Tesla seeks $1.5 billion junk bond issue to fund Model 3 production

FILE PHOTO: First production model of Tesla Model 3 out the assembly line is seen in this undated handout photo from Tesla Motors
FILE PHOTO: First production model of Tesla Model 3 out the assembly line in Fremont, California , U.S. is seen in this undated handout photo from Tesla Motors obtained by Reuters July 10, 2017. Tesla Motors/Handout via REUTERS

August 7, 2017

By Nick Carey and Paul Lienert

DETROIT (Reuters) – Tesla Inc <TSLA.O> said on Monday it would raise about $1.5 billion through its first-ever offering of junk bonds as the U.S. 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 percent this year, pushing the company’s market value to about $60 billion, above that of top U.S. automakers General Motors Co <GM.N> and Ford Motor Co <F.N>, even though Tesla has yet to make an annual profit.

“Bond investors, who typically don’t love companies that don’t make money, will be far more forgiving when it comes to Tesla,” said bond expert Robbie Goffin, managing director of FTI Consulting, 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.

CFRA equity analyst Efraim Levy said the bonds provide Tesla with funds “at least into mid-2018.”

“There is a risk they could still run out of money,” he said. “Then you’d go back to the equity markets and hope it’s not too late” to raise more money.

BURNING CASH

The latest effective yield on single-B rated bonds maturing in seven to eight years, the class for a Tesla issue, is around 5.5 percent, according to Bank of America/Merrill Lynch Fixed Income Index data.

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.

Tesla had over $3 billion in cash on hand at the end of the June quarter, compared with $4 billion on March 31.

The company has said it expects capital expenditures of $2 billion in the second half of this year to boost production at its Fremont, California assembly plant and a battery plant in Reno, Nevada.

Tesla’s cash burn has prompted short-sellers like Greenlight Capital’s David Einhorn to bet against the Palo Alto, California company.

Goldman Sachs, Morgan Stanley, Barclays, Bank of America Merrill Lynch, Citigroup, Deutsche Bank and RBC are the book-runners on the bond offering, IFR reported.

Shares of Tesla closed down 0.5 percent at $355.17 on Monday.

(Additional reporting by Narottam Medhora and Laharee Chatterjee in Bengaluru; Editing by Sai Sachin Ravikumar and Nick Zieminski)

  • Trump Our Greatest POTUS

    5 billion sucked out of american tax payers to prop up tesla

  • Bill Jr

    Well Then They Don’t Sound Too Serious. ‘Let’s Invest Junk In Our Junk!’ If You Want To Loose Your Money Go To Vegas Or Else Back A Democratic Politician.

  • barney59

    without their little Democrat slush fund me back some of the cash “Buddies” these non-freemarket projects always crash and burn… I’m tired of funding someones plaything… Screw the envirowackos… you burn coal to generate electricity you liberal ding-dongs! it’s like they think by plugging it in they are saving the planet! LOL…

  • Barry Soetoro-Chin

    Tesla IS a $1.5 BILLION dollar junk bond. Without massive taxpayer-funded subsidies, Tesla doesn’t exist. Elon Musk, Tesla and their solar-panel green-energy scams should go the way of the Dodo bird, without any taxpayer-funds.

  • That ought to break the bond market into a fast fall.

  • roger

    he needs another 1 1/2 billion more to add to a losing cause. you guys remember bernie madoff, this guy is going to make what bernie did look like chump change. anybody who puts one cent into this deserves what they get

    • barney59

      Obama’s buddies!

  • intimeforthedime

    Definition of how Tesla, Uber, and all the other new wave $BILLION tech companies work.

    I’ll gladly pay you Tuesday for a hamburger today.

    The company has been selling cars now since 2008, and has YET to make profit.
    How is that for a company that is trying to raise $1.4 BILLION on JUNK bonds!
    “There are suckers born everyday” I guess…

    As long as the owners can keep idiots investing cash, then they can afford to live wealthy from the resources of the company.

  • stevens123

    Just so long as its not funded by my tax dollars

    • intimeforthedime

      It is funded by your tax dollars, Tesla has gotten hundreds of millions in grants and tax incentives.

      • barney59

        Democrat kickback funds

      • stevens123

        Supposedly the debt offering will not be funded by tax dollars. Or at least that is the party line. The reality is money is fungible. Tesla still gets taxpayer incentives for both themselves and their customers. So in reality they are taxpayer funded.

  • come and take it

    what? elon misk debt financing another boondoggle? no way…

    at least this time it’s not tax payer funds.

    • come and take it

      musk

      • intimeforthedime

        Tesla Motors Inc., SolarCity Corp. and Space Exploration Technologies Corp., known as SpaceX, together have benefited from an estimated $4.9 billion in government support.

        Nevada agreed to provide Tesla with $1.3 billion in incentives to help build a massive battery factory near Reno.

        Tesla has also collected more than $517 million from competing automakers by selling environmental credits. In a regulatory system pioneered by California and adopted by nine other states, automakers must buy the credits if they fail to sell enough zero-emissions cars to meet mandates. The tally also includes some federal environmental credits.

        Elon Musk is the chief executive of both Tesla and SpaceX and the chairman of SolarCity, and holds big stakes in all three, including 27% of Tesla and 23% of SolarCity. Each one of the companies are failed technologies that CAN NOT live on its own without government handouts and grants.

        They are government welfare companies. And could NEVER make it on their own merits.
        Only instead of thousands being given to them, they are given hundreds of millions. It is a failed technology, being fueled with cash.

        I would love to have a company that is given hundreds of millions because I cannot make it on my own. Even so, and even though the government has helped them create a failing
        technology…I still do not have the money required to own a Tesla. A waste of money.

  • Chris C.

    I personally would like to have every penny given to Tesla back into the countries coffers with interest, if they can’t pay it back go for their personal wallets, LLC be damned, action off all their personal property as well. We have a lot of bigger issues to deal with in this country than a pipe dream of a car and why some politicians decided to give OUR money to this co. is absorb. Billions wasted…

  • Peter789

    I used to follow Tesla and was planning to buy a Model 3 someday. But Musk lost me as a customer when he bent over for the climate change alarmists. Now I’m looking at maybe the Chevy Volt, instead.

    • barney59

      Chevy Volt beat Tesla model S in distance tests… either Consumer Reports or Car and Driver… just heard it on the radio yesterday…

      • Buck Turgidson

        What’s the sticker price on the Volt? Just curious.

  • tj hessmon

    Tesla is a pipe dream, it’s a vehicle company which has a very small audience due in large part to the vehicles sales price. Electric vehicles have never and will never be inexpensive. Electronic technology requires real copper and brass gold and silver in order to work properly.

    I’m not sure how many folks reading this article about Tesla have ever followed those commodities markets, but they are volatile. Attempt to increase the volume globally of electric vehicles and watch what happens to commodity prices. Electric vehicles are simply not cost feasible to construct

    A one off company which makes environmental play toys for the wealthy, does not need investment capital, the down payment program from its customers and its eventual prophet from net sales should provide more than adequate financial resources.

    My concern from a customer perspective would be vehicle maintenance infrastructure. For example, there are several states which have only one or two Tesla dealerships which means one would need to transport the vehicle for service if the trip to the dealership exceeds 200 miles.

    The other issue related to electric vehicles is recharging infrastructure. There are simply fewer and fewer charging stations available to American consumers. Here is an example … Say one wants to drive from Atlanta to Birmingham, There are only two charging stations on that route (Bremen and Waco). Most electric vehicle would simply run out of charge before reaching their destination. as both charging stations are 20+ miles from the Georgia line.

    This is why I say electric vehicles are a pipe dream. They are simply to expensive and have no effective support infrastructure.

    • Buck Turgidson

      Most of what you’ve said is true, and I agree with you on nearly all points. But your operative sentence above is “A one off company which makes environmental play toys for the wealthy…”. You’re correct there, and I agree with you.
      But let’s analyze that – there are a helluva lot of wealthy people out there, a helluva lot of wannabe wealthy who are in debt up to their eyeballs and pay through the nose to finance their Audis and BMWs on credit instead of saving for retirement. They are status symbol-oriented social climbers trying
      to flaunt the illusion that they have real wealth (i.e., half the people
      who currently drive said Audi or BMW SUVs, etc.). Add in all of the “fanboys”, enthusiasts, tech geeks, environmentalists. Lump all of them together in aggregate, and Tesla has generated a lot of demand IF and only if they can get that purchase price south of $45K with various incentives, refunds, and environmental tax breaks. You and I are not one of them, but nonetheless they represent a market force of demand that can’t be ignored… note that Volvo has plans to go all electric and hybrid within the next decade. I respectfully argue that Tesla might be around for awhile, and just might succeed. Not that I want to buy one anytime soon, but I don’t think we can write off Tesla just yet.

  • Jack Woodburn

    So tired of this farce…nothing more than blatant manipulative government funded fraud. No liberals/politicians want to talk about the carbon footprint for the mining and processing of lithium, the battery manufacturing itself nor the source of the electricity for recharging these vehicles which still are still limited to be primarily to urban settings. 300 miles per day is impracticable for vacation road trips away from either coast. Enough already. Formula E still requires two cars to complete a race! Whatta silent joke!

    • Buck Turgidson

      Good points. Not only carbon footprint, but what is the level of toxins from the battery manufacturing processes and disposal/recycling once the battery is kaput?

  • Clearlysane

    Tesla is already the most subsidized car company in America. Donate a few hundred thousand to a few key law makers and you’ll get your billions. America will fail economically because of the ass gaskets in DC! Can’t stress enough the need for “we the people” to drain the swamp! Your Rep/Sen, my Rep/Sen are the problem! DO NOT RE-ELECT INCUMBENTS! Call it “the peoples” term limits.

  • ken

    he could raise the money by selling these pieces of recycled beer cans at a lower priced tag how much does the battery cost for the piece of junk oh yeah I heard the battery cost 12 thousand dollars boy don’t that just make you want to run out and buy two of these recycled beer cans

    • Clearlysane

      Not to mention kw/hrs is way more expensive than gas! No one ever talks about this. $800.00-900.00 a month electric bills will take the wind out of the sails for those who have dove into the save the planet BS. Fossil fuel provides the energy to manufacture these cars and is still the cheapest way to fuel one too!

      • barney59

        Fossil Fuels have been the greatest boost to individual liberty in history… freedom to drive across the country at an affordable price! I can’t even go to LA and back in one of the stupid liberal vehicles! it’s insane…

        The only option is a hybrid, half electric, half fossil fuel, that makes sense!

        • Clearlysane

          Great points all but the last one. Hybrids mount a $7000.00 battery in a car that allows 45mpg. We can do this with nothing more than a gas engine. No battery needed. Hybrids and full electrics are snake oil. The problem is the elites have made ridiculous investments into these crap cars and expect the politicians to insure said investments with legislation. We the people have to drain the swamps. No incumbents in 2018! Dead serious NO FRIGGIN ENCUMBENTS. Once they figure out they are being targeted for firing they’ll snap to but it’ll be too late!

  • Lord Cornbread

    Sooner or later business is about earnings.