Renewable Energy

Elon Musk made a 'very odd' purchase this week

Musk's backing of SolarCity
Musk's backing of SolarCity

Elon Musk's purchase of $65 million of SolarCity debt is highly unusual and does not send a good signal to investors, says a corporate governance scholar.

Musk is chairman and his cousins Lyndon and Peter Rive are CEO and CTO, respectively, at SolarCity, which is undergoing a merger with Tesla, where Musk is chief executive. The three are also SolarCity directors.

The notion of a senior officer or director buying debt is highly unusual, and raises some unnerving questions, according to Charles Elson, an authority on corporate governance at the University of Delaware.

"It is very odd," Elson said in an interview with CNBC.

Stephen Diamond, an advisor to Tesla investor group CtW agrees, calling it a "troubling move."

"It's essentially material information that I think the Tesla board has to consider," the professor at California's Santa Clara University School of Law told CNBC's "Closing Bell."

CtW Investment Group, which works with union-sponsored pension funds that own about 200,000 shares of Tesla, has already raised concerns about governance problems on the Tesla board with respect to the SolarCity merger.

Elon Musk
Valentin Flauraud | Bloomberg | Getty Images

At issue are SolarCity's "Solar Bonds," which are senior, unsecured bonds that pay 6.5 percent interest and mature in early 2018. They are open to retail investors.

Officers or directors generally don't buy debt sold by the companies they run, and Elson generally advises against it. Elson's main concerns are that owning bonds puts officers and directors at "cross-fiduciary purposes" with shareholders, and does not signal the same confidence in the business as a stock purchase would.

"When you see an officer buying stock, it is a good sign — it means the business might have a good future," he said. "If you see them buying debt, you wonder, what is the long-term value."

And debtholders have different risk profiles than equity holders, Elson said. If a company goes bankrupt, for example, bondholders — even those holding unsecured notes — are usually paid before shareholders.

In brief, the difference is that a "debtholder's view is that they want to be repaid," Elson said. "An equity holder wants to create long-term value."

In a statement sent to CNBC, Lyndon Rive said, "We invested in SolarCity's Solar Bonds because it's a very efficient way for the company to raise capital without paying expensive banking fees. The bonds are issued directly, online, and there are no fees for investors either. That allows SolarCity to offer the bonds at a competitive rate for investors 6.5 percent for 18-month bonds and still come in lower than the cost of institutional non-asset financing."

Rive added, "Ultimately Elon, Pete, and I expect to be minority investors."

It appears to be the first time Musk has personally bought the Solar Bonds, though Reuters noted that Musk's company SpaceX has bought them before. Lyndon and Peter Rive, who are the company's chief executive and chief technology officer, respectively, are each buying $17.5 million of the $124 million offer.

Elson added, "I guess the question is: why?"

— CNBC's Michelle Fox contributed to this report.