Elon Musk Supports His Business Empire With Unusual Financial Moves
Since October 2014, SolarCity Corp. has tried to lure individual investors to the solar-power business by pitching $214 million of what it calls “solar bonds” through the company’s website.
The biggest buyer by far, though, was rocket maker Space Exploration Technologies Inc., including $90 million of $105 million sold last month.
The bonds were an “excellent investment,” billionaire entrepreneurElon Musk said in an interview. And he knows more about the companies than anyone. Mr. Musk is their largest shareholder, the chairman of SolarCity and chief executive of SpaceX.
Mr. Musk, 44 years old, has built a business empire like no other in the world, fueled by his voracious appetite for risk and unyielding confidence. The three companies he leads–SolarCity, SpaceX and car maker Tesla Motors Inc.–are worth nearly $50 billion combined.
He has transformed every industry he has touched, speaking without irony about retiring to Mars after SpaceX successfully launches rockets there.
Along the way, Mr. Musk has helped financially support his companies in ways that are as unconventional as he is.
In addition to the bond purchases, he has taken out $475 million in personal credit lines, buying shares of SolarCity and Tesla when they needed capital, securities filings show.
The credit lines are secured with about $2.52 billion of Mr. Musk’s shares in SolarCity and Tesla, based on their closing prices Tuesday.
Few top executives use their shares as collateral for personal loans because it can be risky to other shareholders and also raises concerns that the executive’s personal interests could conflict with the company’s interests.
If the stock price slides, that could trigger a margin call requiring the executive to sell the shares or put up more collateral to repay the loan.
In securities filings, Tesla has disclosed the possibility of margin calls related to Mr. Musk’s loans, which it said “may cause the price of our common stock to decline further.”
Last year, Valeant Pharmaceuticals International Inc. shares fell 14% in one day after CEO Michael Pearson received a margin call on $100 million in loans backed by some of his shares in the drug company. Mr. Pearson’s lender sold 1.3 million of his shares to meet the margin call.
Some corporate-governance experts and analysts say it is even more questionable for Mr. Musk to borrow large amounts of money backed by chunks of stock now that SolarCity and Tesla are big public companies.
“As an analyst, it is often a red flag for me when companies and management direct loans between entities they have personal or financial interests in,” said Nathan Weiss, founder and senior analyst at independent research firm Unit Economics LLC in East Greenwich, R.I.
Mr. Musk said it is “valid” to question his large personal borrowings and the financial shuffling between SolarCity, SpaceX and Tesla.
“There were a few cases where one company was doing considerably better than another, and I borrowed money,” he said in the interview.
Mr. Musk defends the moves as consistent with his philosophy that “if I ask investors to put money in, then I feel morally I should put money in as well,” Mr. Musk said. “I should not ask people to eat from the fruit bowl if I have not myself been willing to eat from the fruit bowl.”
Mr. Musk said it is “important that there not be some sort of house of cards that crumbles if one element of the pyramid of Tesla, SolarCity and SpaceX falters.”
He said his loans aren’t risky to shareholders because they add up to less than 5% of his total net worth, which exceeds $10 billion. That figure doesn’t include Mr. Musk’s large stake in SpaceX, which is private. He said he could easily put up more SpaceX or Tesla shares as collateral if needed.
“The odds that a margin call cannot be addressed are almost zero,” Mr. Musk said in the interview.
He has had a string of triumphs lately. Tesla unveiled its Model 3 sedan to rave reviews and said 325,000 people pledged $1,000 each in the first seven days to reserve cars. Tesla shares are up 77% since Feb. 10. Tesla is the first successful major U.S. auto-company startup since 1925.
On April 8, SpaceX managed to land a rocket in the middle of the Atlantic Ocean on a floating, Global Positioning System-controlled platform for the first time in the company’s history.
According to Tesla’s latest proxy statement, Mr. Musk owns 37 million shares of Tesla, or roughly a 27% stake worth about $9.38 billion as of Tuesday’s close.
Mr. Musk holds a 22% stake in SolarCity, another securities filing shows. Those 21.8 million shares were worth about $719 million as of Tuesday.
SpaceX was valued at $12 billion in a funding round earlier this year. His ownership stake in SpaceX isn’t public, and he declined to disclose it.
At Tesla, Mr. Musk is chairman and chief executive but takes no salary. His total compensation last year was valued at $37,584, reflecting minimum wage requirements in California, but he has never accepted the money.
Mr. Musk got $1.2 million in total compensation from SolarCity, almost all in the form of stock options that vest over three years.
His compensation at SpaceX is about $2.4 million, according to a government website that lists company contracts. A person familiar with the matter said the total includes a salary of $38,000 and the rest in equity.
A study in February by ISS QuickScore, part of proxy adviser Institutional Shareholder Services Inc., found that executives or directors at just 13% of the 3,000 largest publicly traded U.S. companies have pledged shares for loans.
SolarCity and Tesla shares are volatile. SolarCity, which is based in San Mateo, Calif., and installs solar panels at residences across the U.S., has seen its stock price fall about 35% since the start of this year. Tesla fell 40% from the end of December to February, but has since erased those declines.
Mr. Musk said he has “made it clear to shareholders that I subscribe to the notion that the captain is the last person off the ship.” In the interview, he said he has no intention of ever selling any Tesla shares and could even add some of his SpaceX stake to the collateral.
Stephen Jurvetson, a founding partner of venture-capital firm Draper Fisher Jurvetson, an early and large investor in SpaceX, Tesla and SolarCity, said the moves by Mr. Musk aren’t cause for concern.
Mr. Musk’s “passion is breathtaking,” said Mr. Jurvetson, a director at SpaceX and Tesla. He praised what he called Mr. Musk’s dedication and vision.
Asked if Mr. Musk’s personal loans are in the best interest of shareholders and if directors have discussed the matter, Mr. Jurvetson replied: “I don’t have a desire to take on that question.”
Mr. Jurvetson added: “You want to look at it as a percentage of his holdings.” As long as Mr. Musk ties up less than 5% of his holdings, “you don’t have much to talk about,” though it is “something that should be watched,” said Mr. Jurvetson. Mr. Musk said he set the 5% threshold himself.
Mr. Musk helped spawn SolarCity, SpaceX and Tesla using $165 million reaped from the 2002 sale of his stake in online-payments processor PayPal Holdings Inc.
From the start, he was willing to use money from one fledgling company to help another.
In late 2008, Tesla faced a potential financial collapse because of tightened access to funding, as well as manufacturing delays related to its newly launched Roadster electric car.
Mr. Musk pledged to invest $20 million of his own money into Tesla as part of a $40 million funding round for the company.
Around the same time, SpaceX, of Hawthorne, Calif., was struggling to develop its rocket-launch business and was running low on cash. Then it won a $1.6 billion contract from the National Aeronautics and Space Administration to send 12 unmanned cargo capsules to help resupply the international space station, according to news releases.
In early 2009, Mr. Musk personally borrowed $20 million from SpaceX. In the interview, he said the loan was “to help fund Tesla.”
Tesla went public in June 2010. Mr. Musk said he repaid the SpaceX loan with interest by selling 1.4 million shares of Tesla for about $23.8 million. He said that was the only time he has ever sold any shares in the auto maker.
In early 2013, Tesla was running out of cash as it struggled to produce Model S sedans, and the cars were plagued by faulty drive motors and other issues. SolarCity needed cash to help run its solar-panel leasing business.
Musk increased his credit lines to a total of $300 million from the previous $85 million, securities filings show. His lenders, Goldman Sachs Group Inc. and Morgan Stanley, declined to comment.
Securities filings show that 9.5 million Tesla shares, or 29% of his total holdings, were pledged as collateral on the credit lines. He also put up six million SolarCity shares, or 29% of his overall stake.
From May 2013 to October 2013, Mr. Musk used some of the money he tapped from the credit lines to buy $100 million of Tesla shares and $10 million of SolarCity shares in stock offerings that injected both companies with capital, according to securities filings.
A SolarCity spokesman said Mr. Musk’s investment “represented a relatively small percentage of the $398 million raised in the transaction.”
Last year, Tesla burned through more than $1.5 billion in cash reserves, according to analysts. Some analysts fretted about delays in deliveries of the auto maker’s new Model X sport-utility vehicle.
SolarCity stumbled as its costs rose and it cut an important growth target by half. Investors also worried that SolarCity could lose the benefit of some tax credits, though that didn’t happen.
A SolarCity spokesman said the target was cut because the company wanted to focus on profitability.
Tesla disclosed last year that Mr. Musk had boosted his personal credit lines to a total of $475 million. He bought $20 million of Tesla shares and $17.7 million of shares in SolarCity, securities filings show.
In the interview, Mr. Musk said his stock purchases show that he is aligned with investors in both companies. He said he has borrowed less than 65% of the money available from the two credit lines.
SolarCity’s solar-bond offerings have gotten three separate boosts from SpaceX. Securities filings show SpaceX bought $90 million of the bonds in March 2015, $75 million last June and another $90 million last month.
Gordon Johnson, an analyst at Axiom Capital Management in New York who follows Tesla, said most retail investors weren’t interested enough in the solar bonds to buy them. SolarCity said the bond offerings have attracted investors from all 50 U.S. states.
Last November, an entity affiliated with Mr. Musk bought $10 million of a $113 million convertible SolarCity bond issue. Lyndon Rive, who is SolarCity’s chief executive and a cousin of Mr. Musk, bought $3 million of the remaining $103 million, according to the company.
Mr. Rive said the bonds are a “good investment.” He added: “If you take a five-year view on the stock, I think it will have a great return.”
SpaceX’s purchase of $90 million of SolarCity bonds from the $105 million offering in March will be used to retire the bonds SpaceX bought last year, according to Mr. Musk. He said the latest deal offered SpaceX a “decent return” on about 10% of its roughly $1 billion cash position.
The financial transactions have raised questions on Capitol Hill, where some lawmakers are concerned that money from federal contracts with SpaceX could be used to help SolarCity.
SpaceX has received $3.2 billion for its rocket program from government contracts, according to a person familiar with the matter. The lawmakers want to make sure none of that money winds up at SolarCity.
Rep. Doug Lamborn (R., Colo.) this week proposed an amendment that would prohibit Mr. Musk from using SpaceX money to buy SolarCity bonds. The provision is intended to send a message to Mr. Musk that congressional Republicans are watching him.
“It’s more for messaging it than debating it and bringing it to an actual vote,” Mr. Lamborn said Wednesday. “It’s enough to raise the message about it.”
Mr. Musk declined to comment. A SpaceX spokesman said the company’s “cash balances are not ‘government money.’ They are SpaceX funds that originate from a broad combination of commercial customer contracts, government contracts and private investor funds.”
Last year, another lawmaker offered a similar amendment to the defense-spending bill, though it was quickly withdrawn. A House committee plans to take up this year’s defense-spending bill today.
–Jim Oberman and Cassandra Sweet contributed to this article.
First appeared at WSJ Venture Capital