Tesla head Elon Musk talks to the press as he arrives to have a have a look at the development site of the brand new Tesla Gigafactory near Berlin on September 03, 2020 near Gruenheide, Germany.
Maja Hitij | Getty Images
The world’s richest person could soon add one other title to his name – America’s most leveraged CEO.
Two-thirds of Elon Musk’s financing for the $44 billion deal to take Twitter private may have to return out of his own pocket. That pocket is deep. He has a net value of about $250 billion.
Yet because his wealth is tied up in Tesla stock, together with equity in his SpaceX and The Boring Co., Musk may have to sell thousands and thousands of his shares and pledge thousands and thousands more to lift the vital money.
In response to his SEC filings, Musk’s financing plan includes $13 billion in bank loans and $21 billion in money, likely from selling Tesla shares. It also features a $12.5 billion margin loan, using his Tesla stock as collateral. Because banks require more of a cushion for high-beta stocks like Tesla, Musk might want to pledge about $65 billion in Tesla shares, or a few quarter of his current total, for the loan, in response to the documents.
Even before the Twitter bid, Musk had pledged 88 million shares of the electrical auto maker for margin loans, even though it’s unclear how much money he’s already borrowed from the ability.
In response to research firm Audit Analytics, Musk has greater than $90 billion of shares pledged for loans. The entire makes Musk the most important stock-debtor in dollar terms amongst executives and directors, far surpassing second-ranked Larry Ellison, Oracle’s chairman and chief technology officer, with $24 billion, in response to ISS Corporate Solutions, the Rockville, Maryland-based provider of ESG data and analytics.
Musk’s stock debt is outsized relative to the complete stock market. His shares pledged before the Twitter deal account for greater than a 3rd of the $240 billion of all shares pledged in any respect firms listed on the NYSE and Nasdaq, in response to Audit Analytics. With the Twitter borrowing, that debt could soar even higher.
In fact, Musk has loads of cushion, especially since he continues to receive latest stock options as a part of his 2018 compensation plan. His 170 million in fully owned Tesla shares, combined with 73 million in options, give him a possible stake in Tesla of 23%, at a price of over $214 billion. The remainder of his net value comes from his greater than 50% stake in SpaceX and his other ventures.
He received one other 25 million options as a part of the plan this month as Tesla continued to fulfill its performance targets. While Musk cannot sell the newly received options for five years, he can borrow against them.
Yet Musk’s 11-figure share loans represent a completely latest level of CEO leverage and risk. The risks were highlighted this week as Tesla’s share price slid 12% on Tuesday, chopping greater than $20 billion from Musk’s net value. Shares of Tesla were down lower than 1% on Thursday afternoon.
Musk’s bet also come as other firms are sharply cutting back or restricting share borrowing by executives. Greater than two-thirds of S&P 500 firms now have strict anti-pledging policies, prohibiting all executives and directors from pledging company shares for loans, in response to data from ISS Corporate Solutions. Most other firms have anti-pledging policies but grant exceptions or waivers, like Oracle. Only 3% of firms within the S&P are just like Tesla and permit share pledging by executives, in response to ISS.
Corporate concerns about excess stock leverage follow several high-profile blowups by which executives needed to dump shares after margin calls from their lenders. Green Mountain Coffee Roasters in 2012 demoted its founder and chairman, Robert Stiller, and its lead director, William Davis, after the 2 men were forced to sell to fulfill margin calls. In 2015, Valeant CEO Michael Pearson was forced to sell shares held by Goldman Sachs as collateral when it called his $100 million loan.
Jun Frank, managing director at ICS Advisory, ISS Corporate Solutions, said firms at the moment are more aware of the risks of executive pledging, and face greater pressure from investors to limit executive borrowing.
“Pledging of shares by executives is taken into account a big corporate governance risk,” Frank said. “If an executive with significant pledged ownership position fails to fulfill the margin call, it may lead to sales of those shares, which might trigger a pointy share drop in stock price.”
In its SEC filings, Tesla states that allowing executives and directors to borrow against their shares is vital to the corporate’s compensation structure.
“The power of our directors and executive officers to pledge Tesla stock for private loans and investments is inherently related to their compensation attributable to our use of equity awards and promotion of long-termism and an ownership culture,” Tesla said in its filings. “Furthermore, providing these individuals flexibility in financial planning without having to depend on the sale of shares aligns their interests with those of our stockholders.”
The precise amount that Musk has borrowing against his shares stays a mystery. Tesla’s SEC filings show his pledge of 88 million shares, but not how much money he’s actually borrowed against them. If he pledged the shares in 2020 when Tesla stock was trading at $90, he would have been in a position to borrow about $2 billion on the time. Today, the borrowing power of those shares has increased tenfold, so he could have room to borrow a further $20 billion or more against the 88 million shares already pledged. In that case, only a few third of his Tesla stake could be pledged after the Twitter deal.
Yet if he’s increased his borrowing as Tesla shares have risen in value, he could have to pledge additional shares. Analysts say that if Musk has maxed out his borrowing on the 88 million shares (which is extremely unlikely) and he has to pledge a further 60 million shares to fund the Twitter deal, greater than 80% of his Tesla fully owned shares could be pledged as collateral.
That may leave him with about $25 billion in Tesla shares unpledged. If he also has to sell $21 billion of Tesla shares to pay the money portion of the Twitter deal, in addition to the accompanying capital gains taxes, virtually all of his remaining fully owned stock could be pledged.
In response to SEC filings, Musk sold about $8.4 billion value of Tesla shares this week. He tweeted Thursday, “No Further TSLA sales planned after today.” Yet his plans for raising the remaining of the $21 billion in money needed for the deal remain unclear.
Either way, Musk shall be putting a big share of his Tesla wealth in danger, which could make for a bumpy ride ahead for Tesla shareholders.
Borrowing against shares, Frank said, “exposes shareholders to significant stock price risk attributable to an executive’s personal financing decisions.”