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Is Tesla $10 Billion Debt A Cause For Concern?

Elon Musk, Tesla Factory, Fremont (CA, USA). Flickr Image.

Tesla’s debt obligation has been a hot topic, not just among investors but also creditors who are concerned about the company’s financial health.

Based on the numbers, Tesla’s total debt, including current and long-term portions, made up about 45% of the company’s total liability according to the 1Q 2021 filings.

A rising debt level has led to a rising interest expense for Tesla.

By the end of 2020, Tesla has incurred more than $700 million in interest expense, a figure which is about 9% higher than the previous year’s figure.

Without a doubt, Tesla’s growing interest charges will certainly reduce its profitability as it is considered an expense that will be deducted from profits.

In this article, we will dig into Tesla’s expanding debt obligations and find out how the company’s debt amount has grown over the years.

While Tesla has been racking up debt, its cash has also ballooned thanks to the improving fundamentals and business operations.

In this aspect, we will look at Tesla’s net debt, a figure that includes the company’s total liquid assets, cash in particular.

Moreover, we also will look at the relationship between Tesla’s debts and its assets to find out how the company’s assets have grown with respect to debt.

Additionally, Tesla’s ratio of debt to sales will also be studied.

This ratio measures Tesla’s debt growth with respect to its revenue.

Let’s move on!

Tesla’s Debt Summary

In all quarterly and annual filings, Tesla disclosed all the debt obligations, both current and long term, in a table as shown below.

Tesla debt summary 4Q 2020

Tesla debt summary 4Q 2020

There are multiple columns specified in the above table such as “Net Carrying Value”, “Unpaid Principal Balance”, “Unused Committed Amount”, “Contractual Interest Rates” and “Contractual Maturity Date”.

The “Unpaid Principal Balance” will be the main subject of our discussion in this article.

This column discloses the total amount of debts that Tesla owes and this amount will be paid back when the debts mature.

The “Net Carrying Value” is the book value of the debt and it changes from quarter to quarter, depending on the amount of interest expense amortized.

The contractual interest rates basically refer to the interest rates of the issued debt whereas the maturity date or debt due date refers to the date when the debt comes due.

When the debt comes due, Tesla is required to settle the unpaid principal amount instead of the carrying value since that’s the amount that the company owes to creditors.

Keep in mind that the unpaid principal amount can also fluctuate from quarter to quarter, depending on whether Tesla has paid down the debt or drawn on more debt.

Tesla’s Contractual Obligations

Some of Tesla’s contractual obligations involve mandatory purchase obligations which obligate the company to purchase a certain amount of raw materials, components and services from suppliers and third parties.

These purchase obligations contribute a huge liability to Tesla as shown in the following snapshot.

Tesla contractual obligations 4Q 2020

Tesla contractual obligations 4Q 2020

Unfortunately, some of these contractual obligations are off-balance sheet items especially for the purchase obligations in which the amounts are mainly based on estimation.

Nevertheless, some of these items are worth mentioning.

As seen from the above snapshot, Tesla’s purchase obligations totaled as much as $18 billion as of 4Q 2020. This amount is a huge sum and contributes a big liability to the company.

Since purchase obligations are off-balance sheets and only estimation, these liabilities are excluded in the subsequent discussion, tables and charts.

Chart of Tesla’s Total Debt

Tesla total debt

Tesla total debt

* Total debt figures are calculated by the author using Tesla’s quarterly current and long-term debt figures as well as the future interest portion obtained from the company’s financial reports.

The chart above shows Tesla’s historical total debt, both current and long-term portions as well as the expected interest expense portion, combined for the past 6 years from 2015 to 2021.

From the chart, Tesla’s total debt hit its peak figure at $13 billion recorded in 2Q 2020.

Thereafter, Tesla’s total debt has started to decline and reached about $9.5 billion as of 1Q 2021.

Keep in mind that the figures in the chart include only Tesla’s debt and the interest portion.

We have not taken into account Tesla’s finance and operating leases yet.

A note worth mentioning is that Tesla’s debt figure has actually declined consecutively 3 quarters in a row after hitting its peak at $13 billion reported in 2020 2Q.

As of 1Q 2020, Tesla’s debt level totaled only $9.5 billion, a figure that was last seen in 2017.

In 2020, Tesla has some of its debt converted to common stocks.

Tesla’s lenders have chosen to convert their holdings to common stocks because of the surging Tesla’s stock prices.

After the conversion, Tesla’s lenders are reaping billions of dollars in profits as depicted in the following excerpt extracted from the 2020 annual filings.

As of December 31, 2020, the if-converted value of the 2021 Notes exceeds the outstanding principal amount by $3.71 billion.

As of December 31, 2020, the if-converted value of the 2022 notes exceeds the outstanding principal amount by $4.92 billion.

As of December 31, 2020, the if-converted value of the 2024 notes exceeds the outstanding principal amount by $13.32 billion.

Over the chart again, you may notice that the debt levels suddenly surged dramatically to nearly $8 billion in 4Q16 from the prior quarter.

The growth in debt was due to Tesla’s acquisition of SolarCity and hence, the consolidation of all debts from SolarCity into Tesla’s balance sheets in 4Q16.

Chart of Tesla’s Net Debt

Tesla net debt

Tesla net debt

* Net debt figures are calculated by the author using Tesla’s total debt and cash on hand obtained from the company’s financial reports.
* Total cash on hand consists of cash & cash equivalents and current portion of restricted cash.

Tesla’s net debt is the difference between its total debt and cash on hand.

Tesla’s cash on hand is highly liquid assets such as cash & cash equivalents and the current portion of restricted cash.

Similarly, Tesla’s net debt hit its peak figure at about $11 billion recorded in 2019 Q1.

Thereafter, Tesla’s net debt has been going downhill and totaled only $1 billion in 2020 3Q.

In subsequent quarters, Tesla’s net debt turned negative, implying that its total cash was greater than its debt.

As of 2021 1Q, Tesla’s net debt stood at -$4.6 billion, illustrating that the company had more cash than debt.

Debt Breakdown: Tesla vs SolarCity

Tesla vs SolarCity debt

Tesla vs SolarCity debt

* Tesla and SolarCity debt figures are determined based on the data obtained from the company’s 4Q 2016 financial reports.

The above chart breaks down Tesla’s total debt into Tesla and SolarCity portions.

The debt breakdown was based on the 4Q16 quarterly report in which Tesla had explicitly stated the portions of debt that were assumed from the SolarCity acquisition.

From 4Q16 to the most recent quarter, the total debt breakdown has been tracked explicitly in the chart above based on the debt categories obtained from the 4Q16 quarterly report.

According to the chart, both Tesla’s and SolarCity’s debt portions have started to decline after reaching their respective peak figures.

As of 2021 Q1, Tesla’s debt totaled about $7.7 billion compared to SolarCity’s debt of $1.8 billion.

Over the years, Tesla has slowly paid off not only its own debt but also its solar-related debt.

This demonstrates that Tesla is committed to reducing its indebtedness.

Tesla’s Debt Breakdown

Tesla debt breakdown

Tesla debt breakdown

* Debt breakdown data is obtained from Tesla’s quarterly and annual financial reports.

The table above keeps track of all of Tesla’s debt components and shows how each individual debt changes from quarter to quarter.

For debts that have been extinguished, they will no longer be shown in the table.

Aside from the individual debt figure, the debt due date or maturity date is also explicitly stated at the header of the table.

For example, the 2022 notes will be due in March 2022 as stated at the header of the table.

The table shows only the unpaid principal balance which refers to the par value or maturity value of the bond or debt instruments in which Tesla will pay off when the due dates come.

For other debt instruments such as revolving credit facilities, the unpaid principal balance refers to the amortized figures.

The debt figures in the current table combine both current and long-term portions as well as the interest expenses portion.

Some of them may have been classified as current liabilities in the balance sheets which will come due in the next 12 months while some of them may have been classified as long-term portion in the balance sheets, depending on when they are due.

Debts highlighted in “yellow” in the header are debts inherited from the SolarCity acquisition.

All the way to the right of the table is the total debt that adds up all the individual debts.

As of 2021 1Q, Tesla’s total debt or total unpaid principal balance stood at $9.5 billion.

Tesla’s Top 3 Largest Debt Obligations

The 2.00% Convertible Senior Notes

As of 1Q 2021, Tesla’s largest debt went to a bond that was issued in May 2019.

The bond was issued to raise $1.84 billion in aggregate principal amount.

It’s referred to as “2024 Notes” as it will be due by May 2024.

The 2024 Notes is a convertible senior note with an interest rate of 2.00%.

However, the 2024 Notes was seen reducing to $439 million as of 2021 Q1 due primarily to the convertible nature of the debt.

As mentioned in the prior discussion, the lenders have chosen to convert a portion of the loans to Tesla’s common stocks when the stock prices surged to record highs.

The 5.30% Convertible Senior Notes

As of 1Q 2021, Tesla’s 2nd largest debt went to the 5.3% Senior Notes due in 2025 which totals $1.8 billion.

This debt is a non-convertible bond with an interest rate of 5.30% per annum.

The Credit Agreement

Tesla’s 3rd largest debt is the Credit Agreement which is a credit revolver that Tesla has committed to an amount of up to $2.16 billion as of 2021 1Q.

The Credit Agreement is a senior asset-based revolving credit facility.

As of 1Q 2021, Tesla had already drawn nearly $1.9 billion out of the $2.16 billion available credit, leaving about $300 million of unused credit.

The Credit Agreement is a credit facility where the company is able to withdraw funds for general corporate purposes and the availability of the total amount that can be withdrawn is subject to the value of pledged assets.

Tesla’s Debt Due in 2021 and 2022

Of all debts mentioned in the table above, some of them will be due in 2021 and 2022.

Here is a list of Tesla’s debts that will be due in 2021 and 2022.

The 2022 Notes which bears an interest rate of 2.375% will be due on March 2022.

As of 2021 1Q, the 2022 Notes carries an unpaid principal amount of $319 million.

Additionally, the Solar Bond will also be due in June 2021 and the total amount owed by Tesla was $53 million as of Q1 2021.

Tesla’s China Loan Agreement will also be due in June 2021. Tesla owes about $600 million based on the China Loan Agreement.

Part of Tesla’s automotive asset-backed notes will also mature in August 2021. I do not go into details as to how much will be due by the maturity date.

As of Q1 2021, Tesla’s automotive asset-backed notes carried an unpaid principal balance of more than $2.6 billion.

Effect of Leases on Tesla’s Debt

Starting Jan 1, 2019, Tesla has adopted the accounting requirement for the lessee to recognize all leases (operating and finance) on the balance sheets.

As such, there will be both assets and liabilities for leases to appear in the balance sheets from Jan 1, 2019.

Previously, operating leases were off-balance sheet items in which the asset and liabilities portion of operating leases were not accounted for in the balance sheet.

Here is a snapshot extracted from Tesla’s 2020 annual filing that shows the company’s leases obligation:

Tesla minimum lease payments 4Q 2020

Tesla minimum lease payments 4Q 2020

My expectation is that leases will significantly increase Tesla’s total debt amount.

To show that, I have created a chart below that shows Tesla’s debt levels and the effect of leases on debt.

Keep in mind that the leases represent both operating and finance leases and they include the principal as well as the interest portion that Tesla must settle before the end of the lease terms.

Chart of Tesla’s Debt and Leases

Tesla debt and leases

Tesla debt and leases

* Debt and lease data are obtained from Tesla’s quarterly and annual financial reports.

In the chart above, there are two plots and they represent total debt and total debt with leases.

The plots illustrate the impact that leases have on Tesla’s debt.

As shown, leases, both operating and finance, have considerably increased Tesla’s debt amount.

The amount of debt has increased by a large margin. For example, lease obligations, both operating and finance, have added 30% more debt to Tesla in 1Q 2021.

In Q1 2021, Tesla’s total debt has increased from $9.5 billion to $13 billion when leases are added.

Over the chart, you may notice that the impact of leases on Tesla’s debt is getting more significant in recent years.

Back in 2015 and 2016, the impact of leases was rather minimal, only 10% of total debt. However, that was no longer the case after 2019.

The results show that Tesla’s lease obligations have grown substantially over the years with respect to debt.

The reason can be attributed to Tesla’s massive expansion in recent years which has driven the need for more factories and offices.

In short, both operating and finance leases have added a significant amount of debt to Tesla.

Tesla’s Debt vs Assets

Tesla debt vs assets

Tesla debt vs assets

* Debt and assets data are obtained from Tesla’s consolidated balance sheets.

From the chart, Tesla’s total assets seem to be trending higher whereas the debt has remained flat and even declined in recent quarters.

Prior to 2020, both Tesla’s assets and debt had trended in the same direction which was up.

However, they had been in the opposite direction since 2020, with assets going higher as opposed to the downtrend observed for the debt.

This opposing trend suggests that Tesla has no longer used debt to build its assets.

Instead, Tesla has switched to other means such as equity or even its own earnings to build its asset base.

In other words, Tesla has been using less debt to expand.

This trend is expected as Tesla’s stock price has been surging lately.

Using equity to raise capital is less expensive compared to debt when Tesla’s stock price hits record highs.

At a record stock price, Tesla issues far fewer common stocks to raise the same amount of capital when it has a low stock price.

Tesla’s Debt vs Revenue Growth

Tesla debt vs revenue

Tesla debt vs revenue

* Total debt data comes from the prior figure computed by the author.
* TTM revenue data consists of the sum of the quarterly revenue data on a trailing 12-month or 4-quarter basis.

Similarly, Tesla’s revenue has been surging whereas its debt levels have remained flat and even declined.

This trend shows that Tesla has relied less on debt to fuel its revenue growth.

In fact, Tesla will probably be self-sufficient when it makes enough profits in the future.

In that case, neither Tesla need to borrow nor issue any equity to raise capital to expand.

In short, this trend looks good to both Tesla and shareholders.

Tesla’s Debt to Revenue Ratio

Tesla debt to revenue ratio

Tesla debt to revenue ratio

* Ratio is calculated by the author using Tesla’s debt and TTM revenue data computed earlier.
* TTM revenue data consists of the sum of the quarterly revenue data on a trailing 12-month or 4-quarter basis.
* A decreasing ratio indicates better results.

This chart is similar to the previous revenue vs debt chart.

It reinforces the idea of Tesla’s growing revenue with respect to debt.

As seen from the chart, the ratio has been trending down and reached only 0.36 in 1Q 2021, a record low for Tesla.

The decreasing ratio means that Tesla’s revenue growth has been far outpacing its debt growth.

Again, this trend bodes well for Tesla and its shareholders.

Summary

Is Tesla’s $10 billion debt a cause for concern?

Definitely no.

In fact, Tesla has been deleveraging as seen from its declining debt loads.

While Tesla’s debt has grown substantially over the years and reached its peak value at $13 billion in 2Q 2020 or $16 billion when leases are included, it has been on a downtrend thereafter.

Since then, Tesla’s debt has declined and reached $9.5 billion or $12.5 billion with leases as of Q1 2021.

Tesla’s net debt plunged to negative numbers since 4Q 2020, indicating that Tesla has more cash than debt.

Also, Tesla’s revenue and assets growth with respect to debt has shown that Tesla has relied less on debt to fuel its growth.

Instead, Tesla has used equity and its profits, if there are any, to expand.

References and Credits

1. Financial figures in all charts and tables on this webpage were obtained and referenced from Tesla’s quarterly and annual filings which are availabe in Tesla Investor Relations.

2. Featured images in this article are used under the creative commons license and sourced from the following websites: Bill Dickinson and Maurizio Pesce.

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{ 1 comment… add one }
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