The market’s faith in Musk’s ability to raise cash if needed has kept Tesla’s implied risk of default lower than similarly rated junk bonds and has propped up the price of its debt, according to analysts.
Tesla’s junk bond coming due in 2025 fell 1.75 cents to trade as low as 88.875 cents on the dollar, its biggest drop since Moody’s downgraded the company’s senior notes to Caa1 following production delays.
It cost $5.96 to insure $100 of Tesla’s debt, plus an upfront cost of around 18 percent, representing a total of 24.1 percent of the face value of the 2025 bond on Monday.
“The CDS is saying that there are a lot of people betting this company is going out of business,” said Thomas Graff, head of fixed income at Brown Advisory.
Tesla has burned cash ramping up production of its Model 3 sedan, which prior to July, had fallen short of a series of targets.
Profitability has been elusive for Tesla. There is over $11.5 billion of short interest on Tesla’s shares, the largest of such positions in the U.S. market by dollar value, according to financial analytics firm S3 Partners.
A short position is a bet that a company’s shares will fall in price. Investors borrow shares in the hopes of selling them and then buying back shares at a lower price to repay the loan, allowing them to pocket the difference.
As a percentage of outstanding shares, Tesla’s short interest is 20.4 percent, which places it in the top 50 most shorted stocks on the Nasdaq.
The implied market probability of a default on Monday rose to 38.9 percent from 38.3 percent on Friday, according to Thomson Reuters Eikon. The probability of a default was 34.19 percent when the credit-default swap contract, the first and only referencing a Tesla bond, launched on June 27.
Compared to Monday’s swoon in the bond price, the increased default probability seems low. That is explained, however, by the illiquid state of Tesla’s CDS, which have had only one trader, Edward Koo at JPMorgan, regularly offering quotes on the swap, according to Reuters trading sources who requested anonymity because the quotes are not public.
Because it has become harder to find third parties who are willing to take on credit risk via CDS since the financial crisis, market makers sometimes have to absorb that risk themselves. That raises CDS prices.
But the opportunity offered by Monday’s falling bond price saw a market maker added to the mix, with Goldman Sachs quoting an upfront price of 18 basis points to buy debt protection, and 16 to sell, according to Reuters trading sources with access to the quotes. JPMorgan’s quote was 23 points for buyers, versus 18 for sellers, up a point for both parties from last Wednesday’s quote.