SEC filings aren't typically interesting reads. But Tesla (TSLA) is not a typical company.
One of the seemingly overlooked aspects of Tesla's recent filings is its reiteration of a policy restricting loans borrowed against the stock, something that was first added in the company's 2018 14A filing.
"The Board has a policy that limits pledging of Company stock by our directors and executive officers. Pursuant to this policy, directors and executive officers may pledge their Company stock (exclusive of options, warrants, restricted stock units or other rights to purchase stock) as collateral for loans and investments, provided that the maximum aggregate loan or investment amount collateralized by such pledged stock does not exceed twenty-five percent (25%) of the total value of the pledged stock," the filing states for the second year in a row.
Despite the obvious discouragement, Elon Musk's loans against the stock have ballooned in recent years as he has declined to take a salary from his many companies and famously declines to sell Tesla shares on the open market. That could create an issue for the company if the shares continue to deteriorate.
"Elon Musk borrowed funds from affiliates of certain underwriters in our public offerings and/or private placements and another financial institution and has pledged shares of our common stock to secure these borrowings," the most recent prospectus filing states. "The forced sale of these shares pursuant to a margin call could cause our stock price to decline and negatively impact our business."
While the company has not yet disclosed the value of the loans taken by Musk in 2018, the borrowings secured with shares as collateral has increased from just $50 million in 2012 to just over $624 million in 2017. The total borrowed more than doubled from 2014 to 2017, with the amount increasing about $140 million in 2017 alone.
"Investors are flying blind, when it comes to Elon Musk's massive margin loan against Tesla stock," Accipiter Capital Management General Partner Gabe Hoffman said. "But it's a potentially huge risk to the stock, that they need to be aware of."
Nonetheless, he added that the real risk remains murky as Tesla has yet to file an updated prospectus for 2018.
Despite the lack of clarity, Hoffman, who is short Tesla shares, estimated that Musk currently holds about 13 million shares against these margin loans. If borrowings increased at a similar growth rate to prior years that could amount to around $1 billion in shares pledged. Given Musk''s recent hefty fines from the SEC and proclivity to fund ventures personally, the expectation of similar growth in loan balances would be reasonable.
Who's behind the $112.5 Million In fundraising for The Boring Company? Over 90% came from Elon Musk, with the rest— Phil LeBeau (@Lebeaucarnews) April 16, 2018
from early employees. No venture capitalists or outside investors are
involved according to the company.
It is also worth noting that Musk recently took out $61 million in mortgages against his California real estate holdings, a quizzical move for someone of Musk's reported wealth. Whether this move is related at all to Tesla would necessarily be speculation, but it would suggest he needs liquid capital at the very least.
The largest outstanding balance as of the close of 2017 under the loan scheme is approximately $344.4 million owed to Morgan Stanley (MS) , while Goldman Sachs (GS) , Bank of America (BAC) , and Deutsche Bank (DB) noted as other significant financial partners.
The rub comes in where Musk may be forced to sell the shares pledged if the stock price falls by a significant enough percentage. Considering the shares have fallen nearly 40% since his infamous "funding secured" tweet and the last reported quarter was essentially a disaster, this is a tangible threat.
"If the price of our common stock were to decline substantially, Mr. Musk may be forced by one or more of the banking institutions to provide additional collateral for the loans or to sell shares of Tesla common stock in order to remain within the margin limitations imposed under the terms of his loans," the filing reads. "Any sales of common stock following a margin call that is not satisfied may cause the price of our common stock to decline further."
As a real-world example, a similar situation befell Chesapeake Energy (CHK) CEO Aubrey McClendon, who was hit with a margin call for 33.5 million shares of his company amidst the 2008 financial crisis.
The value of Chesapeake shares fell more than 75% over the back half of that year, bookended by a 25% slide from the time of McClendon's disclosure of the margin call to the close of the year. In the years since, Chesapeake stock has lost 96% of its value from the 2008 high.
In a more nefarious example, Worldcom CEO Bernie Ebbers was hit with a margin call in 2000, forcing his hand to sell 3 million shares to satisfy the bank's offering funding for the collateral. The move marked Ebbers' first sale of stock in five years, according to reports from the time.
Worldcom eventually filed for bankruptcy in the ensuing years.
While Hoffman certainly did not compare Tesla to Worldcom, he expected that a margin call is imminent for Tesla and supposed the impact could cull share value into the end of the year, justifying his short position.
"I personally predict in 2019 TSLA stock price will decline enough to force millions of Elon Musk's shares to be sold in a margin call," he told Real Money. "Exactly what price point, how much, and what time, is unknown."
Still, as Hoffman acknowledges, it is unclear where the threshold might lie. Also, it would stand to reason that banks would more slowly liquidate positions so as not to erode the shares they currently hold as collateral.
Additionally, trading volume hovers around 10 million shares per day and has trended north of 20 million shares in recent weeks, meaning that the margin call on Musk could be potentially less harmful than some shorts hope if it can skirt algorithms that generally foment such forceful selling action.
Tesla is also one of the most resilient stocks in the market, carrying with it a loyal fan base that has stymied short-sellers at nearly every turn. Even after recent earnings confirmed many of the expectations of bears, the shares have dropped only about 6%, building back nearly 5% from their slide in earnings week into Tuesday's open.
As far back as 2016, many stock watchers were already worried about a margin call on the company, especially after Valeant Pharmaceuticals (now Bausch Health Companies (BHC) ) saw its stock fall over 70% from the time of its own margin call spurred by Goldman Sachs to the SEC-mandated disclosure of Musk's $475 million in shares pledged as collateral at the time.
"There were a few cases where one company was doing considerably better than another, and I borrowed money," Musk told the Wall Street Journal at the time. "The odds that a margin call cannot be addressed are almost zero."
Musk also has millions more shares on top of the more than 13 million already collateralized to mitigate any fears of liquidating the shares pledged.
Tesla shares gained about 25% in the year following Musk's statements to the Journal.
Even short-seller extraordinaire Andrew Left had a change of heart on Tesla stock even after filing a lawsuit against Musk for stock manipulation.
"The volume of misinformation that comes through our computer on a daily basis has become breathtaking and the "vocal shorts" and critical media in this name have gone too far in their demonizing of Elon Musk," he wrote in a note in March. "We are not here to pick fights with anyone and we always respect solid work, but let's state the obvious on many of the vocal critics whose voices dominate the Tesla conversation."
His firm had previously set a $100 price target for Tesla shares by the close of 2016.
Citron shorting $TSLA Supply AND demand problems should take down to $100 by years end. News flow all around does not look good for stock— Citron Research (@CitronResearch) March 1, 2016
Tesla closed the year north of $200 per share.
Left provided a later update indicating he is neither long, nor short Tesla following its earnings debacle earlier this month.
As the stock remains a battleground and exceedingly firm convictions lie on either side, that may end up being the safest place to be until more clarity is provided in the course of 2019.