Like the share price, Tesla's bonds suspended all profits they made after Musk shocked investors with a tweet on 7 August, saying that he had "secured funding" for a possible buyout deal of $ 420 per share.
This suggests that the credit market has reduced the chances of a deal, and data showed that activity on the stock option market also indicates that these investors are also skeptical.
Tesla's high-yield debts fluctuate around 87.5 cents against the dollar, against 93.0 cents on 7 August, according to data from Thomson Reuters. The Tesla convertible bonds that expire in 2021, trade around 107.20 cents on the dollar, against 120.46 cents on the dollar on 7 August.
Convertible bonds give bondholders the right to trade their debt for equity after shares rise above a certain price.
Bondholders are fully repaid in the event of a buy-out – 101 cents on the dollar for the junk bond that will expire in 2025 if certain conditions are met. The longer-term convertible debt of the company would earn an extra premium above par if Tesla was taken privately.
"The smart trade at the moment is to keep the converts short and the high yield bonds going long, because that spread will collapse" in case Tesla filed for bankruptcy, said Lawrence McDonald, founder of the Bear Traps Report.
McDonald believes that bankruptcy is the path for Tesla if it does not find a buyer because of its high leverage compared to earnings before interest, taxes, depreciation and amortization.
A Tesla spokesman declined to comment. Musk said in his second quarterly letter from shareholders that the company can be profitable from the third quarter onwards.
Investors in Tesla have increased their stake on the convertible bonds. The short positions in the three converts have risen, from $ 38.14 million on August 6 to $ 49.47 million on August 16, according to IHS Markit.
Tesla's convertible bonds, which mature in 2021, trade around $ 107.20 on the dollar – about 20.8 cents shy of where they would trade if a deal for $ 420 was fully priced, "said Geoffrey Dancey, managing partner and portfolio manager. Cutler Capital Management.
"If these bonds were priced for an acquisition, they would trade a serious premium for the conversion value compared to when the deal was announced," Dancey said. "The convertibles certainly do not trade as if this company is privately accepted for $ 420 and they have never done that."
Long-term convertible bonds benefit from take-private deals, which give bondholders extra shares. With a deal of $ 420 per share, the convertible bond of 2021 would be 11 percent higher than the face value, or 11 percent more shares.
On the day of Musk's buyout tweet, the share price reached a 11 month high of $ 387.46, more than $ 27 above the conversion rate of 2021. The highest listing of 2021 on that day was 120.46 cent on the dollar.
The debt is now traded under the price prior to the deal tweet, as well as below the price before the solid second quarter profit on 1 August.
OPTIONS TRADERS UNLIMITED
Traders in the US stock option market also seemed to doubt whether Musk could make up for its proposal, according to the option dates.
Data from the Chicago-based volatility and option data firm ORATS showed that traders had shown some confidence in the first instance, but that Musk might have closed a deal, the conviction was declined.
"Initially, option traders responded with a little faith, now there is disbelief," says Matt Amberson, founder of ORATS.
Discarding the impact of the gain on the implied volatility of a year's Tesla options, this measure of how many traders expect shares to move in the future will go back to where it was for the Musk tweet, data from ORATS .
If there were substantial expectations that the Tesla would become private in the near future, the volatility contained in these contracts would have decreased, Amberson said.
Tesla shares closed at $ 321.64 on Wednesday.
(Reporting by Kate Duguid and Saqib Iqbal Ahmed; Editing by Jennifer Ablan, Nick Zieminski and David Gregorio)
(This story is not edited by Business Standard staff and is automatically generated from a syndicated feed.)