TESLA PLANS US$1.5B BOND MARKET DEBUT TO FUND MODEL 3.

Tesla is making its debut in the primary corporate bond market as Elon Musk bolsters his company’s audacious bet on a more affordable electric car.

The automaker plans to offer US$1.5 billion in senior unsecured notes due in 2025, a statement says. The proceeds will be used to help Tesla bring out the Model 3, its cheapest model yet, and for general corporate purposes.

The debt sale will test Musk’s ability replicate the fervent following he’s built among s t ock i nvestors, who’ve bought into his vision of a clean-energy future and pushed the shares up 67 per cent this year. While bond markets have been running at historically frothy levels, Tesla is asking potential noteholders to overlook the company’s negative cash flow and its repeated trips to capital markets to cover losses.

This would be the company’s first sale of non- convertible bonds, according to data compiled by Bloomberg. During early conversations with investors, Tesla has been offering to pay around 5 per cent on the notes, according to two people with knowledge of the matter, who asked not to be identified as the discussions are private. That lines up with the 5.4 per cent investors are demanding for junk-rated companies, according to Bloomberg Barclays index data.

“As a straight bond investor, it’s hard for me to think I really want to do this,” said Jack Flaherty, a money manager at GAM Holding who previously bought Tesla convertible debt. The convertibles give holders a chance to profit if Tesla succeeds, by letting them swap the bonds for stock.

But prospective investors in this deal will just get the yield — and perhaps not enough to compensate for the risk, Flaherty said. “It’s not like we’re getting 10 per cent to fund a negative-cash-flow company,” said Flaherty, who hasn’t decided if he’ll participate.

The US$35,000 Model 3 is the linchpin of Musk’s plans to turn Tesla into more of a mass- market manufacturer. With a starting price roughly half the cost of the base Model S, the smaller sedan has racked up almost half a million net reservations since the company began taking refundable deposits last year. The carmaker plans to make 500,000 vehicles in 2018 and a million in 2020. The company produced almost 84,000 cars and sport utility vehicles last year.

Investor enthusiasm has catapulted Tesla’s market value past General Motors and Ford Motor, but bringing out the Model 3 has been costly. Tesla burned through a record US$ 1.16 billion in cash in the second quarter, driven by spending on production capacity for the car and batteries.

The bond sale is the latest in a series of moves Tesla made to pad its coffers this year. The company raised about US$ 1.4 billion in March through a stock and debt offering and in June expanded credit agreements by a combined US$800 million.