Tesla opts for junk bond issue to finance Model 3 ramp-up
09 Aug 2017
Tesla Inc said on Monday it would raise about $1.5 billion through its first-ever offering of junk bonds as the US luxury electric car maker seeks fresh sources of cash to ramp up production of its new Model 3 sedan.
The move to issue junk bonds - lower-quality investments that offer higher yields - represents a bet by Tesla chief executive Elon Musk that bond investors will be as hungry as stock investors to back the company on expectations that its Model 3 will be a hit.
Tesla shares are up 67 per cent this year, pushing the company's market value to about $60 billion, above that of top US automakers General Motors Co and Ford Motor Co, even though Tesla has yet to make an annual profit.
According to The New York Times and other experts, Musk had to choose between issuing a bit more of Tesla's turbocharged stock or tapping the overheated junk-bond market to finance the Model 3 ramp-up, and he opted for the latter even though it raises a slight execution risk for the $60 billion electric-car maker.
Tesla has just over $3 billion in cash, but it is burning through roughly $1 billion a quarter as it embarks on one of the most daunting gambits in automotive history - taking production of its mass-market vehicle from zero to 400,000 or more a year in just 18 months.
Fortunately for Musk, investors can't seem to shower his ambitions with too much money. "Bond investors, who typically don't love companies that don't make money, will be far more forgiving when it comes to Tesla," bond expert Robbie Goffin, managing director of FTI Consulting, told Reuters, citing the company's stellar stock market value.
Tesla was to start pitching potential investors on Monday, IFR reported, citing lead bankers on the deal.
So far, Tesla has been raising money to pay its bills with a combination of equity offerings and convertible bonds, which eventually convert into shares. In March, the company raised $1.4 billion through a convertible debt offering.
Following the announcement, Standard & Poor's reaffirmed its negative outlook for the automaker and assigned a "B-" rating for the bond issue - deep into junk credit territory. S&P also maintained its "B-" long-term corporate credit rating on Tesla.
"We could lower our ratings on Tesla if execution issues related to the Model 3 launch later this year or the ongoing expansion of its Models S and X production lead to significant cost overruns," S&P said in a statement on the bonds.
Moody's assigned a junk "B3" rating to the bond issue and said the company's rating outlook was stable.
The rating agency said the overall company's "B2" rating was supported by the fact that if Tesla ends up in serious financial trouble, its brand name, products and physical assets would be of "considerable value" to other automakers.
The automaker's debt load increased significantly last year when it bought solar panel maker SolarCity.
Tesla's bond will price later this week after several days of meetings with credit investors, who will weigh factors including the absence of a borrowing history, its lack of profit and its high cash-burn rate against its growth potential and its attractiveness as an environmentally friendly ''green'' issuer.
Ultimately, the depth of investor interest will determine the bond's interest rate.
Tesla is counting on the Model 3, its least pricey car, to become a profitable, high-volume manufacturer of electric cars.
Tesla said last week that it had 455,000 net pre-orders for the Model 3, which has a $35,000 base price, and that the sedan was averaging 1,800 reservations per day since it launched late last month.
At the launch, Musk, however, warned that Tesla would face months of "manufacturing hell" as it increases production of the sedan (See: Tesla Model 3 finally out: Musk foresees 'production hell').
