previously suspected. I would be wasting my time to make more replies to you, you just don't get it at all.

Long VIX
Long VIX

@stillCJ

Well, it seems that you agree with me that Ludditism should not have anything to do in Libertarian world. However, If you go and check articles and/or their comment section on "libertarian" sites like zerohedge.com and on mishtalk.com (by guest commentors and not Mish) you will see quite a lot of content there bashing technologies like Solar Panels and EVs as impractical (especially if made by tesla). If anything, those technologies are pro-Libertarian in sense that governments can't tax them that easily anymore. I just wanted to provoke thoughts for certain "libertarians" with this irony and it seems I succeeded.

Also, it is important to pay attention from which angle a person tries to reason his point that Tesla is about to go bankrupt - whether that argument is 1) that Tesla is making technology that is impractical; OR 2) that Tesla has terrible financials; OR 3) that Elon Musk is allegedly fraudster by merging TSLA and SCTY or 4) Tesla is receiving government subsidies. 5) Tesla does not know how to automate. Same point, but different arguments. One choses the wrong argument to argue the same point and he immediately looks stupid.

Tesla and Solar City shareholders voted back in 2016 to merge - I can't think of more "libertarian" way to make a decision whether to merge or not. The plaintiff argument is among lines that in one conference call Musk called Tesla "my company". Do libertarians have anything to say about lobbying between two entities in private sector as well?

As for Green Energy and Big oil subsisdies. I think any libertarian would be happy if we could get rid of both subsidies. But there are some subtle Big Oil subsidies we don't seem to be able to get rid for the last several decades - https://archive.mishtalk.com/2013/09/06/the-dick-cheney-syria-oil-connection/ What libertarian is supposed to do in this case? Give up trying to fight Big Oil subsides and focus on fighting easiest subsidies? Or perhaps subsidize Green energy for few years in an attempt to kill Big Oil and its subsidies? Think of "Stanford marshmallow experiment". Assuming Green Energy does succeed any libertarian living decade from now will be better positioned thanks to our choice today.

As another analogy to "Stanford Marshmallow Experiment" - In Computer Science there are two sorts of algorithms - Greedy and Dynamic programming. Greedy algorithms make choice that looks the best one at the given moment. It is not guaranteed to lead you to the best long-term choice. Whereas Dynamic Programming algorithms are willing to explore all non-Greedy choices initially and then guarantees you to get the best long-term choice.

Or that is not how libertarians are supposed to think and they should always take the best short-term, greedy choice?