Tesla elon musk increases personal leverage – tesla, inc. (nasdaq tsla) seeking alpha electricity billy elliot chords


Back in early 2016, I published an article that discussed Tesla ( TSLA) CEO Elon Musk’s personal financial situation. The premise was that Elon Musk had borrowed considerably against his Tesla stake, and a fall in shares could result in a very painful margin call. More than two years later, Musk has actually borrowed even more, making the scenario even more precarious if Tesla shares continue to struggle.

I bring this up today because Tesla issued a proxy filing with the SEC after the bell on Thursday afternoon. The document contained a section discussing the major holders of Tesla shares at the end of 2017. Elon Musk beneficially owned almost 38 million Tesla shares at the end of last year, with the following note provided:

Includes (i) 33,632,421 shares held of record by the Elon Musk Revocable Trust dated July 22, 2003; and (ii) 4,220,620 shares issuable to Mr. Musk upon exercise of options exercisable within 60 days after December 31, 2017. Includes 13,774,897 shares pledged as collateral to secure certain personal indebtedness.

I was curious to see how this new number of pledged shares compared to the past, so I went back and read through the previous year’s proxy filings. For those wondering, my previous article discussed Musk pledging 7.4 million shares, and that was at the end of 2014. The table below shows the key numbers I’ve found. The options/debt column included 33,333 shares at the end of 2016 that Musk could acquire in exchange for a SolarCity $10 million note. He later did make that exchange, adding to his overall equity holdings.

With Tesla shares finishing 2017 at their highest year-end point, and the number of shares pledged being at an all-time high, the market value of Musk’s pledge was almost $4.3 billion, a substantial rise over the prior year. If the same number of shares are currently pledged, the market value will have dropped with Tesla down about $25 since the end of 2017.

However, it wouldn’t surprise me if the number of shares pledged has actually increased since the end of the year. Recently, Elon’s Boring Company raised over $112 million, but 90% of that came from Elon himself. If he doesn’t have tens of millions in cash lying around, it means he likely took out more loans, which means more shares being pledged. The chart below shows how the percentage of shares pledged has surged to new highs, both based on the Musk Trust and total shares. These percentages could be higher now.

Now I would love to know what Elon Musk‘s personal loans are based on, given the substantial rise in interest rates over the past year, both US Treasury rates as well as LIBOR. Just like Tesla, you don’t want to be highly in debt when interest rates are surging. It is also possible that Musk has borrowed from some of the banks that have supported Tesla’s capital-raising activities, which could become an issue if the banks demand their money back.

Regardless of your opinion of Tesla, the highly leveraged nature of Elon Musk is a large risk factor to consider. With Elon borrowing more and more to fund his other ventures, a large decline in Tesla shares could result in a painful margin call, which could force Elon to sell millions of shares, adding to a downward spiral. I’ll be back next week to preview Tesla’s earnings report, which could have a large say in what Tesla shares do the rest of this year.