Tesla’s total debt obligation has been a hot topic for many years, not only among investors but also creditors who are concerned about the company’s financial health.
Creditors and investors are specifically worried about Tesla’s liquidity, as the company’s total debt, based on the 2019 annual filing, made up more than 50% of the company’s total liability and grew almost 14% year-over-year compared to 2018.
A rising debt level has led to an increasing interest expense for Tesla. By the end of 2019, Tesla has incurred $685 million in interest expense, a figure which is about 3% higher year over year.
Without a doubt, the growing interest expense will certainly affect Tesla’s profitability, and the chances for the company to be continually profitable will be greatly reduced when interest expenses keep increasing every year.
In this article, we will dig into Tesla’s expanding debt obligations and find out how much debt has grown over the years. Moreover, we will also look at the relationship between debts and assets, and find out whether the company has been using debt efficiently to grow its assets and hence, revenue.
Tesla’s Unpaid Principal Balance
In the quarterly and annual filings, Tesla disclosed all the debt obligations, both current and long term, in a table as shown below.
There are multiple columns specified in the above table such as “Unpaid Principal Balance”, “Net Carrying Value”, “Contractual Interest Rates”, “Contractual Maturity Date” and so on.
The “Unpaid Principal Balance” will be the main subject of 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 refers to the date when the debt comes due. When the debt comes due, Tesla will settle the unpaid principal amount instead of the carrying value.
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.
Unfortunately, some of these contractual obligations are off-balance sheets 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 $16 billion as of 4Q 2019. This amount is a huge sum and contributes a big liability to the company.
Since purchase obligations are off-balance sheets and only estimation, I have not included these liabilities as part of the debt in the following tables and charts.
Chart of Tesla’s Total Debt
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 5 years from 2015 to 2020.
From the chart, Tesla’s debt has increased significantly over the past 5 years. The debt obligations have grown from only $3 billion in 1Q15 to slightly over $13 billion in 2Q20.
Keep in mind that the figures in the chart account for only the debt and the expected interest expense. We have not even taken into account the leases yet.
You may notice that the debt levels suddenly shot up dramatically to nearly $8 billion in 4Q16 from the prior quarter. The reason for the huge growth was due to the acquisition of SolarCity and hence, the consolidation of all debts from SolarCity into Tesla’s balance sheets in 4Q16.
Debt Breakdown: Tesla vs SolarCity
The above chart breaks down Tesla’s total debt into Tesla and SolarCity portion. The debt breakdown was based on the 4Q16 quarterly report where Tesla had explicitly stated which debts were assumed from 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 in the 4Q16 quarterly report.
According to the chart, the growth in total debt has been largely driven by the increase in Tesla’s debt. Before the acquisition of SolarCity in 4Q16, Tesla’s debt had been relatively flat from 2015 to 2016. However, from 2017 to 2019, Tesla’s debt had more than doubled over the period, reaching a record value of more than $11 billion in 2Q20.
On the other hand, SolarCity debt levels have remained flat since the acquisition and had steadily declined since 2017, reaching the lowest point at slightly more than $2 billion in 2Q20. The decline in SolarCity debt is sort of expected because Tesla has actually paid down some of these debts over the years and have not incurred more borrowings under the existing loans in the energy segment.
Moreover, SolarCity debts shown in the chart are actually old debts inherited from the acquisition and new debts issued are not classified into Tesla or SolarCity.
Tesla’s Debt Breakdown – Part 1
The table above keeps track of all of Tesla’s debt components and shows how each individual debt changes from quarter to quarter.
For example, you can see some debts have been extinguished while some of them have started to emerge 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 2021 notes will be due in March 2021 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.
As the table above is too long, I have broken it down into two parts.
The debt figures in the current table combine both current and long-term portions as well as the interest expenses portion. In this aspect, 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 SolarCity acquisition.
Tesla’s Debt Breakdown – Part 2
The table above shows the second part of the table of debt breakdown into individual components.
All the way to the right of the table is the total debt that adds up all the individual debts.
As of 2020 Q2, Tesla’s total debt or total unpaid principal balance stood at roughly $13.1 billion.
Tesla’s Top 3 Largest Debt Obligations
The 2.00% Convertible Senior Notes
As of 4Q 2019, Tesla 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%.
The 5.30% Convertible Senior Notes
As of 4Q 2019, Tesla 2nd largest debt went to the 5.3% Senior Notes due in 2025 which totals $1.8 billion. This debt is also a convertible bond with an interest rate of 5.30% per annum.
Convertible bond means that the lender has the option to convert the debt into Tesla’s stocks. I have not gone into the conversion detail but my best bet is that the debt is convertible to prefer or common shares and may depend on the stock price in order for the debt to be convertible.
Tesla 3rd largest debt is the Credit Agreement which is a credit revolver that Tesla is able to draw an amount of up to $2.425 billion. The Credit Agreement is a senior asset-based revolving credit facility. As of 4Q 2019, Tesla had already drawn $1.7 billion out of the $2.425 billion available credit, leaving about $500 million of used credit.
The Credit Agreement is a credit facility where the company is able to withdraw funds for general corporate purpose and the availability of the total amount that can be withdrawn is subject to the value of pledged assets. Tesla has amended the Credit Agreement on March 2019 to increase the credit limit by an extra $500 million and extended the term substantially to July 2023.
Effect of Leases on Tesla Debt
Starting Jan 1 2019, Tesla has adopted the requirement for 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 starting 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.
With that said, I have included the lease liabilities, both operating and finance, as part of Tesla’s total debt in the following charts.
The leases included in the chart below represent both operating and finance leases and they include both the principal and the interest portion that Tesla must pay off by the end of the lease term.
Here is a snapshot extracted from Tesla’s Q1 2019 quarterly filing that shows the company’s leases obligation:
My expectation is that leases will increase Tesla’s total debt significantly. To show that, I have created a chart below that shows Tesla’s debt levels and the effect of leases on debt.
Chart of Tesla’s Debt Levels and Leases
*Please note that starting 1Q20, Tesla has stopped disclosing leases explicitly such as the expected minimum lease payments and the expected interest costs. For this reason, the lease obligations starting 1Q20 uses an estimation of $300 million as the expected interest costs.
In the chart above, there are two plots, total debt and total debt with leases included, to show investors how much impact the leases have on Tesla’s debt.
As shown, leases, both operating and finance, have considerably impacted Tesla’s debt and the amount of debt has increased by a large margin. For example in 2Q 2020, leases obligations, both operating and finance, have increased total debt by nearly 23% from $13.1 billion to $16.2 billion.
You may notice that the impact of leases on Tesla’s debt is more significant in recent years.
Back in 2015 and 2016, the impact of leases was minimal, around 10% of total debt. However, that was no longer the case in 2019.
The results show that Tesla’s lease obligations have grown substantially over the years with respect to debt when the company needs more factories and offices for expansion.
In short, both operating and finance leases have added a significant amount of debt to Tesla.
Is Tesla Using Debt Efficiently?
With debt increasing every quarter, is Tesla using the debt efficiently?
My opinion is that Tesla is using debt to increase its asset base and to support its capital-intensive operations when its business expands all around the world.
To further illustrate, we can look at the correlation between assets and debt to see how assets have changed with respect to debt on a quarterly basis.
Here is a chart that shows Tesla’s total assets versus total debts on a quarterly basis.
Chart of Tesla’s Debt vs Assets
From the chart, Tesla’s long-term or tangible assets and debts have been trending in the same direction over the past 5 years. Other than the direction, the pattern of both plots is closely matched, indicating that they are closely correlated.
For instance, debts have steadily increased over the last 5 years and so have long-term assets. The closely matched pattern and direction of both charts show that Tesla has used debts to expand its asset base, in this case, long-term or tangible assets specifically.
Tesla’s long-term assets consist of the company’s most critical assets such as factories, equipment, tools, offices, warehouses, solar energy systems, leased vehicles, etc. The company uses these assets to not only produce cars, batteries, and solar products but also to generate recurring leasing revenue from leased assets such as vehicles and energy storage products.
Of course, the company’s asset base may not come entirely from debts alone since other sources of funds such as stockholders’ equity raised from the capital market can contribute significantly to Tesla’s expanding asset base but the figure below indicates that it is close.
Based on Tesla’s debt to equity analysis in this article: Tesla capital structure, as much as 80% of the company’s balance sheet was funded by liabilities as of Q1 2020 while the remaining 20% was acquired through equity. In other words, Tesla’s assets have come almost exclusively from debts.
Chart of Tesla’s Debt to Revenue
To find out how Tesla has efficiently used debt to generate revenue, we can look at the debt versus revenue growth which is shown in the chart above.
The chart shows the plots of total debt (inclusive of leases) versus the trailing 12-months (TTM) revenue growth.
Accordingly, Tesla’s total debt has grown substantially over the years and reached $16 billion in 2020 Q2 between 2015 and 2020. During the same period, the company’s TTM revenue has grown even faster compared to debt.
Prior to 2018, Tesla’s TTM revenue was growing along with debt. But the gap between revenue and debt widened dramatically starting in 2018 Q3, suggesting that Tesla’s revenue growth has outperformed that of the debt.
In other words, Tesla’s debt to revenue ratio was around 1.0 prior to 2018 but the ratio has dropped to only 0.6 in 2020, indicating that the company’s TTM revenue has outgrown total debt.
Indirectly, based on the debt vs revenue plot in the chart, Tesla has used debts to acquire assets and subsequently, these assets have managed to produce a return on investment in the form of revenue that far exceeds that of the total debt.
In summary, Tesla’s debt has grown substantially over the years and reached an all-time high of $13 billion in 2Q 2020 or $16 billion when leases are included.
Along with the growth of debt, Tesla’s TTM revenue has also expanded dramatically and even outgrown the debt since 2018 as reflected from the debt to revenue plot.
Additionally, there is also a close correlation between Tesla’s long-term assets and total debt which suggests that Tesla has used debts to acquire a substantial amount of long-term assets. Tesla capital structure analysis shows the company is 80% funded by liabilities with the remaining funded by equity.
In return, these long-term assets help the company to produce cars and energy products and subsequently, generate an increasing sales revenue for the company.
Indirectly, the cycle of debt, assets and revenue growth has propelled the company’s market valuation to an all-time high of more than $400 billion as of Sept 2020.
References and Credits
1. All financial figures in all charts and tables on this webpage were obtained and referenced from the quarterly and annual filings between 2015 and 2020 which can be found in Tesla Investor Relation: Tesla Investor Relations.
Related articles that you might be interested:
- How much free cash flow does General Motors have?
- Tracking Tesla Model 3 Deliveries and Production Numbers
- General Motors revenue and gross margin
- GM vs Tesla: R&D Costs
- Tesla frequently asked investment questions
Readers, investors, analysts, bloggers, visitors, researchers, writers, or academicians are encouraged to use, copy, quote, distribute, duplicate, modify, edit, upload, share and link any materials on this webpage such as the charts, snapshots, texts, paragraphs, etc. You can credit back to this page by a link or a mention of the website. Thanks for sharing!