Tesla Takes A Breather Passing $184/Share Due To Outstanding Convertible Debt, Warrants

Tesla has been on a tear in 2013, showing its first quarterly profit, raising $1 billion in cash, paying off its government loan, and enjoying a more than 400% gain in its share price year to date.

Today, however, Tesla slipped 6%, settling around the $180 per share mark. After having risen to a 52 week high of $191.83, Tesla has eased. A good portion of the slip can likely be attributed to some early terms that got outdated quickly due to Tesla’s meteoric rise.

There actually appear to be a few factors, including declining institutional investment and its stock price reaching levels that impact the convertible notes and warrants that Tesla sold in May. At that point in time, Tesla traded for under $100 per share.

In its August 7th investor letter, Tesla spelled out its fundraising activity during the quarter, including the sale of 4.5 million shares and the raising of $660 million in convertible debt. About 45% of those funds were used to repay a Federal loan, and a fee for repaying the debt ahead of schedule.

The convertible debt carries a 1.5% coupon rate, which is quite low, and on the lower end of expectations set at the time of sale. As the Wall Street Journal notes, the size of the convertible note offering was increased twice to $600 million, a figure that could rise to $660 million if “underwriters purchase additional shares.”

They did. So, the full tally of new cash for Tesla tipped past the $1 billion mark.

Then its stock continue to rise. Here’s Tesla on how it raised the set up the convertible debt to avoid potential dilution. Recall that Tesla traded for under $100 per share at the time of its issuance:

To mitigate the potential dilution impact from the issuance of convertible debt to our common shareholders, we also entered into a call spread to increase the effective conversion price from $125 to $184 per share. The call spread allows us to avoid incremental dilution from the convertible debt until our common share price climbs past $184.

Tesla recently went past the $184 per share mark, and then saw its stock fall. The company also issued warrants this May – the time of the share sale and debt issuance – that had a strike price of, you guessed it, $184.84. Those warrants are for 5.3 million shares, or around $1 billion at current valuation.

So, it seems that Telsa didn’t anticipate its stock to perform as it has, and therefore the financial controls – likely set up for the long-term, given that the convertible debt were not due until 2018 – became somewhat moot. Crossing the $184 mark, Tesla’s stock unlocked investor agency, pushing its share price down.

Add to that the fact that Tesla has had an incredible run over the summer that some are citing as perhaps too optimistic and we could be seeing more pullback over the next few weeks.

For more on the potentially dilutive effects of the convertible debt, which have been hedged, this chart is for you.

Image Credit: Wendell Oskay / Flickr CC