By Philip van Doorn, MarketWatch
Tesla is one of the most controversial companies among investors.
Despite the electric-car maker’s 38% share-price decline so far this year, it still has die-hard fans and a very high market value. Tesla’s debt securities may be your best way to invest in it, assuming it will survive or merge with another company — in other words, that it won’t go bankrupt.
Here’s a Twitter posting that provides food for thought:
Heavily discounted 5.30% notes
The post is about Tesla’s 5.30% notes that mature Aug. 15, 2025. On Tuesday, May 21, they were trading at 82.919 cents to the dollar. That means if you had purchased the notes at that discounted price, your current yield would be 6.39% and if you held them until maturity, you would have a 17% capital gain. The yield to maturity would be 8.93%. These and all the other notes here have below-investment grade ratings from ratings agencies, and are considered high-yield or “junk” securities.
If you are certain that Tesla will survive or be acquired by another car manufacturer with deep pockets, that is an attractive investment.
James Dinsmore, a portfolio manager at Gabelli Funds, agrees “wholeheartedly,” and said during an interview on May 21 that “if you are bullish on Tesla /zigman2/quotes/203558040/composite TSLA +2.36% , you have a number of options that are better than the stock, whether it is these bonds with the high yield-to-maturity or the convertible notes.”
Dinsmore is a portfolio manager for three closed-end funds, including the Gabelli Convertible and Income Securities Fund /zigman2/quotes/210046049/composite GCV -1.60% , the Bancroft Fund /zigman2/quotes/209007985/composite BCV -0.68% and the Ellsworth Growth & Income Fund /zigman2/quotes/200372555/composite ECF +0.36% , as well as the open-ended Teton Convertible Securities Fund /zigman2/quotes/204409380/realtime WESRX +0.07% . He said his portfolios “have some exposure” to Tesla’s convertible paper.
Tesla has four convertible notes, which are summarized below. Convertible notes have a strike price above which the notes will gain value. If you are holding a convertible note that matures when the price of the common shares is above the strike price, you will receive the additional value, depending on how the note is set up. For example, you might receive the face value of the note (par) plus common shares so that you receive the full value above the strike price.
”You are really de-risking the equity,” Dinsmore said, because you are going to receive interest on the notes as well as possibly enjoying the upside on the shares, and a gain on the notes if you buy them at a discount.
• Tesla acquired SolarCity in 2016. The SolarCity convertible notes that mature Nov. 1 have a coupon (the stated interest rate) of 1.625% and were trading at around 96 cents to the dollar May 21. So if you purchased them at that price, you would be looking at a 4% capital gain in less than six months, while receiving a current yield of about 1.69%. The strike price (determined by the companies’ merger prices in 2016) is $759, so this is obviously a play on par. Tesla’s stock was trading at around $203 on Tuesday.
• Tesla’s convertible notes that mature March 1, 2021, have a coupon of 1.25%, a strike price of $359.86 and were trading at about 92 cents to the dollar on May 21.
• The convertible notes maturing March 15, 2022, have a coupon of 2.375% and a strike price of $327.50. They were trading at about 92 cents to the dollar May 21.
• The convertibles maturing May 15, 2024, have a coupon of 2% and a strike price of $309.82. They traded around 88 to 89 cents to the dollar May 21.