Tesla Default Probability Hits A Record 48%

With Tesla stock plunging 13%, suffering its biggest one day drop in years as the market was forced to evaluate a world in which Elon Musk is no longer affiliated with the company should the SEC get its wish (a proposition which according to Barclays could wipe out as much as $130 from the TSLA stock price), bond traders are likewise trimming their exposure, which in turn has sent Tesla’s default odds to a new all time high.

According to CMA, Tesla credit default swaps – i.e., the upfront cost of protection against default – rose over 1% to 22.8 points, the highest on record. This means that for every $10 million in protection, investors will have to pay $2.28 million upfront. This also means that the implied probability of default over the next 5 years is an all time high of 48%.

Alongside the stock selloff, Tesla’s junk bonds fell to 84.75 cents on the dollar, down half a cent.

Tesla currently has $11.5 billion in outstanding debt, of which European insurance giant Allianz is the biggest holder. At the end of February, $920 million in convertible debt matures with a convert price of $360. Tesla is currently trading 30% below that price, so it will come due as cash instead of equity for holders of those notes unless the stock somehow surges by $90 in the next 4 months.

Making matters worse for Tesla is that the company will now, with the SEC lawsuit in play, almost certainly require another cash infusion before it reaches profitability, and the new capital would be far harder to come and be more expensive after SEC lawsuit, especially if Musk is forced to step down.

“To be clear, near-term if Tesla is able to ramp the Model 3 over the coming quarters, we believe cash flow should improve,” Joseph Spak, an analyst at RBC Capital Markets said Friday. “Having Elon Musk as CEO has undoubtedly made that easier in the past. Securing attractive funding in the future could be more difficult.”

One potential loophole proposed by Covenant Review is for Musk to pledge Tesla’s intellectual property as collateral for new loans; however this plan involves a foreign entity stepping up much like Musk claimed Saudi Arabia’s Public Investment Fund was prepared to do. It is unlikely that the Trump administration would approve what would effectively be a virtually free technology transfer to a foreign power just so Musk can continue losing money.