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1/ There has been much speculation lately surrounding Tesla's recent management behavior. Doing away with the referral program, cancelling the 75Kwh Model S, and of course a second round of massive job cuts. There have also been stories of requests for discounts from vendors.
2/ Many in the $TSLAQ community have speculated outside forces are now influencing company behavior, perhaps even a restructuring advisor like Alvarez and Marsal. I have no idea if any of that is true or has happened, but. . .
3/ In my experience, Tesla's behavior is consistent with a company in the throes of a massive cash crunch. I spent my early career years in the workout group of TIAA-CREF, the giant teacher's pension fund.
4/ This was during the heyday of Michael Milken and Drexel Burnham when the high yield market was literally being invented, first as a private placement market, later as public debt.
5/ We typically owned 80% of an outstanding issue or more, so were usually the chair of the creditor's committee, which meant we called the shots. Our first step was often dumping existing management (who had caused the mess) and bringing in a turnaround artist or specialist.
6/ There was one we frequently used because he was so good at getting results, i.e., stabilizing the business and growing cash flows enabling us to maximize our recovery in bankruptcy.
7/ This turnaround specialist, a wonderful guy, had first started small. He had a private consulting business but due to his skill, has now managed to turn that into a multi-billion dollar public acquisition vehicle.
8/ He now owns a professional sports franchise in one of the four majors, in addition to his public acquisition vehicle. He clearly knows what he was/is doing. And the first thing he always did when he took over one of our failing businesses was to raise prices.
9/ But, if raising prices was impossible, he did the only other thing one could do: take an axe to costs. Ruthlessly. I have no idea if Tesla has hired Alvarez and Marsal, but they are sure acting like a company in the middle of a cash crisis.
10/ In the workout business, which I have written about previously, there are many steps taken, with urgency, prior to a bankruptcy filing. Mainly because bankruptcy filings are the less resort. No creditor ever wants to get there, but sometimes one has no choice.
11/ The first step is to get the company to build as much of a cash cushion as possible, because DIP facilities are never a given, and priming subordinated lenders is a messy business, and all bankruptcies start with a small liquidity crisis that cascades into a larger one.
12/ The second step is to survey the market to see if there isn't a security that can be crafted, or a new money source, to step in to fill the gap short of a Chapter filing and a DIP loan.
13/ It is simply mind-boggling that Tesla hasn't issued new equity, especially with a stock price STILL SIGNIFICANTLY HIGHER THAN DURING ANY PRIOR EQUITY RAISE. Said another way, from a price standpoint, new Tesla equity today would be the least dilutive issuance in its history.
14/ Whether regulatory roadblocks to new issuance exists is anyone's guess. I maintain something else - there simply isn't enough market demand to support the size of the raise Musk needs now. Unfortunately for Musk, there are only so many idiots like James Anderson.
15/ Tesla simply cannot support its growth plans, the rollout of much needed new models and upgrades, without a gigantic, multi-billion capital spend. But Tesla's predicament is actually now more complicated.
16/ Because of its widely known manufacturing issues, and now the possibility that demand has in fact cratered, it seems obvious to me at least, it cannot attract new capital without a massive reorg. Who will take equity here with the company literally at a cash abyss?
17/ After the 420 Fakeover, I was expecting Tesla to proactively reach out to its major existing capital constituencies and start negotiating a global structured recap. Extremely complicated and brutally destructive for Musk's pocketbook.
18/ And there's your rub. The entirety of the Musk empire is at risk here. It is not just Tesla. It's now SpaceX. And the Gulfstream and the five mansions and the lifestyle. Therefore, I have always believed, without supervision, Musk would run this into a wall at 80 MPH.
19/ But now we have multiple cash preservation methods enacted. Tesla is not being impacted because of an economic slowdown. It is suffering because it built a capital structure that cannot be supported by its total addressable market. There never will be enough demand.
Someone not named Musk is making decisions now. Maybe the failed SpaceX raise was the prompt. I suggest instead that was just another Jenga block removed. Regardless, this edifice is teetering. Management decisions enacted today will tell you all you need to know.
