by Karl Denninger, Market Ticker:

Musk has been sued by the SEC, asking for a permanent bar on him being a director or officer of a public company.

Needless to say, that would include Tesla.

To those who said that Musk’s “420” tweets were of no importance, or wouldn’t lead to serious enforcement action — how’s that prediction looking roughly about now?  And further, while you have to assume there is some settlement effort being made it appears, from reporting, that Musk has already refused a settlement offer.

Any settlement or sanction that removes Musk from Tesla — and bars him from any officer position in a public company in the future — would be quite bad.  But it’s not really the big problem the company has right now.

As I’ve pointed out the real issue is cash flow and debt, which was the motivating factor for his “tweets” in the first place.  There are two convert issues coming due — one toward the end of the year and another in early 2019 — that the company does not have the cash to redeem.  This means either they have to go back to the market with more debt issuance (and a lot of it) or the stock price has to be over the conversion price, so the holders would choose to convert to common stock.

The latter would be quite dilutive to existing shareholders but that risk was known all along when the converts were issued — and as such if you bought or are holding the stock this is a risk you have already accepted.

In a generally rising rate environment, which is where we are today, rollovers of debt and especially those that had highly-favorable terms previously get more expensive, pinch cash flow and in some cases become impossible to fund at a cost the firm can afford.

It is outrageously stupid bordering on insane to take debt you do not believe you will be able to pay off in cash when rates are at historic lows, as any requirement to roll said debt over down the road must be assumed to have to take place at a higher cost — not a lower one.

The chimera of “ever-lower and lower rates” has driven trillions of uneconomic borrowing decisions over the last 30 or so years.  That cycle is over — and will not repeat.  Tesla is far from the only firm that is going to get it up the chute from this practice but it is one with a CEO that thinks smoking a joint on TV is a good idea.

Maybe the board and Musk were equally-stoned when they issued the converts.

I smell bankruptcy.

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