Elon Musk Buys His Company’s Stocks & Bonds on Credit, Pledges His Shares
$TSLA, $SCTY, $GS, $MS
Elon Musk is Risky Business
SolarCity Corp. (NASDAQ:SATY) has tried in vain since October 2014 to lure individual (retail) investors to the solar-power business by pitching $214-M of what he dubs “solar bonds” through the company’s website.
The biggest buyer by far has been his Space Exploration Technologies Inc., including $90-M of $105-M sold last month.
The bonds were an “excellent investment,” he said Elon Musk, 44 anni, said in an interview. And of course Mr. Musk knows more about the companies than anyone, as he is their largest shareholder, the Chairman of SolarCity and CEO of SpaceX.
Mr. Musk has built a business empire that is driven by his appetite for risk and wild confidence.
The 3 companies he leads: SolarCity, SpaceX and Tesla Motors (NASDAQ:TSLA) have a combined SuperValuation of $50-B.
This pas week he talked about retiring to Mars after SpaceX successfully launches rockets there.
He financially supports his companies in very risky unconventional and risky ways.
In addition to the bond purchases, he has taken out $475-M in personal credit lines, buying shares of SolarCity and Tesla when they need support and capital, SEC filings show.
His credit lines are secured with $2.48-B of his shares in SolarCity and Tesla, based on their closing prices Friday.
Top executives do not usually use their shares as collateral for personal loans because it very risky to themselves, and other shareholders as it raises concerns that the executive’s personal interests may be in conflict with the company’s interests.
If and when the stock price falls margin calls require the executive to sell the shares or put up more collateral to repay the loan.
In securities filings, Tesla has disclosed the possibility of margin calls related to Mr. Musk’s loans, which it said “may cause the price of our common stock to decline further.”
Corporate-governance experts and analysts say it is even more questionable for Mr. Musk to borrow large amounts of money backed by lots of stock now that SolarCity and Tesla are big public companies.
It is a Red Falg
Mr. Musk defends the moves as consistent with his philosophy that “if I ask investors to put money in, then I feel morally I should put money in as well,” Mr. Musk said. “I should not ask people to eat from the fruit bowl if I have not myself been willing to eat from the fruit bowl.”
Mr. Musk said it is “important that there not be some sort of House of Cards that crumbles if one element of the pyramid of Tesla, SolarCity and SpaceX falters.”
He said his loans are not risky to shareholders because they add up to less than 5% of his total net worth, which exceeds $10-B. He said he could put up more SpaceX or Tesla shares as collateral if needed.
“The odds that a margin call cannot be addressed are almost Zero,” Mr. Musk said in an interview last week. That begs the question of what the deal is between Goldie, Morgan and Musk.
According to Tesla’s latest proxy statement, Mr. Musk owns 37-M shares of Tesla, or about 27% stake worth about $9.25-B at Friday’s close, the stock is off about 3.0% on the week and finished at 240.52 on the week.
Mr. Musk holds a 22% stake in SolarCity, another securities filing shows. Those 21.8-M shares were worth about $723-M as of Friday, the shares are also off about 6% on the week and finished at 30.29 against a 52 wk trading range of 16.31-63.79, HeffX-LTN is Bearish the stock with a 20-22 price target.
SpaceX was valued at $12-B in a funding round earlier this year. His ownership stake in SpaceX is not public, he will not disclose it.
At Tesla, his compensation last year was valued at $37,584, reflecting minimum wage requirements in California, he has never accepted the wages.
Mr. Musk got $1.2-M in total compensation from SolarCity, almost all in the form of stock options that vest over 3 years.
His compensation at SpaceX is about $2.4-M, according to a government website that lists company contracts. His total compensation includes a salary of $38,000 and the balance in equity.
A study in February by ISS QuickScore found that executives or directors at only 13% of the 3,000 largest publicly traded US companies have pledged their shares for loans.
SolarCity and Tesla shares are volatile.
SolarCity’s shares have been cut in half since December 2015.
Tesla shares fell 40% from the end of December to 10 February, but has erased those declines YTD.
Mr. Musk said he has made it clear to shareholders that he subscribe to the notion that the captain is the last one off a sinking ship. In the interview, he said he has no intention of ever selling any Tesla shares and could even add some of his SpaceX stake to the collateral.
Mr. Musk helped create and finance SolarCity, SpaceX and Tesla using $165-M from the Y 2002 sale of his stake in online-payments processor PayPal Holdings Inc, since them he has been willing to use money from one company to help another.
Around the time, SpaceX was struggling to develop its rocket-launch business and was running low on cash it won a $1.6-B contract from the National Aeronautics and Space Administration to send 12 unmanned cargo capsules to help resupply the international space station.
In early Y 2009, Mr. Musk personally borrowed $20-M from SpaceX, the loan was to help fund Tesla.
In early Y 2013, Tesla was running out of cash as it struggled to produce Model S sedans, and the cars were plagued by faulty drive motors and other issues. SolarCity needed cash to help run its solar-panel leasing business.
So, Mr. Musk increased his credit lines to a total of $300-M from the previous $85-M, the SEC filings show. His lenders, Goldman Sachs Group Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS) his biggest public cheerleaders, declined to comment.
Securities filings show that 9.5-M Tesla shares, or 29% of his total holdings, were pledged as collateral for the credit lines. He also put up 6-M SolarCity shares, or 29% of his overall stake.
From May 2013 to October 2013, Mr. Musk used some of the money he tapped from the credit lines to buy $100-M of Tesla shares and $10-M of SolarCity shares in stock offerings that injected both companies with capital, according to the companies SEC filings.
A SolarCity spokesman said Mr. Musk’s investment “represented a relatively small percentage of the $398 million raised in the transaction.”
Tesla burned through more than $1.5-B in cash reserves in Y 2015. Some analysts worry about delays in deliveries of the auto maker’s new Model X sport-utility vehicle, there are delays around virtually everything that happens with Mr. Musk’s companies.
SolarCity stumbled as costs rose and it cut an important growth target by 50%.
Tesla disclosed last year that Mr. Musk boosted his personal credit lines to a total of $475-M. He bought $20-M of Tesla shares and $17.7-M of shares in SolarCity, SEC filings show.
He said he has borrowed about 65% of the money available from the 2 credit lines.
SolarCity’s solar-bond offerings have gotten 3 separate boosts from SpaceX. Securities filings show SpaceX bought $90-M of the bonds in March 2015, $75-M in June 2015, and another $90-M last month in March 2016.
Last November, an entity affiliated with Mr. Musk bought $10 million of a $113 million convertible SolarCity bond issue. CEO Lyndon Rive, a cousin of Mr. Musk, bought $3-M of the remaining $103-M on offer, according to the company.
Mr. Rive said the bonds are a “good investment. If you take a 5-year view on the stock, I think it will have a great return.”
SpaceX’s purchase of $90-M of SolarCity bonds from the $105-M offering in March will be used to retire the bonds SpaceX bought last year, according to Mr. Musk. He said the latest deal offered SpaceX a “decent return” on about 10% of its roughly $1-B cash position.
The financial transactions have raised questions in Washington DC, where lawmakers are concerned that money from federal contracts with SpaceX may be being be used to prop up SolarCity.
SpaceX has received $3.2-B for its rocket program from government contracts. US lawmakers want to make sure none of that money winds up at SolarCity.
Last week, Rep. Doug Lamborn (R-CO) proposed an amendment that would prohibit Mr. Musk from using SpaceX money to buy SolarCity bonds. The provision is intended to send a message to Mr. Musk that congressional Republicans are focused on him.
A call to Mr. Musk was unanswered.
A SpaceX spokesman said the company’s “cash balances are not ‘government money.’ They are SpaceX funds that originate from a broad combination of commercial customer contracts, government contracts and private investor funds.”
A House committee took up this year’s defense-spending bill last Wednesday.
We should caution Mr. Musk that “bright feathers are always in the hunter’s sights.”