Tesla Raises $1.8 BILLION via Junk Bond Offer To Help Produce The Model 3

NEW YORK (Reuters) - Bond investors on Friday gave a $1.8 billion boost to Tesla Inc's (TSLA.O) balance sheet by snapping up the electric car maker's first foray into the U.S. junk bond market, where yield-hungry investors have raced to lock in relatively higher returns.

Those robust returns, however, have shrunk as a strong reservoir of cash ready to deploy in the riskiest areas of the high-yield fixed income market has pushed them to near their lowest levels in three years. That has given junk-rated issuers such as Elon Musk's U.S. car company the opportunity to raise cash cheaply.

Tesla sold $1.8 billion of eight-year unsecured bonds at a yield of 5.30 percent, the Palo Alto, California-based company said in a filing with the Securities and Exchange Commission...
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mre30 - 8/12/2017 10:37:34 AM

+4 Boost

More from the financial press....

“Tesla recently announced a $3,000 price reduction on the Model X. No company on this planet lowers prices when demand is rising. They only lower prices when demand is falling, having exhausted all sales at the higher price point.

The real shocker was Tesla has slipped 0.9%, 72-month financing into the order pages for both Model S and X on Tesla.com. The big players use this routinely to move slow inventory. If Tesla is doing so well with sales, why are they now subsidizing financing of new vehicles? We can assume some of the $1.5 billion in bond money now being raised will be spent financing new car sales. This completely erases any doubts that Tesla is now demand constrained.”

On the junk bond offering…”At a 5.25% yield, you just are not being compensated for the risk in this business. The company is raising $1.5 billion in this bond deal, which is roughly the amount of cash it burned through in the past 4 months. If things go well, you get paid your coupon and eventually get your principal back, perhaps at a small premium if the bond is called. If things go poorly, you could lose a substantial portion of your principal. This particular bond deal is unique in that the company's Gigafactory is not part of the collateral package, remaining unencumbered by the possibility that it could be pledged to secure future debt without securing these notes. This lack of security potentially makes the recovery worse in a distressed situation.

Not liking the debt does not automatically mean that you do not like the equity. Equityholders own the upside, and the prospect of Tesla revolutionizing transportation and renewable energy markets is tantalizing. Shareholders, though, have already baked in tremendous growth and healthy operating cash flow into the share price. The uniquely low ratings on the debt for a company with this large of an equity capitalization should give bullish shareholders at least a little pause. “

TheSteve - 8/12/2017 11:46:14 AM

+4 Boost

The reason they're called "Junk Bonds" is because they aren't secured, meaning if Tesla goes down the tubes, the bonds are worthless (AKA Junk).

TomM - 8/12/2017 6:11:37 PM

+1 Boost

Uh - No - TheSteve.

Corporations often issue general obligation Bonds that are unsecured - and if the Corporations debt is investment grade - they are NOT Junk Bonds.

A "Junk" bond is a bond that carries a rating of BB or lower IE - not Investment Grade. . Since they are low rated -they also carry higher interest charges.

AND - I would expect that - being older models - that the sales of the S and X have been slow - and offering a lower interest rate is a way to give an incentive to a customer to buy without Lowering prices - something Tesla has said it will not do.

senft - 8/14/2017 6:14:54 AM

+3 Boost

Junk bonds are not what profitable, competently managed businesses take out -- specially with near zero interest rates. Then again, that Tesla will ever be profitable is an open question at best.
Then again, Elon can't personally afford to do anything that would dilute his holdings; so borrowing at any rate is all Tesla can do: more scamming, more scamming, more scamming. (This is not a dis against the cars, but the business and the rot at the top of the business.)