Tesla Executives Continue To Flee As The Company Goes Rogue With Its Balance Sheet

The torrent of executive departures from Tesla continued this weekend as news emerged on Friday night that Senior Vice Preisdent of Engineering Doug Field is "taking a break from the company," and the Wall Streer Journal reported that Tesla’s former director of field performance engineering, Matthew Schwall, left for Alphabet's Waymo last week. Field’s decision to take a hiatus is a stinging blow for Tesla, as he was the closest thing to a "car guy" in Tesla's senior leadership team. That Field could be considered a car guy when his automotive experience, according to his LinkedIn profile, consisted of six years as an engineer at Ford that ended 25 years ago shows how bereft of automotive manufacturing experience Tesla is at the senior level.

Rescue workers proceed with caution around the spot where a Tesla slammed into a tree in Baarn, on September 7, 2016. Pioneering US electric car firm Tesla said on September 8, it was investigating a fatal crash in The Netherlands when a Model S sedan ploughed at high-speed into a tree. (ROBIN VAN LONKHUIJSEN/AFP/Getty Images)

That dearth of talent has reared its head in the excruciatingly slow launch of the Model 3.  If Musk's decision last month to remove Field as Tesla's production czar (in favor of himself) caused hurt feelings, it certainly wouldn't be the first time that has happened in Fremont. As those departures and the exit of Autopilot and chip architecture guru Jim Keller to Intel receive all the headlines, though, the departures in March of Tesla's Vice President of Finance Susan Repo and Chief Accounting Officer Eric Branderiz were more disturbing to me.  

A thorough reading of Tesla's first quarter 2018 10-Q showed the company making two moves that I would consider aggressive from an accounting standpoint, and also red flags in terms of financial stress.  If one didn't read that document ,one might have missed that Tesla created a special purpose entity (or SPE, the most reviled instrument on Wall Street since Enron’s 2001 collapse) and mortgaged its main assembly plant.  I'm guessing Tesla's now-departed finance executives were aware of those two actions. Specifically:

1. Tesla created a special purpose entity to house the $546 million of automotive asset-backed notes (ABS) the company issued in February, and
2. Tesla added its Fremont facility to the collateral package underlying its revolving credit agreement.

Financially healthy companies do not make either move, and that leads back to the rhetoric surrounding Tesla.  In the last few months, I have heard the shorts yell “Tesla is Enron,” and I just had to chuckle and murmur to myself, "Incredibly unprofitable and overvalued, maybe, but not a product of financial malfeasance like Enron.” Putting the ABS into a special purpose entity changes all that. Yes, the ABS transaction is Tesla's first SPE while Enron, at its height, had an incomprehensible 3,000 different SPEs floating off its balance sheet, but there is no reason proceeds of automotive leasing should not be presented in the same portion of the balance sheet as the assets that produce those autos.

That's the key here. In the Tesla world, there is recourse and non-recourse, and those words are thrown around in the way other managements use core and non-core.  The non-recourse debt is presented separately, and before 2018 consisted almost entirely of legacy solar notes from SolarCity, so it's not an integral part of the "Tesla story." Selling cars via leasing, however, is very much a part of Tesla's core business. So, even though Tesla's ABS are not technically off-balance sheet items (they are presented as part of long-term debt in note 10 in the 10-Q), they bear no recourse to the company, and therefore live in that part of Tesla's balance sheet that management tends to ignore.

Also, Tesla’s 10-Q notes that on the same day the ABS transaction closed, the company repaid $453 million under its Warehouse Agreement.  Warehouse credit agreements are typically used by mortgage lenders and are quite common among solar panel suppliers. So, all but $93 million of the proceeds from the ABS transaction were used to pay off proceeds from the old SolarCity warehouse credit facility, which is also non-recourse.  Again, funds are being used from Tesla’s most lucrative, if not ever profitable, business--sales of high-end electric vehicles--to support the debt left over from SolarCity’s years of unprofitability. In the process more non-recourse debt is being created.

The disclosure of the collateralization of the Fremont facility is buried even deeper in Tesla's 10-Q--it is part of the Ninth Amendment to the Credit Agreement, dated May 3, 2018, which is Exhibit 10.3 in Tesla's filing.  Only those of us who are true geeks--and I asked bonehaded questions for 11 years as a sell-side auto analyst--read that far into a company's financial statements.

Clearly, though, Tesla is trying to increase the amount it can borrow under its credit agreement.  As of the end of the first quarter Tesla had only $543 million available under its Credit Agreement's maximum borrowing base of $1.829 billion.  That is a tight window, especially since Tesla noted in its April 3 press release (emphasis added):

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