|Tesla Needs Some Good News As Concerns Grow|
As expected Tesla's competitors have not been sitting on their hands or surrendered the electric car market to the upstart. An article on "autoevelution" delves into how not all new Model 3 owners are happy with the quality of their new cars after the feeling of pure euphoria has passed Tesla owners have started noticing flaws. This means Tesla has been swamping its already busy service centers by rolling out flawed cars rather than slowing down production to maintain their standards. This bodes poorly for Tesla's reputation and how people feel about the brand but Tesla has decided to put quantity over quality must keep production moving. If Tesla can't produce as many good quality cars as promised then eyes will quickly turn towards the fact Tesla is burning through cash at an alarming rate. Goldman Sachs estimates the burn rate to be as high as one billion dollars per quarter this year.
It is reported that Bloomberg is tracking the Model 3 rollout with an experimental tool that estimates production using Vehicle Identification Numbers (VINs). Currently, their model estimates that Tesla is making 805, Model 3s a week, for a grand total of 10,636 cars so far and they are showing that significant improvement is about to come. This estimate is thought to be a bit low by some Tesla watchers who think it’s possible that Tesla could already be producing more than 1,000 a week and climbing. Still, for many investors Tesla’s first-quarter production failures loom extremely large. The company said at the beginning of 2018 it was already capable of building 1,000 Model 3s a week and would be cranking out 2,500 a week by quarters end. An even bigger problem is that it is impossible to forget Tesla originally had said it would get to 5,000 Model 3 sedans a week in 2017 and then on to 10,000 a week in 2018.
This explains why Tesla's unsecured bond, which has no direct claims on Tesla's asset base and depends entirely on cash flows is not behaving well. This debt which represents Tesla’s first venture in pure bonds was sold at the height of excitement about the Model 3 and amid lofty company promises over how fast they would ramp up production. Moody's rated that bond assuming 300,000 Model 3 deliveries would be made this year. Last week Tesla's $1.8bn unsecured bond, which reached a near all-time high yield of over 6.5 percent. Issued at par with a yield of 5.30 percent in August, the bond's price has been grinding downward. This means its yield has been moving higher. Again, the blame is being placed on the botched rollout of Tesla's Model 3. It has been so troubled that Tesla was forced to stop production for a week in February in an effort to address "bottlenecks" slowing the line.
|Debt Has Risen While Free Cash Falls (click here)|
Some $1.7 billion of this debt consists of three convertible bonds falling due between this coming November and the next one. Almost half of it that was inherited from SolarCity and is very far out of the money, with conversion prices starting at $560. The remainder of it, a $920 million convertible due next March, has a conversion price of just under $360. Tesla closed Friday trading at around $302. The good news for Tesla is that compared to its market cap the company still has relatively little debt and in the past when Tesla sold $546 million of auto lease-backed bonds demand was huge. These ABS bonds were tied to leases of Model X and Model S vehicles. These investors had to weigh uncertainties about the resale value of electric cars where very little data exist against the fact that lessees on average had high credit scores and the bonds mature in less than three years.
While we can debate what has brought Tesla to where it is today we must certainly give much of the credit to QE, tax incentives and a slew of other factors that would be difficult to recreate at any other time in history. A recent Seeking Alpha article pointed out that in a head-to-head comparison in Motor Trend, three reviewers compared the Tesla Model 3, Chevy Bolt, and Nissan Leaf in a test, and only one person picked the Tesla. Many people would be surprised to know that the reviewers were comparing the base versions of the Leaf and Bolt, which cost $30,000-35,000, to the fully loaded Model 3 that costs more than $60,000, all this comes at a time when a fair number of unflattering articles have begun to surface questioning Elon Musk's ability to hold all his ventures together. This indeed raises the question of how long those shareholders enamored with Tesla or creditors will be willing to hang on if the stock begins to tank.
Footnote; The articles below look at several different aspects of the Tesla story and why the car company is in itself a cultural phenomenon.
http://Traits Jeff Bozos, Elon Musk, And Mark Zuckerberg Share html
http://Elon Musk Continues to Razzle Dazzle The Masses html
Illinois’ out-of-control pension crisis wasn’t inevitable. By simply growing at the more moderate pace of its neighbors since 2003, the state’s unfunded pension liability would be $40 billion to $85 billion lower today. The plain fact is that pension benefits have grown multiple times faster than the economy and is unsustainable. Clearly, Illinois' pension benefit growth must be reined in if the state is to avoid insolvency and a further exodus of its tax base. The financial problems of the state and increasing taxes are a large part of why Illinois has lost population four years in a row and is one of the nation’s leaders in outmigration. In 1987, Illinois households were on the hook for $4,300 in promised pension benefits. By 2016 that amount had exploded to over $43,000 per household.
No business or government can remain solvent with such rapidly growing obligations, especially when that growth overwhelms any ability to pay for it. In fact, Illinois pension benefits grew the third-fastest in the nation between 2003 and 2015. Kentucky, which is suffering a massive pension crisis of its own, was the only nearby state with pension growth similar to Illinois. Its benefits grew 7.4 percent annually between 2003 and 2015. Still, the annual pension growth rate in Illinois was far greater than in larger states such as California’s annual growth rate of 6.6 percent. Other examples are Florida’s pensions which grew 5.6 percent, New York saw a 5 percent jump and Texas was up 4.9 percent.
We were often led to believe pensions are a promise carved in stone, however, when the money is not there pensions and promises will be broken so pensioners should prepare for the pain. This is especially true in the public sector which has a history of granting pensions that are unheard of in the private sector. The 25 largest U.S. public pensions face about $2 trillion in unfunded liabilities. If Americans took the time to stand back and look at the bigger picture they will see the Pension Benefit Guaranty Corporation (PBGC) an independent agency of the United States government responsible for acting as the nation’s "safety net" for failed pensions is also in trouble. When a fund fails this agency is expected to take control of its assets and dole them out to its pensioners in the coming years. The ugly truth is the PBGC is not a rock and is in need of its own bailout. This so-called government agency "independent or not" has total liabilities of $164 billion with assets of only $88 billion.