Tesla’s debt obligation has been a hot topic for many years, not just among investors but also creditors who are concerned about the company’s financial health, its liquidity in particular.
Tesla’s total debt, including both current and long-term portions, made up nearly 50% of the company’s total liability according to the 3Q 2020 quarterly filings.
A rising debt level has led to a rising interest expense for Tesla.
By the end of 2019, Tesla has incurred $685 million in interest expense, a figure which is about 3% higher compared to the previous year.
Year to date, Tesla’s interest expenses totaled as much as $500 million.
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 if interest expenses keep rising 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 as well as debt vs sales.
Additionally, we will also find out whether Tesla has been using debt efficiently to grow its assets and hence, its revenue.
Let’s get started!
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.
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.
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 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 $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, these liabilities are excluded in the subsequent discussion, 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.
Between 2015 and 2020, Tesla’s debt amount has grown from a little over $3 billion in 2015 Q1 to nearly $13 billion as of 2020 Q3.
Keep in mind that the figures in the chart include only the debt and the expected interest expense.
We have not even taken into account the finance and operating leases yet.
Over the chart, you may notice that the debt levels suddenly surged dramatically to nearly $8 billion in 4Q16 from the prior quarter.
The reason for the huge growth was primarily driven by 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 $10.7 billion as of 2020 Q3.
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 2020 Q3.
The decline in SolarCity debt is sort of expected because Tesla has gradually paid down some of these debts over the years.
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
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 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.
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 SolarCity acquisition.
All the way to the right of the table is the total debt that adds up all the individual debts.
As of 2020 3Q, Tesla’s total debt or total unpaid principal balance stood at roughly $12.7 billion.
Tesla’s Top 3 Largest Debt Obligations
The 2.00% Convertible Senior Notes
As of 3Q 2020, 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%.
The 5.30% Convertible Senior Notes
As of 3Q 2020, Tesla’s 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.
A convertible bond means that the lender has the option to convert the debt into Tesla’s common or preferred stocks, depending on the debt debenture.
Additionally, the debt conversion feature may also depend on Tesla’s stock price in order for the debt to be convertible.
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 $2.328 billion as of 2020 3Q.
The Credit Agreement is a senior asset-based revolving credit facility.
As of 3Q 2020, Tesla had already drawn $1.885 billion out of the $2.3258 billion available credit, leaving about $400 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 has amended the Credit Agreement in March 2020 to increase the credit limit by an extra $100 million and extended the term substantially to July 2023.
Tesla’s Debt Due in 2021
Of all debts mentioned in the table above, some of them will be due in 2021.
Here is a list of Tesla’s debt that will be due in 2021.
The 2021 Notes which bears an interest rate of 1.25% will be due on March 2021. As of 2020 3Q, the 2021 Notes carries an unpaid principal amount of $1.376 billion.
Additionally, the Solar Term loan will also be due in January 2021 and the total amount owed by Tesla was $155 million as of Q3 2020.
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 Q3 2020, the automotive asset-backed notes carries an unpaid principal balance of more than $1.8 billion.
Effect of Leases on Tesla’s Debt
Starting Jan 1, 2019, Tesla has adopted the accounting 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 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.
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 before 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
*Starting in 1Q20, Tesla has stopped disclosing leases explicitly, including 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 which is roughly the same as what Tesla has disclosed in 4Q19.
In the chart above, there are two plots and they are total debt and total debt with leases added.
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.
The amount of debt has increased by a large margin. For example, lease obligations, both operating and finance, have added nearly 25% more debt for Tesla in 3Q 2020.
In the same quarter, Tesla’s total debt has increased from $12.7 billion to $15.8 billion, due mainly to the leases added.
Over the chart, 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 rather minimal, only 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.
The reason can be attributed to Tesla’s relentless 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.
Is Tesla Using Debt Efficiently?
With debt increasing every quarter, is Tesla using the debt efficiently?
We can explore this question by looking 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 total assets and debts have been trending in the same direction over the past 5 years.
For instance, debts have steadily increased over the last 5 years and so have total assets.
The closely matched pattern and direction of both charts show that Tesla’s debts have been used to expand the company’s asset base.
Tesla’s total assets are primarily comprised of the company’s most critical assets, including factories, equipment, tools, offices, warehouses, solar energy systems, leased vehicles, etc.
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 come almost exclusively from debts.
Chart of Tesla’s Debt vs Revenue Growth
To find out how Tesla’s debt has grown with respect to revenue, we can look at the debt growth versus revenue growth plot as 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 nearly $16 billion in 2020 Q3.
During the same period, Tesla’s TTM revenue has grown even faster than debt as depicted in the chart above.
Prior to 2018, Tesla’s TTM revenue was running along or below the company’s debt levels.
However, the gap between revenue and debt widened dramatically starting in 2018 Q3, suggesting that Tesla’s revenue growth has outgrown that of the debt.
Chart of Tesla’s Debt to Revenue Ratio
The debt to revenue chart above shows Tesla’s total debt to TTM revenue ratio.
The debt to revenue chart clearly shows that Tesla’s revenue growth has steadily surpassed that of the company’s debt growth.
For instance, Tesla’s debt to revenue ratio was above 1.0 prior to 2018 but the ratio has dropped significantly to only 0.56 as of Q3 2020, the lowest level in the last 5 years.
For your information, the lower the debt to sales ratio, the more efficient Tesla is when it comes to using debt.
Over the last 5 years, Tesla’s debt usage efficiency has improved significantly as more revenue is squeezed out of the same level of debt.
In other words, Tesla’s efficient use of debt has translated to an improved return on investment in the form of revenue or sales.
In summary, Tesla’s debt has grown substantially over the years and reached an all-time high of nearly $13 billion in 3Q 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 total assets and total debt which suggests the company has used debts to acquire a substantial amount of assets.
Tesla’s capital structure analysis shows the company is 80% funded by liabilities with the remaining funded by equity.
In return, these assets help Tesla 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 Tesla’s market valuation to an all-time high of more than $600 billion as of Dec 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.
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