Elon Musk’s wealth and ability to take loans are put to the test now, as stocks Tesla the main engine of his wealth, fell sharply, in parallel with his attempts to stabilize the huge personal investment he made in Twitter.
The electric car manufacturer’s stock price fell by 18% just this week and by more than 60% since Musk announced his plan to buy the social network platform. His ability to use his Tesla shares to raise money, by selling them or taking loans against them, has been complicated by the rapid decline in value in recent months.
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Looking back, Musk was a cash-poor billionaire, dependent on so-called margin loans — loans backed by his stock — for his personal expenses and business investments, while he held his Tesla shares and profited from their appreciation.
But this year, Tesla’s market value dropped by about 700 billion dollars, and along with the drop in the company’s market value, Musk’s personal fortune also dropped. The decline in Tesla’s valuation comes after years of growth that allowed Musk to borrow money easily without having to sell stock.
Tesla shares fell by about 65% in 2022 and were hurt, among other things, because of a higher interest rate environment. Another issue may be related to why Musk needs the cash: Twitter. Tesla investors have worried that Musk’s attention has not been fully devoted to the car company since he took over the social network company in October.
At the end of last year, just as Tesla’s stock price reached its peak, he began selling shares of the company, for a total of more than $39 billion, including $3.5 billion last week. It is not clear what the state of Musk’s financial liquidity is after he said that his tax liability in 2021 will be more than 11 billion dollars, and after he provided about 25 billion in cash for the purchase of Twitter.
Musk’s holdings in Tesla today, not including exercisable options, stand at 424 million shares worth about $52 billion, as of Friday’s closing price, about $123.15 per share.
In simple words, if Musk could use all these shares as collateral within the framework of Tesla’s rules, he could borrow about 13 billion dollars. That’s only slightly more than the amount he intended to borrow in April as part of the original Twitter deal using just 40% of his shares as collateral, underscoring how much his borrowing capacity has shrunk as the car company’s share price has collapsed. He later canceled the margin loans he offered to finance the purchase following investor concerns about the risk involved.
Musk and Tesla did not respond to requests for comment.
“Emergency fire drill”
Tesla shares are not Musk’s only asset or the only channel through which Musk can raise funds. He also owns shares in the rocket and space company SpaceX, and has ownership in startups such as Boring Co., a tunnel mining company. His personal debt level is unknown.
The question on Musk’s mind is whether Tesla, where he is also CEO, is ready for a recession as he simultaneously tries to reduce losses at Twitter by cutting thousands of employees from the social network. Late on Tuesday, Musk said that the drastic spending cuts he made at Twitter were necessary because the company was on a path to bleed billions of dollars.His team also tried to get more investors on Twitter.
“We have an emergency fire drill on our hands,” Musk said in a public conversation he held on Twitter Spaces. After making these drastic efforts, he said, Twitter could break even next year.
While Twitter has rarely been profitable in the past decade, the company’s financial situation has become more challenging due to the debt Musk took on to finance its purchase and because of a drop in spending from advertisers who are wary of the frenetic changes that have taken place under his leadership. Analysts estimate that the debt expenses alone added more than a billion dollars in annual costs to a company that last year generated 5 billion dollars in sales, mainly from advertisements.
Musk has been in this situation before – deep in debt and burning cash while the global economy falters – and has come out of it successfully.
These successes and the investors’ enthusiasm for his initiatives raised him for a certain period to the rank of the richest man in the world. The decline in the value of Tesla shares dropped Musk to second place behind Bernard Arnault, the chairman and CEO of the luxury goods conglomerate LVMH. Musk’s assets fell to about $140 billion a little over a year ago, according to the Bloomberg Billionaires Index.
“somewhat paranoid”
If he needs cash, Musk can always sell more Tesla shares, as he recently did. But in the past, Musk, Tesla’s largest single shareholder, has been in no rush to sell. In Tesla, Musk does not have the two types of shares that allow the founders of Meta or Alphabet to be the controlling owners of the company. Instead, in the past, Musk’s de facto veto power over proposals from other shareholders stemmed from his large stake in Tesla shares and the company’s requirement for a qualified majority vote on shareholder decisions.
On Thursday, Musk said he sold some of the shares to make sure he had “dry powder … for the worst-case scenario,” and said he was done with sales by probably 2025, though he had already made such statements this year and then sold more shares.
“I’m somewhat paranoid after experiencing two very bad recessions,” Musk said.
Although there have been cases in the past where Musk has taken out margin loans, the idea of borrowing billions based on Tesla shares to help Twitter involves risks.
The board of directors at Tesla limited its loan capacity to about 25 cents per dollar of share value, as can be learned from reports to the authorities. When the shares go down in value, he still has to comply with this 25% limit. The risk for Tesla shareholders, as the company describes in its filings with authorities, is that Musk may be forced to dispose of a lot of shares in Mecca to generate cash. He never found out at what price he would be asked to present more bonds.
In recent days, Musk has criticized the very idea of margin loans. In a tweet, Musk warned that such a step is not smart in the market. “While there are macroeconomic risks, it is generally prudent to avoid using margin lending in any company, because stocks may move in ways unrelated to their long-term potential,” he wrote on December 8.
According to the last public report submitted, Musk pledged as collateral more than half of his holdings in Tesla, except for options that he can exercise. The pledge does not necessarily indicate that the loans against those shares have been taken out, the report said.