Sale aim in bonds by Tesla is $1.5B
Issue to help it go big with Model 3
PALO ALTO, Calif. — Tesla is raising $1.5 billion as it ramps up production of the Model 3 sedan, its first mass-market electric car.
The company said Monday that it planned to offer senior notes due in 2025 and would use the offering’s proceeds to further strengthen its balance sheet during a rapid increase in production of the Model 3.
Tesla delivered the first 30 Model 3s to employees at the end of July. At the time, Chief Executive Officer Elon Musk worried some investors when he warned that Tesla was about to embark on “at least six months of manufacturing hell” as it attempts to get Model 3 production to 5,000 cars per week by December.
The debt sale will test Musk’s ability replicate the fervent following he’s built among stock investors, who’ve bought into his vision of a clean-energy future and pushed the shares up 67 percent this year. While bond markets have been running at historically frothy levels, Tesla is asking potential note holders 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 nonconvertible bonds, according to data compiled by Bloomberg. During early conversations with investors, Tesla has been offering to pay around 5 percent 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 percent investors are demanding for junkrated 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 percent to fund a negative-cash-flow company,” said Flaherty, who hasn’t decided whether he’ll participate. The $ 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 $1.16 billion in cash in the second quarter, driven by spending on production capacity for the car and batteries. Musk said on a quarterly-earnings conference call last week that the company was considering raising debt but not equity. Tesla has been able to negotiate favorable payment terms with suppliers to the Model 3, which should help improve cash flow. “The nirvana is that we can make the car and get paid for the car before we have to pay our suppliers, which then the faster you grow, the faster your cash position grows,” Musk said Wednesday. “Obviously, that’s like the promised land right there.” The bond sale is the latest in a series of moves Tesla made to pad its coffers this year. The company raised about $1.4 billion in March through a stock and debt offering and in June expanded credit agreements by a combined $800 million. “There is a well-developed track record of successful investments and generating returns on those investments,” said James Albertine, a senior analyst at Consumer Edge Research who has a buy rating on Tesla shares. “Tesla’s a company that’s always on to the next big innovation or the next big advancement, and they raise money well in advance of when the public finds out about that.” Tesla ended the second quarter with a little more than $3 billion in cash, the lowest on hand in more than a year. The carmaker said last week it expects about $2 billion in capital expenditures in the second half of the year as it spends on Model 3 equipment, its battery “gigafactory” and the expansion of its supercharger network. To accommodate its expanding customer base, Tesla has said it plans to add 100 service centers worldwide over the next year and hire more than 1,400 technicians to work on its cars. Musk plans to add a semi truck to the lineup after the Model 3. Tesla shares fell $1.74 to close Monday at $355.17.