Yesterday, SolarCity (SCTY) announced that it was planning a $124 million bond offering. That's not unusual.
The company has $6 billion in liabilities on its balance sheet. It burned more than $300 million in cash in the latest quarter.
The thing that is unusual about the bond offering is that Elon Musk -- the co-founder of SolarCity and CEO of Tesla (TSLA) , the company which is in the middle of acquiring SolarCity -- is buying half the bonds. Musk will buy $65 million of bonds. His cousins, Lyndon Rive and Peter Rive -- SolarCity's CEO and chief technology officer, respectively, who are also SolarCity co-founders -- each are buying $17.5 million of the bonds.
Altogether, the three men are buying 80% of the bond offering, or about $100 million of the $124 million they are raising.
Tesla and SolarCity bulls see this as a positive. They see it as a signal to the market that Musk and the two Rives are putting their money where their mouths are.
However, we are skeptical. Why would Musk and the Rives do this unless they had to?
It's worth pointing out a few things about how Musk and the Rives have conducted debt and equity offerings to date:
- According to Reuters, Musk has never directly purchased any SolarCity bonds before.
- In the past, SpaceX -- a rocket and space exploration company started and run by Musk -- has used money raised from third parties to invest in SolarCity bonds where there is seemingly no corporate overlap between the companies.
- The Wall Street Journal said in an April article that an entity associated with Musk bought $10 million of a November SolarCity $113 million bond offering, while $90 million was bought by SpaceX and $3 million was bought by Lyndon Rive
- That same article said SpaceX had bought $90 million SolarCity bonds in March 2015, $75 million in June 2015 and $90 million in March 2016.
- So it appears that Musk and the two Rives are choosing to step up and buy bonds that typically have been purchased by SpaceX for the last 18 months (the Journal article notes that SpaceX has received $3.2 billion in government contracts, which would suggest approximately 10% of these revenues have been used to buy SolarCity bonds)
- The Wall Street Journal April article also points out that Musk has pledged 29% of his Tesla and SolarCity stock to cover personal lines of credit he's received from various banks he's worked with. The lines of credit total approximately $500 million.
So, it's not so simple to conclude that Musk buying SolarCity bonds is a sign of his confidence in SolarCity.
Musk has a history of raising money for the different companies he controls and then shuffling money from one hand to another. There's nothing illegal about it, but it does raise questions about why it's necessary.
What would happen if SolarCity had to sell its bonds on the open market and let that market decide how much it was willing to risk and what compensation it expected in return for that risk?
It makes one wonder whether Musk and the Rives must work this hard in order to accomplish the larger goal of keeping the companies going.
Elon Musk has become such a symbol of American creativity and entrepreneurship that these types of financial maneuvers don't seem to draw attention, whereas they would if the CEO's name was Elon Smith.
As long as Musk gets a pass and the capital markets stay open for new bond and equity offerings for these three companies, this will continue. However, there is a risk that if new money is not quite so easy to raise in the future the music will stop.
Continue to color us skeptical.