Tesla faces a cash crunch with a $920 million debt payment due Friday

Key Points
  • For Tesla, $920 million in convertible senior notes are set to expire on Friday at a conversion price of $359.87 per share.
  • Tesla shares haven't traded above $359 for weeks, so the company will have to pay that debt in cash.
  • Despite its diminishing liquidity, the electric vehicle maker aims to build a new factory in Shanghai while also ramping up Model 3 production.
GP: Elon Musk, chief executive officer of Tesla Inc., speaks during an event at the site of the company's manufacturing facility in Shanghai, China, on Monday, Jan. 7, 2019.
Qilai Shen | Bloomberg | Getty Images

On Friday, close to $1 billion in debt comes due for Tesla, an obligation that will wipe out about a quarter of the company's cash.

According to regulatory filings, Tesla has $920 million in convertible senior notes set to expire on March 1, at a conversion price of $359.87 per share. Tesla's stock hasn't traded above $359 for weeks, and closed Tuesday at $297.86.

If the shares were valued at the conversion price, the bonds could convert into Tesla stock, and Tesla wouldn't need to pay the debt in cash. But in the absence of a major share rally this week, the electric vehicle maker will have to make the payment in cash.

In its 2018 annual report, Tesla said it had $3.69 billion in unrestricted cash and equivalents to end the year. Former hedge fund manager Darius Brawn said the debt payment could put Tesla in a cash crunch, unless the company sees exceptional Model 3 sales next month.

"If March doesn't go gangbusters for Tesla they are in real trouble, especially without raising," said Brawn, who worked as a portfolio manager for Citadel, SAC and Sharpe Point. Brawn added that he doesn't think the company can raise while CEO Elon Musk clashes with the Securities and Exchange Commission.

On Monday, the SEC asked a federal court to hold Musk in contempt for violating an agreement the parties struck last year over Musk's Twitter use.

A Tesla spokesperson pointed to comments from the fourth-quarter shareholder letter, when the company said it has "sufficient cash on hand to comfortably settle in cash our convertible bond that will mature in March 2019." Tesla also said that its cash position improved by $1.45 billion in the second half of 2018, and that it expects positive net income and positive free cash flow "in every quarter beyond Q1 2019."

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But Tesla has been showing signs of financial strain for a while. The company decreased capital expenditures throughout 2018 and plans for only a modest increase this year. All that while Musk has tantalized Tesla fans with the promise of speedy repairs and body work for Tesla owners, as well as "full self-driving" features and a pipeline of new products like sleek solar roof tiles and new electric cars and trucks.

With such plans, you would expect capital expenditures to rise, especially for Tesla, which has talked up new and improved facilities including its forthcoming Shanghai Gigafactory. But capital expenditures declined 43 percent last year to $2.32 billion, and the company is targeting $2.5 billion in 2019, well below the $4.08 billion in costs in 2017.

There are other indications of stress.

In the last quarter of 2018, Tesla rolled a $180 million Solar City debt forward first to January, and then to April 2019, opting to pay a higher interest rate at a later date. Additionally, letters of credit rose 53 percent against Tesla in the second half of last year. Letters of credit are generally taken out by vendors who aren't sure if a customer can pay their bills in full or on time.

Tesla says in the risk factors section of its annual report every year that it's "negotiating with existing suppliers for cost reductions." The company also warns investors that, "if we are unsuccessful in our efforts to control and reduce supplier costs, our operating results will suffer."

In January, Tesla implemented a massive restructuring, laying off workers, and reducing its production of older, higher-priced Model S and X vehicles to focus on making Model 3 electric sedans for European and Chinese customers.