Update: As per latest information, Elon Musk seems to have dodged the margin call which would have triggered as per the original commitment agreement.
— Gary Black (@garyblack00) December 29, 2022
Elon Musk, the CEO of Tesla, may have regretted buying Twitter, or at least the financing method he used. Musk might have received his first margin call. The call implies a requirement to pay up cash or offer additional collateral following the arrangement he struck with bankers to help finance his purchase of Twitter.
Musk reportedly wrote an email to Tesla staff on Wednesday, advising them to disregard stock market fluctuations and concentrate on selling as many vehicles as possible as the end of the quarter and the year draw near.
A request for comment about the email received no immediate response from Tesla.
Given the recent performance of the shares, that could be sage advice for staff members. The price of Tesla shares was down around 68% year to date. Moreover, approximately 58% over the previous three months as of the start of trade on Thursday.
This isn’t the first investment advice Musk has sent in an email this month. For example, musk advised investors to keep clear of margin borrowing on December 8 when the economic picture was uncertain.
After using a $12.5 billion margin loan facility to buy Twitter, Musk has gained knowledge on volatility and margin.
Musk’s borrowings were the subject of an instant request for a response from Tesla.
Tesla executives are permitted to take out loans up to 25% of the company’s stock value, using the shares as collateral. However, the initial loan-to-value ratio for the $12.5 billion facility component of Musk’s Twitter financing was 20%.
As a result, the $12.5 billion loans required $62.5 billion shares as security. That agreement’s initial margin call occurs when the loan-to-value ratio drops below 35%. Musk received his first call this past week, supposing the facility was fully utilized when the Twitter takeover transaction concluded.
To reach a loan-to-value ratio of 35%, the price of Tesla shares had to fall by around 43%. As a result, the Tesla stock, which ended at $125.35 on December 22, was down 44% from the time of the Twitter acquisition.
Musk sold out Tesla stock for around $3.6 billion
When faced with a margin call, a person has three options: pay back a portion of the loan, provide extra security, or combine the two. For the loan, Musk could have repaid the margin facility in the amount of around $3.7 billion, pledged an additional $15 billion in Tesla stock as collateral, or any combination of the two.
Earlier in the month, Musk did sell Tesla stock for around $3.6 billion. However, he may not have wanted to commit additional Tesla shares because he was concerned about the margin call.
Requests for comments about the stock sale and the margin call went unanswered from Musk. However, during a Twitter space appearance, he declared that he would stop selling Tesla shares for 18 to 24 months.
Recent regulatory filings reveal that Musk has around 267 million Tesla shares pledged as collateral for margin borrowing. In addition, he owns roughly 423 million Tesla shares and some fully exercised management stock options. Tesla stock fell by nearly 31% over a devastating seven-day losing run, bringing the loan-to-value ratio below 35%. However, in Thursday morning premarket trade, Tesla stock is up 6.5%.