The Collateral Grab Begins As Tesla Burns Through Cash

Tesla bank creditors have forced the Company to add its Fremont manufacturing factory to the pool of assets which secure Tesla’s $1.8 billion credit facility.  The cover story is that the banks “suggested” that Tesla add the additional collateral to support the asset base underlying the bank.  However, that’s unmitigated propaganda.

Banks have access to the inside books at companies to which they lend.  In this regard, bank creditors have valuable insight to the actual cash flows in and out of a borrower.  Anyone who has dabbled professionally in the world of credit, especially junk credit, will recognize this as the beginning of the end for Tesla.   This is a move by the bank lenders to grab title to Tesla’s most valuable assets.  Soon there will be a scramble to tie anything not already pledged.

The junk bond investors are totally screwed now.   Not that we have any idea of the true “next best use” of Tesla’s primary assets.  But by the time the liquidation of Tesla begins there will be a flood of EV’s on the market which means there will likely not be much demand from a company looking to use Tesla’s manufacturing facilities to produce even more EVs. In fact, its seems at this point that Tesla’s production process has major flaws, which means the facilities require a large infusion of capital to bring Tesla’s facility up to an acceptable standard of production quality.

Perhaps the next best use in a place like Fremont is to convert the manufacturing facility into a homeless shelter.  But that won’t help the banks.

This is to say that, intrinsically, the junk bonds are worth zero.  The assets are tied by the banks and likely worth less than that the value of the debt that sits above the junk bonds in the pecking order.  The bondholders have no prayer of ever receiving their principal back from cash flow.  This means that the stock is intrinsically worth zero as well.

I guess the irony in this situation is that Deutsche Bank, of all banks, is the lead creditor. Talk about letting the inmates run the asylum…this also means, of course, that  $10’s of billions in credit default swaps are likely connected to the credit facility as well as the junk bonds. As is, Deutsche Bank is radioactive.  Add Tesla to that mix and the recipe for financial nuclear explosion has been created.

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