Tesla’s total debt obligation has been a hot topic over the years, not only among investors but also creditors who are concerned about the company’s financial health. For investors and creditors who are studying about Tesla’s liquidity, they have a valid reason to start worrying as total debt obligation, based on the 4Q 2019 annual filing, made up more than 50% of the company’s total liability and grew almost 14% year-over-year compared to 4Q 2018.
A rising debt obligation has led to an increasing interest expense for Tesla. As of 4Q 2019, Tesla has incurred $685 million in interest expense at the end 2019, a figure which is about 3% more than a year ago. Without any doubt, interest expense will take a portion of profits out, and with the growing interest expense, the possibility for Tesla to make a profit will be greatly reduced.
In this article, we will dig into Tesla’s ever increasing debt obligations and find out how much debts have grown over the years. Moreover, we will look at the relationship between debts and assets as well as figure out if the company is using debt efficiently to grow its assets and hence, revenue.
Tesla’s Total Debts
In the quarterly and annual filings, Tesla created a table that listed down all the debt obligations (both current and long term). There are multiple columns specified in the tables such as “Unpaid Principal Balance”, “Net Carrying Value”, “Contractual Interest Rates”, “Contractual Maturity Data” and so on as shown in the following snapshot.
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 being amortized to expenses.
The contractual interest rates basically refer to the interest rates of the issued debt whereas maturity date refers to the date when the debts come due. When the debts come due, Tesla will pay off the principal amount instead of the carrying value.
With all that said, there are a series of charts and tables below that keep track of Tesla’s quarterly total debt over the last 5 years from 2014 to 2019.
Tesla’s Contractual Obligations
Some of Tesla’s contractual obligations involve mandatory purchase obligations which obligate the company to purchase 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.
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.
While the purchase obligations are a liability and increase the amount of debts to Tesla, the following discussions and all data in the charts and tables have not taken into account of these purchase obligations and thus their effect on total debts.
However, I have added an extra chart below to show the effect of operating and finance leases on total debt.
Chart of Tesla’s Quarterly Total Debt
The chart above shows Tesla’s historical quarterly total debt, both current and long-term portions as well as the expected interest portion combined for the past 5 years from 2015 to 2019.
From the chart, Tesla’s total debt has increased significantly over the past 5 years, growing from about $3 billion in 1Q15 to more than $12 billion in 4Q19 which is a record high for the company. If you put the growth rate into a percentage perspective, the growth in debt is nothing short of 400% over the past 5 years.
Furthermore, you may notice that total debt suddenly shot up dramatically to nearly $8 billion in 4Q16 from the prior quarter of only $3 billion. The reason for the huge growth was due to the acquisition of SolarCity and hence, consolidation of all debts from SolarCity into Tesla’s balance sheet was done since then.
Again, total debt has reached roughly $12.5 billion in Q4 2019, and is on its way to the $13 billion mark. To reiterate, total debt in the chart includes only current and long-term portion and have not accounted for purchase obligations as well as leases.
Debt Breakdown: Tesla vs SolarCity
The above chart breaks down Tesla’s total debt into Tesla and SolarCity portion. The debt breakdown was obtained from the 4Q16 quarterly report where Tesla had explicitly stated which debts were assumed from SolarCity acquisition. For example, here is an excerpt from the 4Q16 quarterly report under the “Note 13 – Convertible and Long-Term Debt Obligation” section:
“Assumed Debt from our SolarCity Acquisition:
Secured Revolving Credit Facility
SolarCity has entered into a revolving credit agreement with a syndicate of banks to fund working capital, letters of credit and general corporate needs. Borrowed funds bear interest, at our option, at an annual rate of (a) 3.25% plus LIBOR or (b) 2.25% plus the highest of (i) the federal funds rate plus 0.50%, (ii) Bank of America’s published “prime rate” or (iii) LIBOR plus 1.00%. The fee for undrawn commitments is 0.375% per annum. The secured revolving credit facility is secured by certain of SolarCity’s accounts receivable, inventory, machinery, equipment and other assets.”
From 4Q16 to the most recent quarter, 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 among all quarters has been largely attributed to the increases in Tesla’s debt. Before the acquisition of SolarCity in 4Q16, Tesla’s debt had been relatively flat from 2015 to 2016. But from 2017 to 2019, Tesla’s debt had more than doubled over the period, reaching a record value at more than $10 billion in 4Q19.
On the other hand, SolarCity debt obligation has remained flat since the acquisition and had steadily declined since 2017, reaching the lowest point at slightly more than $2 billion in 4Q 2019. 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, the 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.
Total Debt Breakdown – Part 1
The table above keeps track of Tesla’s debt components and shows how each individual debt changes from quarter to quarter.
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 is 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 vale 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 figure.
As the table above is too long, I have broken it 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.
Total Debt Breakdown – Part 2
The table above shows the second part of the table of total debt breakdown into individual component.
This part of the table shows that most of the debts came from SolarCity (highlighted in yellow). All the way to the right of the table is the total debt that adds up all the individual debts.
As of Q4 2019, Tesla total debt stood at roughly $12.5 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 asset 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, when measuring total debt as these are part of Tesla’s contractual obligations which are the same as other debt payments and they take cash out of the company’s coffer.
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 total debt and the effect of leases on debt.
Chart of Tesla’s Total Debt and Leases
In the chart above, there are two plots, one with only total debt while the other is total debt inclusive of leases to show investors how much impact the leases have on total 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 3Q and 4Q 2019, leases obligations have increased total debt by nearly 35% from $12 billion to $16 billion.
You may notice that the impact of leases on Tesla’s debt has been more profound in recent years. Back in 2015 and 2016, leases have only added an extra 10% to 15% of debt, but that was no longer the case in 2019. The results show that Tesla’s leases obligations have grown significantly over the years with respect to debt when the company is expanding its factories and offices.
In short, both operating and finance leases have added significant amount of debt to Tesla.
Is Tesla Using Debt Efficiently?
With debts being added every quarter, what does Tesla do with all the borrowed capitals and how efficient is the company using them?
In this aspect, I believe Tesla is using debts to expand its asset base and support its capital intensive operations.
To further illustrate, we can look at the correlation between assets and debts to see how assets have changed with respect to debts on a quarterly basis.
Here is a chart that shows Tesla’s total assets versus total debts on a quarterly basis.
Chart of Tesla Total’s Assets vs Total Debts
From the current chart, Tesla’s total assets and debts have been trending in the same direction over the past 5 years. Other than the direction, the pattern of both plots are closely matched, indicating that they are closely correlated.
For instance, debts have steadily increased over the last 5 years and assets have also followed suit. The closely matched pattern and direction of both charts show that Tesla have used debts exclusively to expand its asset base.
Of course, the company’s asset base may not come entirely from debts alone since other sources of funds such as stockholders’ equity 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 Tesla’s balance sheet was funded by debts as of Q3 2019 while the remaining 20% was acquired through equity. In other words, Tesla total assets have been almost entirely funded through debts.
From the close correlation of the plot and Tesla’s debt to equity analysis, we can conclude that Tesla has used much of the borrowed capitals to acquire assets all these years in order to run its asset-heavy business.
To find out whether Tesla has efficiently used debts to run its business, we will look at Tesla’s asset turnover ratio, judging from the close correlation between assets and debts.
Asset turnover ratio measures the company’s efficiency in using assets to generate revenues or sales. The ratio indirectly measures whether Tesla has used debt efficiently to generate revenues.
Here is a chart that shows Tesla asset turnover ratio.
Chart of Tesla’s Asset Turnover Ratio
The asset turnover ratio in the current chart shows that Tesla has been generating quarterly double-digit return from 2015 to 2019. On an annual basis, the asset turn was almost 80% in 2019, meaning that for every $1 dollar of asset, the company managed to generate about $0.80 of revenue.
Tesla’s asset turnover ratio has been nothing short of extraordinary as the company has experienced double-digit revenue growth in 2019 and the results were in much better shape than General Motors’ asset turn which was in the ballpark of only 60% as shown in this article: GM’s asset turnover ratio.
Although Tesla’s asset turnover ratio seems solid as seen from the double digit annual return, the results show that the company needs a very large asset base to obtain this kind of return. At an annual rate of 80%, Tesla is using a large asset base to generate the required revenue. When you compare Tesla’s ratio with an asset-light company such as a technology or software company, Tesla’s ranking will be at the bottom of the ladder.
You may notice that the ratio took a dive in 4Q16. This was the quarter when Tesla completed the acquisition of SolarCity and consolidated the financial results from SolarCity. During the same quarter, Tesla added a significant amount of assets in its balance sheet which has caused the ratio to dive remarkably.
After SolarCity acquisition, the asset turnover ratio grew steadily since 2017 and reached its peak figure of 25% at the end of 2018 before dropping slightly to 20% in 4Q 2019. The growth in the ratio show that Tesla has improved its asset usage significantly over the years.
Indirectly, based on the asset turnover ratio shown in the chart, Tesla has used debts efficiently when compared to other automaker such as GM where its asset turnover ratio was much lower than that of Tesla.
Tesla’s total debt has increased by as much as 400% over a period of 5 years from 2015 to 2019. The company posted an amount of only $3 billion in 1Q 2015 but the figure reached a record high of more than $12 billion in 4Q 2019.
Leases, both finance and operating, have contributed substantial amount of debts to Tesla since 2018. When leases were taken into account, total debt has increased by as much as 30% in 4Q 2019, signaling that total debt is inching towards the $16 billion mark very soon.
Tesla’s total debt can be categorized into Tesla and SolarCity’s portion based on the 4Q16 quarterly filing after completing the acquisition of SolarCity. Tesla’s portion contributed the most debt to the company and the amount has increased over the years whereas Solarcity’s portion has remained flat and showed sign of declining after Tesla paid down some of the debts inherited from SolarCity.
There is close correlation between Tesla total assets and total debts which indicates that Tesla has used debts to acquire assets. Tesla capital structure analysis shows the company is 80% funded by debts with the remaining funded by equity.
In short, Tesla has been using debts to fund most of the assets acquisition to run its capital intensive business. Indirectly, Tesla’s better-than-expected asset turnover ratio tells us that the company has efficiently used asset to generate a double-digit return on revenues and subsequently, this relates to a good debts usage efficiency.
References and Credits
1. All financial figures in this page were obtained from Tesla Investor Relation: Tesla Investor Relations.
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