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Tesla's Lenders Place SolarCity In A Leper Colony

Summary

Tesla's revolving credit lenders want no part of SolarCity.

They won't allow Tesla to guarantee any SolarCity debt, and they've made it difficult for Tesla to downstream borrowed funds.

What? You didn't know that? I'm not surprised; Tesla did its best to hide those facts.

The recent SolarCity bond offering is a new low - huge red flags, and tremendous potential for more insider looting.

But first, a quick look at the Tesla fire sale in progress. Get an extra $1,000 savings on your new Tesla at the link I provide. (You're welcome!).

I. Hurry Down For Great Deals At Tesla's Summer Sale

Today's main topic is SolarCity (NASDAQ:SCTY), but first a quick word about Tesla's (NASDAQ:TSLA) Q3 deliveries.

(It looks as if the cousins will be paid by the sun. About which more later.)

(It looks as if the cousins will be paid by the sun. About which more later.)

Last week, I detailed evidence that Tesla is slashing prices and making deals like never before. Why, I asked, would Tesla be emphasizing deliveries despite the devastating effect on the income statement?

My best guess was (and remains) it's because a big capital raise is coming this year. (Truly big - $3 billion plus, if the market can stand it.)

The deals keep getting better and better.

The great Tesla fire sale continues. The company is making truly attractive lease deals, and is slashing prices on inventory Model S P90Ds by 25%.

Meanwhile, as I write this article, the EV-CPO Consolidator lists 101 Model X inventory cars, 100 of which have seen one or more price reductions.

And Tesla is now, in effect, advertising at Consolidator site, offering $1,000 discounts there on all new Teslas:

Some of the price cuts, no doubt, are necessitated by the need to unload the inventory of "classic" style Model S in favor of the "Facelift" models.

There has been no update of Model X styling, however, yet Tesla has cut prices on Model X inventory cars as well. And the discounts and deals on Model S cars are not limited to the P90D versions. There are, quite simply, many indications that the company's price cuts have been prompted by fading demand; Tesla investors ignore this evidence at their peril.

Nope, it's no different from what the "other makers" do.

I certainly don't fault Tesla for this. All automakers periodically cut prices and offer incentives. It's a fact of life in the auto business when a model faces slack demand. Tesla was bound to lose its "we never discount" virginity at some point.

And, far more than most other automakers, Tesla is vulnerable to weakening demand. If the company stops showing delivery increases, its growth narrative unravels, its stock price collapses, and its ability to raise desperately needed capital evaporates.

So, in cutting prices to move metal, Tesla is simply doing what it must do. That said, while Tesla investors can salute the company for taking the steps necessary to bolster demand, they shouldn't pretend the price cutting won't cause a large hit to margins and a consequent deepening of operating losses.

(Tesla is moving metal, but this one's plastic, and hollow. Photo by Electrek.)

Much like the inverse relationship Uncle Brian recently described between gross margin and SG&A, there's also an inverse relationship between gross margin and deliveries.

When demand is dimming, Tesla can still achieve decent margins, but not if it wants rapidly increasing deliveries. And the company can increase its deliveries, but only by seeing its margins shrink.

The timing of the next capital raise.

In last week's article, I speculated the next capital raise might come in October, after the release of the Q3 delivery figures early that month but before the Q3 financial results are announced in early November.

Several thoughtful commenters took issue, explaining why Tesla can raise equity before it releases Q3 delivery numbers or after it releases Q3 financial results, but not at any time between those two events.

On reflection, I'm sure those commenters are right; the underwriters would not allow Tesla to go to market in Q4 without investors having the Q3 numbers. So, the capital raise will come either in September or after the Q3 numbers are published in November.

I still believe it's risky for Tesla to delay the capital raise until after the SolarCity merger. Once that merger happens, Tesla becomes a crippled firm whose demise is all but certain.

Which brings us, of course, to our main topic: SolarCity.

II. Tesla's Lenders Create A SolarCity Leper Colony

After Tesla announced its plan to acquire SolarCity, I examined Tesla's asset-based loan agreement (the ABL), under which a consortium of banks led by Goldman Sachs Bank USA (NYSE:GS) (with a $175 million commitment) and Deutsche Bank AG New York Office (NYSE:DB) (the administrative agent)...


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