Elon Musk will be America’s most indebted CEO

Elon Musk will have to pay for two-thirds of the $44 billion plan to buy Twitter. It’s a big one. His net wealth is roughly $250 billion. Musk will have to sell millions of Tesla shares and commit millions more to raise funds because his fortune is related to Tesla stock, SpaceX, and The Boring Company.

His SEC filings show he plans to borrow $13 billion from banks and raise $21 billion in cash from Tesla stock sales. His Tesla stock will be used as security for a $12.5 billion margin loan. A quarter of Musk’s current Tesla stock value will be required as collateral for the loan because banks like high-beta stocks like Tesla.

Musk had previously promised 88 million Tesla shares for margin loans before the Twitter deal, though it’s unknown how much he’s borrowed. Musk has guaranteed over $90 billion worth of shares for loans, according to Audit Analytics’ study.

According to ISS Corporate Solutions, a Rockville, Maryland-based provider of ESG data and analytics, Musk now has more stock debt than any other executive or director, surpassing Larry Ellison, Oracle’s chairman and chief technology officer, who has $24 billion in debt.

Musk’s stock debt dwarfs the market’s. According to Audit Analytics, his pre-Twitter shares committed accounted for over a third of the $240 billion total pledged by all NYSE and Nasdaq corporations. Twitter’s borrowing may increase that debt.

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That Musk has plenty of breathing room comes as no surprise, given his 2018 compensation package. Mitt Romney has a 23 percent stake in Tesla, worth about $214 billion, thanks to his wholly owned shares and options. SpaceX and other enterprises provide the rest of his net worth.

Tesla continues to meet its performance benchmarks this month, giving him another 25 million options as part of his strategy. Musk can borrow against his freshly acquired options for five years. Musk’s 11-figure share loans, though, reflect a new level of risk and CEO leverage.

As a result, Musk’s net worth dropped by over $20 billion after Tesla’s stock price fell 14% on Tuesday. Tesla’s stock dropped less than 1% on Thursday. In addition, other corporations are limiting or prohibiting executive share borrowing.

To borrow money, executives and directors cannot pledge company stock, according to ISS Corporate Solutions data. Other firms, like Oracle, have anti-pledging policies but allow exceptions or waivers.

According to ISS, only 3% of S&P 500 corporations allow executives to pledge stock in the company. In recent years, several high-profile stock market crashes have forced executives to sell shares to meet margin calls.

Founder and chairman Robert Stiller and lead director William Davis were demoted in 2012 after selling to meet margin requirements. When Goldman Sachs called his $100 million loan in 2015, Valeant CEO Michael Pearson had to liquidate shares held as security.

The hazards of CEO pledges are now better understood by organizations, according to Jun Frank of ICS Advisory.

 

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“Executive stock pledges pose a serious corporate governance risk,” Frank added. Failure to meet the margin call by an executive with significant pledged ownership positions could result in sales of those shares and consequent price declines.

Tesla claims in its SEC filings that permitting executives and directors to borrow against their stock is essential to their compensation. “Our directors and senior officers’ capacity to pledge Tesla shares for personal loans and investments is inextricably tied to their compensation,” Tesla noted in its filings. This matches their interests with our stockholders’ interests.

Musk’s specific share-loan amount is unknown. A commitment of 88 million shares is disclosed in Tesla’s SEC filings, but not the amount borrowed against them. He could have borrowed around $2 billion if he had pledged the shares in 2020 when Tesla was trading at $90.

Due to the tenfold increase in borrowing power of those shares, he may be able to borrow an extra $20 billion or more on top of the 88 million pledged shares. After the Twitter sale, just approximately a third of his Tesla investment would be pledged.

He may have to promise more shares if he increased his borrowing when Tesla’s stock price rose. To fund the Twitter transaction, analysts estimate that Musk would have to commit more than 80 percent of his Tesla fully owned shares as collateral if he maxed out his 88 million share borrowing limit (unlikely).

Amounts unpledged: approximately $25 billion in Tesla shares Assuming he has to sell $21 billion of Tesla stock to cover the cash portion of the Twitter acquisition, practically all of his remaining fully owned stock will be pledged as well.

Musk sold $8.4 billion worth of Tesla stock this week, according to SEC filings. “No TSLA sales planned after today,” he wrote on Thursday. But his ideas for raising the remaining $21 billion are unknown.

So, in either case, Musk will be risking a big portion of his Tesla riches and putting Tesla stockholders at risk. In addition, borrowing against stock “exposes stockholders to severe stock price risk.”