Tesla stock has been buffeted by disappointing car deliveries, steeper first-quarter losses than Wall Street expected, and the departures of top executives. And then there is CEO Elon Musk and his tweets.
“Oftentimes, investors get Tesla the company and Tesla the car confused, but in this case, you really get to separate the two out,” says Henry Song, a portfolio manager with Diamond Hill Capital.Here’s how it works. Tesla’s financing division collects customers’ monthly lease payments and distributes them to bondholders, with owners of the higher-rated slices of ABS getting paid first. The leases included in these securities have an average of 20 to 30 months remaining on a 36-month lease.
For individual investors, the only way to make this car-lease bet is through mutual funds and other professionally managed investment vehicles. Diamond Hill Capital owns Tesla ABS in its Short Duration Total Return Strategy fund . Calvert Investments’ Calvert Bond fund , TIAA-CREF’s Social Choice Bond fund , and the JPMorgan Limited Duration Bond fund have also bought them, filings show.
Auto loan standards weren’t tightened as much as other types of consumer credit after the crisis. But because borrowers have less credit-card and mortgage debt than they did during the crisis, their auto loans should be easier to pay off, says Dave Goodson, head of securitized credit at Voya Investment Management.
And that is a risk. If the company ever does default, owners of the high-yield bonds could be left collecting lower recoveries than Tesla’s bankers, because the securities are unsecured. The bond contract doesn’t prevent Tesla from borrowing more money—in fact, it allows the company to pledge its Gigafactory to secure new debt, according to Covenant Review.
I love Elon, but putting family in charge of a few of his ventures was a long term mistake.
In the net cash flow project model, you embed a bond rule and calculate the risk. You get the required yields.
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