Tesla will need to recharge coffers to make Model 3 go

YORK • Now that

investors know how many Model 3s the carmaker built in the first quarter, they’re focusing on a new question: how Elon Musk is going finance the next batch.

Tesla says it won’t need to raise more equity or debt this year, apart from using its standard credit lines, because it expects to assemble cars faster. The company built 2,020 Model 3 sedans in the past seven days and said its production rate should “climb rapidly” this quarter, “laying the groundwork” for strong positive operating cash flow in the third quarter.

But better-than-feared results aside, analysts still expect the company will want to refuel its coffers. The company’s US$10-billion debt load is turning into a real burden, with cash dwindling and costs rising for any new borrowing after the electriccar maker’s credit rating was cut last week.

“They still need to come to the market, no question about that,” said CreditSights analyst Hitin Anand, who estimates Tesla may raise up to US$2 billion in the next six to 12 months, likely through a combination of equity and convertible debt. That could be less, however, if the company follows through on its production targets or borrows through its bank credit line, he said.

“Not requiring any more funds for the Model 3 may still be mildly possible, but that does not mean they don’t have refinancing needs,” Anand said.

Tesla ended 2017 with US$3.4 billion of cash on hand and is expected to burn through about US$2.5 billion this year. With US$390 million of debt to pay off this year, that could leave the company entering 2019 with about US$500 million of liquidity.

If Tesla continues to run through cash at about US$600 million a quarter, a capital raise is just a matter of when, according to Bloomberg Intelligence analyst Joel Levington, who says he’s skeptical of plans to scrape by without one.

“Technically they could do that, but is it the prudent thing to do? That’s where I say absolutely not,” Levington said. “All stakeholders would be concerned about that.”

A representative for Tesla, which is based in Palo Alto, California, declined to comment beyond the company’s Tuesday statement.

The year-end balance sheet showed Tesla had about US51 cents of cash and other highly liquid assets on hand for every dollar’s worth of expenses coming due within 12 months.

Before its first-quarter debt and equity raise last year, Musk had said Tesla didn’t need to raise any more capital then either, telling analysts at the time the company was mulling the question of “how close to the edge do we want to go?”

“It’s pretty likely they’re going to have to go to the capital markets in the not-toodistant future,” Bruce Clark, a credit analyst at Moody’s Investors Service, said in an interview Monday ahead of the first-quarter output results. Tesla has US$1.2 billion of debt maturing in the next 12 months and is expected to burn through US$2 billion of cash this year. After repeatedly missing Model 3 production milestones, raising money could prove difficult, he said. “Their credibility has taken some hits.”

Musk has proven adept at raising money before, but it’s likely to be more expensive the next time. The unsecured bonds Tesla sold just months ago are trading near record lows, and a similar sale is less likely because investors probably would demand a yield of at least 10 per cent. That’s almost double the 5.3 per cent Tesla had to offer last time.

Alternatives include debt that can be converted to stock, which Tesla has issued several times before. The equity’s volatility — and thus its potential for gains — could make this option worth more to a buyer, so the coupon wouldn’t have to be as high, according to debt investors who are studying Tesla’s financial situation. Tesla also has capacity to issue secured debt, which typically carries lower interest rates than unsecured bonds.

Another source of cash could include US$438 million of unused funds from a revolving credit facility listed in its year-end annual report. The actual amount available could be curbed if Tesla falls short on minimum levels for liquidity and expense coverage set by its lenders, but the company said it met all the standards for its loans as of Dec. 31. companies to brand bots with a disclaimer and link those accounts and ad purchases to “verified human accounts.”

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