Tesla total debt obligation is the largest component within the liability section of the company balance sheet. Total debt disclosed in the financial statements consists of both current and long-term portions. From the balance sheet (shown in snapshot below), the debt component is further broken down into recourse and non-recourse debt.
According to Tesla, recourse debt refers to debt that is recourse to the company general asset, meaning that lenders can take possession of any general asset (such as inventory, buildings, receivables, etc) in the case of default.
In contrast, non-recourse debt refers to debt that is recourse to only specified assets such as those that have only been pledged as collateral.
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 to keep track of Tesla quarterly total debt obligation for the previous 5 years.
Notes to readers
The data in the charts and tables below do not include Tesla contractual obligations such as those related to purchase obligations. The following snapshot shows Tesla purchase obligation as of Q3 2019.
Update: I have added an extra chart below to show the effect of operating and finance leases on total debt.
Chart of Tesla Quarterly Total Debt
The chart above shows the historical quarterly debt obligation, both current and long-term portions combined for the past 5 years from 2015 to 2019.
From the chart above, Tesla total debt has increased significantly over the past 5 years. For example, total debt was only about $3 billion in 1Q15 but total debt has reached a staggering number of more than $12 billion as of 3Q19 which is a record high for the company. If you put that into a percentage perspective, the increment in debt is nothing short of 400% over the past 5 years.
Furthermore, you may notice that total debt suddenly shot up in 4Q16 from the prior quarter from roughly $3 billion to close to $8 billion. The reason for the huge increase was the acquisition of SolarCity. As a result, SolarCity debt obligations has been consolidated in Tesla balance sheets since 4Q16.
Again, total debt has reached a new high in Q3 2019, registering more than $12 billion and is most likely on its way to the $13 billion mark.
Debt Breakdown: Automotive vs SolarCity
The above chart shows the breakdown of Tesla debt into automotive and SolarCity section. The debt breakdown was first 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, the debt breakdown has been tracked in the chart above based on the debt categories obtained in the 4Q16 quarterly report.
Nevertheless, the chart above shows that SolarCity debt only appeared in the balance sheet since 4Q16 which was when the acquisition of SolarCity was completed.
As you can see from the chart, the add-up of total debt is mainly due to the increases in automotive debt. Before the acquisition of SolarCity, automotive debt had been relatively flat from 2015 to 2016. But from 2017 to 2019, automotive debt had increased significantly and had more than doubled over the period, reaching a record value at more than $9 billion in 3Q19.
On the other hand, SolarCity debt obligation has remained flat since the acquisition and had actually declined slightly in 2017. The figure had been in the $3 billion level throughout most of the quarters.
Debt Breakdown – Part 1
The table above keeps track of the debt components and shows how each component 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 table combine both current and long-term portions. As such, 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 “yellow” in the header are those assumed from SolarCity acquisition.
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 debt components.
As of Q3 2019, Tesla total debt stood at roughly $12.5 billion.
Top 3 Largest Debt Obligations
The 2.00% Convertible Senior Notes
As of 3Q 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 Q3 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 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.
Tesla 3rd largest debt is the Credit Agreement in which Tesla is able to draw an amount of up to $2.245 billion. The Credit Agreement is a senior asset based revolving credit facility. As of 3Q 2019, Tesla had already drawn $1.83 billion out of the $2.245 billion available 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.
As of 3Q19, Tesla has about $400 million of unused amount in the Credit Agreement facility where the company can withdraw for general corporate usage.
China Loan Agreement
On March 2019, Tesla has started the China Loan Agreement with a syndicate of lenders in China for an unsecured facility of up to RMB 3.5 billion (about 500 million in US Dollar). This credit facility is for expenditures related to the construction and production of the Gigafactory Shanghai.
As of Q3 2019, China Loan Agreement has increased up to $1.1 billion of available credit and the company has withdrawn $200 million so far, leaving about $900 million in available credit.
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 in which the company was not required to recognize the asset and liabilities of operating leases.
With that said, I have included the lease liabilities, both operating and finance, when calculating the total debt as these are contractual obligations which are the same as debt payments and they take cash out of the company.
The leases included in the chart below represent both operating and finance leases liabilities and they represents the principal amount and the interest portion that Tesla must deal with cash payment monthly, quarterly or annually, depending on the lease terms.
Here is a snapshot taken from Tesla Q1 2019 quarterly filing that shows the company’s lease obligation:
My expectation is that leases will increase Tesla debt obligation significantly. To prove that, I have created a series of charts below that shows Tesla total debt and the effect of leases on debt.
Chart of Tesla Total Debt and Leases
In the chart above, I have created two plots, one with only total debt while the other is total debt added with leases to show investors how much impact have leases caused on total debt.
As shown, leases have considerably impacted Tesla debt by increasing the amount of total debt by a large margin. For example in 3Q 2019, leases obligation has increased total debt by close to 30% which is from $12 billion to a figure close to $16 billion.
You may notice that the impact of leases on Tesla debt has been more profound in recent years. Back in 2015 and 2016, leases have only added an extra margin of about 10% to 15% to debt, but that is no longer the case in 2019. That only shows that Tesla leases obligation has increased significantly over the years with respect to debt.
In short, both operating and finance leases have added significant amount of debt to Tesla.
Is Tesla Using Debt Efficiently?
With all the debts added every quarter, how efficient is the company using the borrowed capital? Since Tesla is an auto and energy products manufacturing company, it should require significant amount of fixed asset to support its capital-intensive operations.
Imagine all the factories, machinery, offices, warehouses and so on that the company uses to operate its manufacturing business. For this reason, the company would probably be using a lot of borrowed capital to acquire asset to support its asset-heavy business operation.
Having said that, we can look at the correlation between asset and debt to see how asset changes with respect to debt on a quarterly basis.
Here is a chart that shows total assets versus total debts on a quarterly basis.
Chart of Tesla Total Assets vs Total Debts
From the chart above, we can see that both total assets and debts have been moving in the same direction over the past 5 years. Other than the direction, the pattern of both plots are closely matched. For example, when debts increased or dropped in a period, so did assets.
From 2015 to 2019, debts have steadily increased. In the same period, assets have also followed the pattern of debts. Therefore, both debts and assets plots above are closely correlated.
Of course, the company may not have used all the capitals to acquire assets as some of the cash may have been spent on running the day-to-day operations such as rentals, employees payroll and marketing. And not all assets were acquired using debts as stockholders’ funds may have been used as well to acquired assets when Tesla did an equity offering to the public.
Based on the debt to equity analysis of this article: Tesla capital structure, as much as 80% of Tesla balance sheet is funded by debts as of Q3 2019 while the remaining 20% is acquired through equity. In other words, Tesla total assets are almost entirely acquired through debts.
From the close correlation of the plot above and the result of Tesla capital structure analysis, we can conclude that Tesla has been using much of the borrowed capital to acquire assets all these years to operate its asset-heavy business.
To find out whether Tesla has been efficiently using debt to run its business, we will look at the asset turnover ratio since there has been close correlation between assets and debts.
Asset turnover ratio measures the company efficiency of using assets to generate revenue or sales. The ratio indirectly tells us whether Tesla has used debt (assets) efficiently to generate revenues.
Here is a chart that shows Tesla asset turnover ratio.
Chart of Tesla Asset Turnover Ratio
The asset turnover ratio in the chart above shows that Tesla has been having double-digit return from 2015 to 2019. The company is doing quite an extraordinary job in using asset to generate a double-digit return in sales.
However, to find out whether the ratio is competitive with respect to automotive industry, it needs to be compared with the industry standard and other automakers to arrive at a conclusion.
From looking at Tesla ratio alone, it looks like a solid result based on the double-digit return on sales. As of Q3 2019, Tesla asset turnover ratio stood at about 20%. What the ratio tells us is that for every $1 dollar of asset, Tesla managed to generated about $0.20 of revenue.
Although Tesla asset turnover ratio seems solid as seen from the double digit return, the numbers show that the company needs a very large asset base for that return. At an asset turnover ratio of 20%, Tesla is using quite a large based of assets to generate sales revenue. When you compare Tesla ratio with an asset-light company such as a technology or software company, Tesla 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 has completed its acquisition of SolarCity and has consolidated the financial results from SolarCity. During this period, Tesla added a significant amount of assets in its balance sheet which has caused the ratio to decline remarkably.
After SolarCity acquisition, the asset turnover ratio has increased significantly from 2018 and have reached its peak figure of 25% at the end of 2018 before dropping slightly to 20% in the latest quarter. The increases in the ratio show that the company has improved its asset usage.
In general, Tesla has been using debts in the right direction which is to acquire valuable assets. In return, the acquired assets helps the company to generate a double-digits return in sales revenue.
As a result, based on the correlation of the assets and debts as well as Tesla capital structure which is 80% funded by debts as of Q3 2019, we can make a decisive conclusion that Tesla has been using debts efficiently and in the right direction which is to buy assets. These assets are then used to generate sales for the company at a return rate of 20%.
Tesla total debt has increased by almost 600% over a period of 5 years from 2015 to 2019. Total debt was only $3 billion in Q1 2015 but has reached a record amount of more than $12 billion in 3Q 2019.
Leases, both finance and operating, have added substantial amount of debts to Tesla since 2018. When leases were taken into account, total debt has increased by as much as 30% in 3Q 2019. Total debts figure has inched closer to $16 billion in 3Q 2019 when leases were accounted for in the measurement of debts.
Tesla total debt can be broken down into automotive debt and SolarCity debt based on the 4Q16 quarterly filing when Tesla completed the acquisition of SolarCity. Automotive segment contributed most of the debt to the company. Tesla largest debt component as of 3Q19 was the 2% convertible senior bond which was issued in May 2019 to raise $1.84 billion.
There is close correlation between Tesla total assets and total debts. Tesla capital structure indicates the company is 80% funded by debts. In short, Tesla has been using debts to fund most of the asset acquisition needed to run its asset-heavy business.
Indirectly, the result tells us that Tesla has been using debts quite efficiently to generate a 20% return on revenue from its asset base.
References and Credits
1. All financial figures in this page were obtained from Tesla Investor Relation: Tesla Investor Relations.