JIM CHANOS: Tesla is putting itself ‘under the red line’

Tesla’s Elon Musk doesn’t impress Jim Chanos.

Kynikos Associates is still short the securities of both Elon Musk’s electric auto company Tesla (TSLA) and energy company SolarCity (SCTY), the firm’s founder Jim Chanos said on CNBC’s “Halftime Report” on Tuesday afternoon.

At the CNBC Institutional Investor Delivering Alpha Conference in New York, Chanos did not make his bearish attitude a secret, dismissing the company’s business model as “uneconomic”. He called the Tesla-SolarCity deal as a “walking insolvency”, noting that the “synergies are questionable at best”.

Chanos’ firm ran a Z-score, a score that predicts bankruptcy for a company, for the merger. He added that Musk’s plan to buyout SolarCity is a “shameful example of corporate governance at its worst”. Tesla’s stock was trading down about 1.5% early Tuesday afternoon.

If Chanos proves right, and his dreaded nightmare team of TSLA/SCTY comes to pass, the new Tesla-SolarCity merger company could be looking at a cash burn in the ballpark of $1 billion each quarter, putting Musk in a position to “constantly need access to capital markets”, the very approach Chanos condemns. As such, the company typically borrows to cover its capital needs and that is the reason behind the company’s $3.35 billion total debt at the end of 2Q2016.

“A lot of people aren’t paying attention to the actual financial statements” of the companies and the risks for Tesla, Chanos said.

Up to Friday’s close of $US16.77, SolarCity’s shares had lost more than a fifth of its value since Tesla made its first offer in June.

The deal between the two companies, “to in effect bail out the shareholders of SolarCity“, Chanos said, “Strikes us as just the height of folly”. “And continue to need more and more capital”.