Elon Musk’s immense wealth and credit standing are now being tested as shares of Tesla Inc. TSLA -1.76%, which have been fueling his fortune, have fallen sharply as he rushes to replenish his massive personal investment in Twitter Inc .to stabilize.
The automaker’s share price has plummeted 18% this week alone, and more than 60% since it announced its plan to buy Twitter.
His ability to use his shares in Tesla to raise money by selling or borrowing them has been complicated by their rapid downturn in recent months.
In the past, Mr. Musk was a poor billionaire who relied on so-called margin loans — loans backed by his stocks — for his personal spending and business investments while holding onto his Tesla stock and benefiting from its rising value.
But Tesla’s market value has fallen about $700 billion this year, causing its personal wealth to drop. Tesla’s valuation drop comes after years of growth that have allowed it to easily borrow money without having to cash out on its shares.
Tesla’s shares are down around 65% in 2022, partially muted, due to the higher interest rate environment. Another issue concerns the reason he may need cash: Twitter. Tesla investors have been concerned that Mr Musk’s attention has been divided following his acquisition of the social media company in October.
Late last year, just as Tesla’s stock price was at its peak, it began selling more than $39 billion in total Tesla stock, including $3.5 billion last week. What his liquidity is is unknown after he said it would involve a more than $11 billion tax bill for 2021 and around $25 billion in cash as part of the Twitter purchase.
Mr. Musk’s current Tesla holdings, excluding exercisable options, total 424 million shares worth approximately $52 billion at Friday’s close of $123.15 per share.
Simply put, if he could use all of that stock as collateral under Tesla’s rules, he’d be able to borrow about $13 billion. That’s just a little more than he was willing to lend out with just 40% of his shares as collateral in April’s original Twitter deal, underscoring how his creditworthiness has dwindled with the collapse in the automaker’s share price. He later scrapped those proposed margin loans to fund the deal due to investor concerns about the risk.
A Tesla launch in Bangkok earlier this month.
Photo: Vachira Vachira/Zuma Press
Mr Musk and Tesla did not respond to a request for comment.
Tesla stock isn’t his only asset or his only way to raise money. He also holds shares in Space Exploration and Technologies Corp. or SpaceX and is the owner of start-ups such as Boring Co. His personal debt is not clear.
Mr Musk faces questions over whether Tesla, where he is also chief executive, is ready for a recession as he separately seeks to stem losses at Twitter and divest thousands of employees from his newly acquired social media platform. Late Tuesday, he said drastic spending cuts were needed at Twitter as the company was on track to bleed billions of dollars. His team had been looking for additional investment funds for Twitter.
“We have an emergency fire drill on our hands,” Mr Musk said during a public speaking engagement on Twitter Spaces. After those drastic efforts, he said, Twitter could break even next year.
While Twitter has rarely been profitable over the past decade, it is Finances were complicated by the debt Mr. Musk took on to fund his acquisition and a drop in spending from advertisers worried about the unpredictable changes under his leadership. Analysts estimate that debt spending alone cost a company that made $5 billion in revenue last year more than $1 billion in costs annually, mostly from ads.
Mr. Musk has been here before – in debt and burning money while the global economy falters – and has emerged thriving.
These successes and the enthusiasm of investors for his ventures made him the richest person in the world at times. Tesla’s fall in value this year put Mr. Musk as the second-richest man in the world behind Bernard Arnault, chairman and CEO of luxury conglomerate LVMH Moët Hennessy Louis Vuitton. Musk’s wealth fell to an estimated $140 billion on Thursday from a peak of $340 billion just over a year ago, according to the Bloomberg Billionaires Index.
If he needs cash, Mr. Musk could sell more and more Tesla stock, as he recently did. But in the past, Mr. Musk, Tesla’s largest single shareholder, has been reluctant to sell. At Tesla, Mr. Musk lacks the kind of dual ownership that gives the founders of Meta Platforms Inc. or Alphabet Inc. controlling power. Instead, Mr Musk’s large stake in Tesla was a thing of the past has effectively given him veto power over shareholder proposals thanks to the company’s supermajority requirement.
On Thursday, Mr. Musk said he sold some shares to make sure he was “powder dry… for a worst-case scenario,” and said he’s likely done selling by 2025, although he’s seeing similar ones this year Made statements just to sell more.
“I’m a little paranoid after going through two really intense recessions,” Mr. Musk said.
While he had previously used margin loans, the idea of borrowing billions on the back of Tesla stock to help Twitter carries risks.
Tesla’s board of directors has limited its borrowing to essentially 25 cents per dollar of stock value, according to regulatory filings. Since the shares are falling in value, he must comply with the 25% limit. The risk for Tesla shareholders, as the company describes in its listing filings, is that it may have to sell many shares at once to generate cash. He never disclosed the price at which he would have to put up more collateral.
In the past few days, Mr. Musk has completely dismissed the idea of margin loans. In a tweet, Mr. Musk warned that such a move would be unwise in this market. “When macroeconomic risks exist, it is generally prudent to avoid the use of corporate margin lending, as stocks can move in ways that are decoupled from their long-term potential,” he wrote Dec. 8.
At the time of the most recent public filing, Mr. Musk had pledged more than half of his Tesla holdings as collateral, excluding options he might exercise.
The pledging does not necessarily imply actual borrowing against those shares, the filing said.
Write to Tim Higgins at [email protected]
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