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Could Tesla skip the bill on $566 million of convertible bonds due this year?

Investors are asking that question, according to credit-research firm Covenant Review. Unfortunately for them, there isn’t a clear answer.

The convertible bonds in question were issued in 2014 by SolarCity, before the solar-energy company was purchased by Tesla. (It has since been renamed Tesla Energy Operations, but we will use SolarCity in this story for simplicity’s sake.) When they mature on Nov. 1, the bonds will be exchangeable for either cash or Tesla stock (ticker: TSLA).

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But the bonds convert to Tesla stock at the equivalent of $759 a share, which is more than 3 times the electric-car maker’s current stock price. So the bondholders will probably choose to collect cash instead of Tesla shares, because the latter option would leave them with a paper loss.

Fulfilling those requests “may be difficult given significant cash burn at Tesla,” writes Covenant Review. The auto maker used up $1.6 billion of cash in the first quarter of this year, according to company statements.

Thanks to a loophole in its bond contracts, however, it may not need to pay at all. The bonds aren’t guaranteed by Tesla, which means “there is no direct obligation of Tesla to repay the notes at maturity,” Covenant Review wrote in a Tuesday note.

Tesla may still want to pay off the convertible debt, because a failure to do so might also constitute a default on Tesla’s $1.8 billion of bonds due in 2025. But that double default would occur only if SolarCity fits the 2025 bond contract’s definition of a “significant subsidiary,” Covenant Review wrote.

It isn’t clear that will be true when the convertible bonds mature on Nov. 1. While SolarCity met regulators’ definition of “significant subsidiary” last month, the 2025 bond contract uses a different definition.

Under the 2025 bond contract, SolarCity would be a “significant subsidiary” only if one of two conditions are met. First, Tesla’s investments in (and advances to) SolarCity would need to add up to more than 20% of the combined total assets of both Tesla and SolarCity. Or, second, the SolarCity assets on Tesla’s balance sheet would need to make up more than 20% of the combined total assets of both companies.

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Tesla doesn’t report details about SolarCity’s balance sheet, which makes it difficult to know whether SolarCity meets either of those conditions.

Of course, none of this will matter if Tesla decides to pay back the convertible bondholders with some of the $2 billion it raised in its recent offering of shares and a new convertible note.

Yet there is still a chance Tesla could abandon its SolarCity convertible notes altogether, according to Covenant Review. “It remains possible that at the time of reckoning, SolarCity will not meet the definition of significant subsidiary,” the firm wrote.

A Tesla representative couldn’t immediately be reached for comment.

Write to Alexandra Scaggs at alexandra.scaggs@barrons.com