BUSI­NESS Musk’s debt-mar­ket­ing pitch aimed at bond buy­ers re­alises $600m in or­ders

Weekend Argus (Saturday Edition) - - FRONT PAGE -

TESLA’S Elon Musk is sell­ing his dream. Bond in­vestors seem to be closing their eyes and buy­ing it.

Musk brought his charm offensive to the debt mar­ket at a meet­ing for bond buy­ers in Man­hat­tan on Mon­day and came away with or­ders for $600 mil­lion af­ter just a few hours, ac­cord­ing to in­vestors briefed on the mat­ter.

The ses­sion was part of a four- day debt- mar­ket­ing ex­trav­a­ganza aimed at rais­ing $1.5 bil­lion to sup­port the elec- tric car­maker’s new mass-mar­ket Model 3.

It is a well-oiled rou­tine. Musk pre­vi­ously tapped his cult-like fol­low­ers in the eq­uity mar­ket for cap­i­tal eight times in seven years to fund Tesla’s growth. Ap­par­ently his pitch works on debt in­vestors, too: the com­pany could wind up pay­ing no more than 5% on the junk-rated bonds, the peo­ple said, ask­ing not to be iden­ti­fied be­cause the dis­cus­sions are con­fi­den­tial.

In a world where some in­ter- est rates are still hov­er­ing near zero, that’s enough to seal the deal, even for a com­pany whose man­agers burned through a record $1.16bn of cash in the sec­ond quar­ter.

“It’s a great deal for them, which by def­i­ni­tion means it can’t be a great deal for the in­vestors,” said Marty Frid­son, chief in­vest­ment of­fi­cer of Lehmann, Li­vian, Frid­son Ad­vi­sors.

“The rea­son they’re get­ting a good deal is be­cause yields are near record lows and risk pre­mi­ums are much less than they should be. Tesla is tak­ing ad­van­tage of that.”

The cam­paign started with a pre­sen­ta­tion at the New York Palace Ho­tel that had the bil­lion­aire an­swer­ing in­vestor ques­tions while a gleam­ing blue Model 3 sat on dis­play in the court­yard. Musk, 46, also in­vited his au­di­ence to a visit sched­uled for later this week at the com­pany’s as­sem­bly plant in Fre­mont, Cal­i­for­nia.

Rep­re­sen­ta­tives for the com­pany didn’t im­me­di­ately re­spond to re­quests for com­ment. To be fair, bond mar­ket in­vestors for years have sus­pended re­al­ity and their ba­sic train­ing to buy into ever-riskier cred­its as in­ter­est rates shriv­elled. But Tesla has some­thing else go­ing for it: the halo ef­fect, says Kevin Mathews, global head of high yield at Aviva In­vestors Amer­i­cas.

“The halo ef­fect is real,” said Mathews. “We saw that with Net­flix. As a brand name, peo­ple know it, they know the sit­u­a­tion from a fi­nan­cial stand­point, so when it came to mar­ket, peo­ple bought it.”

Net­flix sold $1bn of bonds with a 4.375% coupon in Oc­to­ber. The bonds are now trad­ing with a yield of about 4.2%, as in­vestors con­tinue to bet on the growth story and ig­nore the cash burn.

Musk is ask­ing his in­vestors to do the same. The Model 3 is the linch­pin of his plans to turn Tesla into more of a mass- mar­ket man­u­fac­turer. With a $35 000 (R471 000) start­ing price that’s about half the base cost of the Model S, Musk’s new smaller sedan has racked up al­most half a mil­lion reser­va­tions. The com­pany plans to turn out 500 000 ve­hi­cles next year and a mil­lion in 2020.

Among those con­tain­ing their en­thu­si­asm is Bruce Clark at Moody’s In­vestors Ser­vice.

“Get­ting pro­duc­tion lev­els up to where they want them and do­ing it in a glitch-free man­ner – that is not easy,” Clark said. –Bloomberg

Elon Musk

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