When it comes to Tesla Motors, an irrational exuberance has overtaken Wall Street, the Department of Energy, electric car advocates, government interventionists, crony capitalists, techie nerds and Elon Musk fanboys everywhere.
The praise comes rapid fire: $20 billion market capitalization! It’s worth more than Chrysler! Its stock price is at $169! They’ve had two consecutive profitable quarters! They paid back their government loan early! The Model S is the safest car of all time! Consumer Reports says it’s almost perfect! Its batteries don’t burn up!
But the media has not tried to mute the celebration too much with the reality that much of Tesla’s “success” has come thanks to government mandates, subsidies, and taxpayer support. NLPC reported last month, for example, that Tesla’s second quarter results included $51 million in zero-emission credits revenue thanks to a warped California vehicle sales scheme. Also, the company delivered $26 million in net income if you disregard Generally Accepted Accounting Principles, but under GAAP Tesla lost $30.5 million.
Nevertheless the developments this year have been more positive for Tesla than the dismal results overall in the much-maligned electric vehicle industry. As a result new Energy Secretary Ernest Moniz has announced he is looking for ways to revive the moribund Advanced Technology Vehicles Manufacturing loan program. No alternative transportation company would touch it after it got a bad reputation because of excessive government red tape and horrendous publicity from other DOE loan failures such as Solyndra, Fisker Automotive and A123 Systems. The findings were part of a Government Accountability Office report.
Moniz, the replacement for departed Secretary Steven Chu, sees a renewed opportunity thanks to Tesla.
“The Department first offered loans to Tesla and other auto manufacturers in June 2009, when car companies couldn’t get other financing and many people questioned whether the industry would survive,” Moniz boasted after Tesla’s $465 million stimulus loan was repaid in May. “Today, Tesla employs more than 3,000 American workers and is living proof of the power of American innovation….Tesla and other U.S. manufacturers are in a strong position to compete for this growing global market.”
As the secretary prepares to open the stimulus vault again and twists arms to get businesses to take money, another killjoy (besides NLPC) has weighed in to dilute the Tesla party punch. The excitement over billionaire CEO Musk’s payback, according to investment lawyer John Petersen, is no signal that Tesla is a good bet to make electric vehicles a certain future success. Instead, he says, it looks like Musk (in Flickr photo above, by Jurvetson) hid information about having to refinance the loan to avoid default at the end of the year, and quickly (and/or secretly) raised a massive amount of private capital to make the loan go away.
Why should anyone care how it was paid back, so long as it was paid back? Petersen, a regular contributor to investment Web site Seeking Alpha, says it’s because Musk may have run afoul of Securities and Exchange Commission disclosure rules as well as the terms of its DOE loan.
“Tesla’s management knew that it would have to refinance the DOE loan before year-end to avoid a certain default,” Petersen wrote, “but it didn’t adequately disclose that fact to the market.”
Rather than explain those less-than-optimistic circumstances, Musk painted a pretty picture. Tesla reported in its Dec. 31, 2012 SEC filing that “current projections of cash flow from operating activities, will provide us adequate liquidity until we reach expected profitability in 2013…,” adding that those resources would cover its endeavors for the coming year. But in its March 31, 2013 disclosure Tesla had removed “expected profitability in 2013” (despite its claim for 1st quarter profitability) and added what Petersen described as a “fuzzy disclosure…to describe a remote-sounding possibility that Tesla might seek additional financing….”
The unpleasantness that Petersen said should have been disclosed were the implications from the conditions of the DOE loan. He explained in his Seeking Alpha article that the Leverage Ratio terms prohibited Tesla’s consolidated debt from exceeding 6.5 times Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) for the 4th quarter of 2012, and 4.5 times EBITDA for each quarter in 2013. Because the company could not meet those standards, DOE lend-o-crats awarded a waiver in Feb. 2012 that delayed the effective dates of those ratios, but also required Tesla to set aside its loan payments ahead of time in a segregated account. A second waiver that delayed the Leverage Ratio requirement was granted on March 1, 2013, but the requirements to accelerate repayment of its loan became even more onerous as a result.
“Both waivers were presented to the market as triumphs of financial engineering,” Petersen wrote, “but they were basically an up-market equivalent of a credit card issuer increasing minimum payments for a troubled cardholder.”
Because, according to Petersen’s analysis, Tesla had no chance of raising 2013 earnings (EBITDA) high enough (an estimated $220 million, which Tesla would fall far short of) to cover the Leverage Ratio requirements for the year, the company would need to either renegotiate or repay the loan by the end of the year.
Those facts were not disclosed in its SEC filings, nor was Musk forthcoming about the situation on a May 7 1st quarter conference call, after he was asked by a participant about the need to raise more capital.
“We don’t have any plans right now to raise funding,” Musk responded. “Potentially we expect to be – we were positive cash flow in Q1 and we expect to be there relatively sort of neutral on cash flow in Q2. But if it was possible, we could be optimistic about raising a round, but we have spent no time on that at all.”
But only eight days later Tesla announced a $1 billion public offering backed by heavy hitters Goldman Sachs, JP Morgan and Morgan Stanley, which enabled the payback of the $465 million DOE loan and “shore(d) up a dismally feeble balance sheet that had $124.7 million of equity and a $14.2 million working capital deficit on December 31, 2012,” Petersen wrote.
“Are Tesla investors that chronologically challenged?” Petersen wondered. “Does anybody believe Tesla could conceive, negotiate, document and sell a billion dollar public offering in 10 days?”
In other words, you’d have to be pretty gullible to believe Musk pulled those massive finance entities together so quickly to put the deal together. Rather, it’s more likely he already had it in his hip pocket. Nevertheless Tesla – especially after implementing a financing scheme that allowed customers to lease its cars while the company got all the money up front from private banks – had far more debt on its books than DOE would have allowed them to get away with.
“If Tesla didn’t promptly renegotiate or repay the DOE loan,” Petersen added, “it would be in default by year-end. Instead of fully and fairly disclosing that risk and discussing management’s plans to mitigate it, Tesla relied on vague half-truths in its SEC filings and deliberately hid the ball when a caller asked about the need for additional financing in its (1st quarter of 2013) conference call.”
Petersen has his detractors, to be sure – there are many in the comments on his Seeking Alpha article. But while he builds his case based upon documents, public comments and hard numbers, his critics base their attacks on issues he cares little about: Wall Street prognostication, how much money they made on Tesla stock, speculation about motives, etc.
Add to that NLPC’s previous reporting on Tesla’s dependence on California’s automotive market distortions and government subsidies, rather than actual sales, and the need to temper enthusiasm is obvious to those who pay attention to such details.
So a few years need to pass, and more stability added, before we anoint Tesla as “the next Apple.” Got that, fanboys?