August 8, 2017    5 minute read

Tesla to Issue Debt, Samsung Heir to Go to Prison, and Dieselgate Continues to Make Victims

Your Breakfast Briefing    August 8, 2017    5 minute read

Tesla to Issue Debt, Samsung Heir to Go to Prison, and Dieselgate Continues to Make Victims

Tesla to Issue Bonds

The electric car company has announced that it intends to raise $1.5bn of debt to finance the production of its Model 3 cars.

Editor’s Remarks: Elon Musk said last week that Tesla may issue debt, but would not raise new equity, as its second quarter results showed a very high cash burn. The company is currently rolling out its new Model 3 mass market electric cars. Tesla has approximately $3bn of cash on hand but will need more in order to hit its target of manufacturing 20,000 Model 3s per month by year end and 40,000 by the end of 2018. The debt issue will be used to strengthen the company’s balance sheet and finance the rapid scaling of car production, and the senior unsecured notes will mature in 2025 although an interest rate has not been fixed yet. Investors have been showing concern over Tesla’s burn rate in recent weeks but the car company’s shares rose close to 10% following last week’s results announcement, and the market seems to favour higher debt over share dilution to pay for Model 3 production ramp up.

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Samsung Heir Facing 12-Year Prison Sentence

South Korean prosecutors are pushing for a long jail term for Lee Jae-yong, the Vice-Chair of Samsung Group.

Editor’s Remarks: Samsung is South Korea’s largest “chaebol” (conglomerate) and has been accused of offering $38m in bribes for government support in a scandal that has already led to the impeachment of South Korea’s ex-president Park Guen-hye. Now prosecutors are calling for a 12-year jail sentence for Lee, charged with bribery and embezzlement, and up to 10-year jail sentences for four other senior Samsung executives. They cited the “typical close ties between government and business undermining the countries constitutional value,” and a verdict will be delivered on the 25th of August. Samsung Electronics, which Lee heads up, has recently become the world’s largest semiconductor company and has announced significant new investments in chip capacity in South Korea while Lee has been on trial.

German Diesel Scandal Hits Politicians

Germany’s Lower Saxony State owns 20% of Volkswagen’s shares, and its premier has been accused of going soft on the car maker.

Editor’s Remarks: The Diesel scandal is rumbling on and is beginning to expose the close cooperation between car makers and the government in Germany. Lower Saxony State Premier Stephan Weil, who is also a member of VW’s supervisory board, has been forced to deny an accusation that he allowed the car company to edit a speech he made in 2015. He is accused of taking out passages that said that the car company should be held accountable for rigged emissions testing in the US. VW was fined over $4.3bn in April 2017 by US authorities after admitting in 2015 to falsifying its emission test results. Weil claims that the speech was only “fact-checked” by VW and the car company has said that it is common practice for supervisory board members to coordinate speeches with the company management. But this could prove to be an ongoing problem when Germany’s politicians and state governments have such a close relationship with its car companies.

Warren Buffett Cashed Up

Berkshire Hathaway’s second quarter results showed close to $100bn of cash holdings, its highest ever.

Editor’s Remarks: With the Dow Jones index hitting all-time highs, even Warren Buffett is finding it difficult to find investment targets. His Berkshire Hathaway investment conglomerate reported second quarter net income of $4.26bn, down 15% year-on-year, but the focus is on his growing cash pile, which hit $99.7bn compared with $72bn in the second quarter of 2016. Berkshire has been trying to invest some of this surplus cash – it invested $3bn in stocks such as Bank of America and Apple in the first half of the year – but the lack of a bumper deal, and a policy of not paying dividends and rarely buying back stock, has led to rising cash levels. Buffett is currently bidding $9bn to buy Texas power utility Oncor Electric Delivery Company out of bankruptcy, which should reduce the cash pile, but even he has admitted that he has not “put his foot to the floor” for a while. Keeping the powder dry for a stock market correction… ?

China Ratchets Up Pressure on North Korea

Foreign Minister Wang Yi says the situation has reached “crisis point” as Pyongyang reacts aggressively to the UN export ban.

Editor’s Remarks: The major global players may be getting onto the same page in facing up to the North Korea missile threat but Pyongyang has said it will never give up its nuclear programme. Wang Yi said that sanctions were “necessary, but not the end goal” and are aimed at bringing North Korea to the negotiating table. The US has been the main protagonist pushing for the ban, which will hit $1bn of North Korean exports, but China and Russia have stressed the need for dialogue accusing the US of raising tensions with military exercises on the peninsula. Washington and Seoul will want to see that Beijing fully adheres to the sanctions as most of North Korea’s trade is with China, and some sort of consensus may be forming as US Foreign Secretary Rex Tillerson and South Korean President Moon Jae-in have both started making overtures to Pyongyang about sitting down to talks.

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